VAT is no laughing matter but some rules are a joke

April 1 this year marks 40 years since the creation of VAT.

Despite the anniversary falling on April Fools’ Day, East Lancashire VAT expert Andrew Stephenson, warns it is no laughing matter.

Andrew, senior VAT and tax investigation manager at Pierce, the Blackburn-based accountancy and business advisory group, reports that the tax has now become so complicated many businesses are still unaware of their responsibilities. And East Lancashire’s very own VAT man has lifted the lid on the most bizarre rules that businesses find to be anything but a joke.

VAT (Value Added Tax) came into force in 1973, introduced as a simple 10 per cent tax on goods bought from a business.

In the years since, it has become one of the Government’s largest sources of revenue after income tax and national insurance. Some essentials, such as certain food types, are exempt from the tax, or ‘zero rated.’

However, far from being a simple tax, many experts now feel it has come to represent one of the worst examples of red tape and has become far too complex.

Andrew explained: “Since VAT was introduced in the 1970s, the Government has struggled to keep the regulations up to date with the changing way we live our lives in the UK, in particular the food we eat.

“This has resulted in a number of high profile instances such as the difference between hot and cold food, and whether Jaffa cakes and marshmallow tea cakes were snacks or cakes – snacks carry the full VAT rate as they are deemed non-essentials, whereas cakes are zero rated, and VAT does not apply.

“Some of the VAT rules are simply bizarre, and experts have been arguing for reform for some time.”

Andrew reports that his top five strangest VAT rules are:

  1. Yoghurt which has been frozen but has to be thawed before consumption is not subject to VAT, but frozen yoghurt is.
  2. MOT test fees that are recharged to customers at cost are not subject to VAT but MOT test fees recharged on a “cost plus” basis are.
  3. VAT incurred on entertaining the employees of a business can be reclaimed but any VAT incurred on entertaining customers or suppliers cannot.
  4. When is a biscuit a cake? When it’s a Jaffa cake of course.
  5. Particularly topical at the moment, horsemeat sold in the UK for human consumption would be zero-rated, but the sale of a live horse would be subject to VAT.

He added: “However, behind the strange rules and the red tape is a serious message. VAT is a hugely complex field which is far from being a simple tax and many businesses still do not fully understand their responsibilities.

“This 40th anniversary of VAT is a good time to consult with your advisors and ensure that you are clear.”