George Bull

Written by: George Bull

George Bull

Consultant

Could a hard Brexit see the introduction of a higher rate of VAT on luxury goods?

Even before Prime Minister Johnson announced the UK lockdown on 23 March 2020, future UK tax policy was the subject of heated debate. Social and economic inequality, intergenerational unfairness and the tax practices of some multinational corporations were already driving calls for tax reform. Perhaps we shouldn’t be surprised that informal polls reveal support for higher taxes, provided the taxes are paid by others.

During the following 200-plus days, a series of incompatible alternatives have introduced themselves into the debate about tax policy. Some of these alternatives are more illusory than real but they have had a dramatic effect in shaping the debate. For example, the health of the economy versus the health of the people. Increasing national borrowing while interest rates are low, at the risk of saddling future generations with unprecedented levels of debt. Raising tax levels before the end of 2021, with the attendant risk of choking off whatever fragile recovery might have taken hold. Maintaining public optimism with phrases such as “we are all in this together”, while recognising that the economic impact of the virus falls hardest on people with lowest incomes. “Levelling-up” for the regions or “levelling-down” for London?

Despite all the careful work being undertaken by HM Treasury, HMRC, the Institute for Fiscal Studies and the Office of Tax Simplification, the direction of travel for post-pandemic UK tax policy remains unclear. 

We can be sure that all these issues will be recognised in the first Budget of Chancellor of the Exchequer Rishi Sunak, whenever that Budget is delivered. United as the country should be in its fight against our common enemy, the coronavirus, it is hardly surprising that Prime Minister Johnson and other members of his cabinet have used wartime language.

That got me thinking about tax lessons which can be learned from the Second World War, and how they might be applied now. Surprisingly, a hard Brexit may offer possibilities for a hard-pressed Chancellor. Allow me to explain. 

During the war, the government was under extreme pressure to raise taxes and was also worried that scarce resources were being used to manufacture luxury goods. These two issues were addressed simultaneously by the imposition in October 1940 of purchase tax, a consumption tax levied at the point of manufacture and distribution with rates which depended on the luxuriousness of the product. Although it was fearsomely complicated to administer, because every imaginable product was divided between 32 different categories to apply multiple rates of tax, it was highly effective. Having been introduced at the rate of 33.33 per cent, by April 1943 the rate of purchase tax had increased to a staggering 100 per cent. In the post-war years, rates gradually reduced, reaching 25 per cent in 1972. 

A milestone was reached on 1 January 1973 when the UK joined the European Economic Community. On 1 April 1973, purchase tax was replaced by VAT with most goods and services then taxed at 10 per cent. 

While the UK is part of the EU single market, VAT continues as the nation’s sales tax with the UK standard rate currently set at 20 per cent. On the question of any possible changes to UK VAT rates in the future, Treasury Minister Mel Stride said, in answer to a Parliamentary Question on 10 September 2018, “Future VAT rules will depend on the outcome of negotiations with the EU. Any future decisions on VAT will continue to be taken as part of the normal Budget process.” 

As the likelihood increases of a hard Brexit at the end of the transition period on 31 December 2020, there is no legal impediment to the government reintroducing a 21st-century version of the purchase tax. It’s very unlikely that a whole new tax would be introduced, but you can be pretty sure that somebody in the Treasury is addressing the possibility of a higher rate of VAT on what might be described as luxury goods. Carefully structured, and set at an acceptable level, it would raise additional revenue while ensuring that more voters were pleased with the results than displeased. Definitely one to watch. 


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