The History Of VAT

Anyone who has to pay VAT as part of their business must feel as if it has been around for ever.

But in actual fact VAT has a relatively short history. Even though its roots go back to the 17 th century, it has only actually been in operation in the United Kingdom since 1973. That’s thirty five years of more expensive goods – and more paperwork and headaches for businesses of all kinds.

It did replace something called Sales Tax in the UK though, so in reality things probably didn’t change that much in terms of prices.

A 17 th century beginning to VAT?

That’s right. We can thank a European economist for coming up with the idea originally, although more than two centuries would go by before it was actually put into practice. Some sources say a Frenchman thought of it originally, while others attribute the brainwave to a German.

But whoever it might have been (and we can understand why they would want to remain pretty much anonymous), the idea is not in dispute. The tax was deemed to be slapped on the final price of the saleable item.

This meant that the consumer was ultimately the one to pay the tax.

Who first joined the VAT system?

It was actually France that first decided to take up the value added tax system, and that happened back in 1954. Basically if a country wanted to join what is now known as the European Union, it had to agree to bring in VAT in one form or another.

So that tells us which year the UK joined – 1973.

What kind of rates are in effect?

Rates vary widely among the countries in Europe which charge VAT. The government recently lowered the UK’s VAT amount to 15%, and this is actually the lowest amount by law that can be charged.

The highest amount is 25%, so by comparison with countries like Sweden which charge the full amount, we are actually very low.

But it isn’t just a case of having one rate for everything. Certain items do not attract the full rate of value added tax. For example, the reduced rate is just 5% – a third of what the full rate is at present. And the zero rate is not surprisingly where no VAT is payable at all.

The reduced and zero rated items are generally things which are of real help to us in our lives. And in some ways you could deem them as being essential. For example, among the goods attracting the 5% rate are children’s car seats and items which are intended to help people quit smoking. And zero rated items include books, magazines and kids’ clothing.

As with anything else to do with the government, these rules can change at any time. So long as the standard rate remains within the 15% to 25% laid down by the European Union rules, the government can amend them as it sees fit – as was seen on the 1st December 2008. This also indicated that the rate can be raised or lowered for a limited period of time – in this case around thirteen months.

Which countries don’t use the VAT system?

The most notable exclusion isn’t in Europe at all – it is the United States. It has to be said that VAT isn’t the most popular of taxes (what tax is?), and as such the idea of introducing it into America has been met with stern opposition from all quarters in the past.

It doesn’t seem likely that they will adopt the system at any point in the near future – and new President Barack Obama isn’t likely to want to jeopardise his new position by suggesting it either.

We all know that VAT isn’t very popular, but what is the reason?

Businesses tend not to like it because it involves more paperwork which has to be done on a quarterly basis. Consumers don’t like it because it is a crafty way of bringing in more money for the government in the form of taxes.

If you think about it, you get taxed on your income which is fair enough. But if you then go out and buy something with your hard earned money, you will get taxed again in the form of VAT. No wonder people don’t like it.

But in reality it brings in billions of pounds for the government each and every year – money which goes in all kinds of different directions. If the VAT system were to be abolished, there would be a huge hole in government revenue, and that would lead to all kinds of problems.

In conclusion

While that first idea of VAT occurred between two and three hundred years ago, it hasn’t been with us for that long in reality. And it is certainly a mere five minutes when you compare it to the fact that tax as a whole has been around since ancient Egyptian times.

But whatever you may think of VAT yourself, we should be grateful that we are at the lower end of the amount that could be paid to the government. So perhaps we should be happy with things as they are.