by Sarah Hills FoodBizDaily.com London
March 05 2010 - The UK’s VAT exemption on items such as food should be scrapped to help rescue the public finances and promote stronger economic growth, according to a new report from the think tank Reform.
In the report called “Reality check: Fixing the UK’s tax system” the think tank includes broadening the VAT base as one of a number of key reforms that could be implemented in April 2011 to improve the design and outcomes of the tax system
It argues that eliminating the exemptions on VAT, with protection for the poorest third of households, would make VAT a less complex tax and bring the UK in line with other nations.
The UK is one of only four EU countries to apply a zero rate to food (along with Ireland, Cyprus and Malta) and one of only three to apply a zero or reduced rate to children’s clothes.
However, Reform has calculated that the government could scrap the zero and reduced rates of VAT, while compensating the poorest, and still raise an estimated £15 billion of extra revenue.
The report states that it is widely expected that the next government will increase the VAT rate from 17.5% to 20%.
It adds: “Indirect taxation is a well-established alternative to taxing the income of individuals or companies. There are strong arguments for a tax on goods and services (a consumption tax) being a preferable way of raising revenue.
“However, broadening the VAT base by abolishing the zero and reduced rated items, such as food and children’s clothes, would be less damaging and more efficient than putting up the rate.”
Arguing the need for a broader base, it highlights “holes” in the VAT base, which have led to costly litigation to determine the tax treatment of different goods.
An example is the case Jaffa Cakes, where the producer won the argument that these products, largely identical in form to biscuits, should be classified as cakes (taxed as basic foodstuffs) and therefore are VAT exempt. Biscuits are classed as a luxury item and incur a 17.5% VAT charge.