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It’s time for Brexit Britain to introduce VAT reform

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WHILE OUR POLITICIANS have spent the last few weeks partying, dancing and soaking up free beer and wine at their respective Party Conferences, men and women on the streets of this country have had their taxes raised – along with more to come, it seems – and have seen energy prices soar. This comes along with threats of electricity power cuts; shortages of gas; the possibility of ongoing problems refuelling our cars; as well as new suggestions of food and gifts delivery problems disrupting another Christmas.

Despite all this, the Government has repeatedly shown it is unwilling to utilise new powers – regained following our exit from the EU – to permanently break away from out of date and unsuitable regulations we adopted during our membership of the EU.

One such area where a decision to break away from the status quo would help reinvigorate our economy, and benefit businesses and normal people is taxation – and more specifically VAT.

VAT (Value Added Tax) was first introduced in the UK back in 1973, as a condition of joining the European Economic Community (as it was back then), with a minimum rate of 10% set by Brussels. This EU set minimum then rose to 15% in 2007 – although the UK Government has consistently chosen to exceed this minimum and in in 2011 raised VAT in the UK from 17.5% to its current rate of 20%.

However, alongside the minimum rate of VAT, the EU also instituted rules which mandated which goods had VAT added, with limited exemptions and reduced rates allowed for specific goods. We can all remember the controversy of the UK being forced to add VAT to supposedly non-essential feminine hygiene products! While this has now been removed following our exit from the EU, the UK Government must now look at other areas where VAT is needlessly applied – or cut it out entirely now we have left the EU. 

The major area where this cut should be implemented is on household fuel bills. Not only is a reduced rate of 5% VAT currently enforced, but these bills are also already subject to additional taxes and levies to pay for the ‘Net Zero’ green agenda. VAT was supposed to be levied on ‘non-essential/luxury goods’, so in what way is heating your home in winter deemed non-essential? 

Not only would a cut to the VAT levied on basic goods – like household bills – help reduce costs for consumers, it would also reduce costs for businesses. These are savings which could then be put directly into hiring additional staff or investing in new technologies to improve efficiency and innovation. 

What makes this all the more frustrating is we have already seen the Government accept cutting VAT is a good idea for encouraging investment in industry, it also encourages spending. Just last year, to encourage people to go out and spend money, the Government temporarily cut VAT in the hospitality sector, which prior to the Pandemic faced the standard rate of 20%. Since July 15th, 2020 until September 30th, 2021 the industry paid just 5% VAT and until March 31st, 2022, they will continue to pay a reduced rate of 12.5%. However, despite the scheme clearly working to help sustain the industry, drive forward growth and help lower inflation – according to the Treasury – the Government still insists on these reductions being temporary. Its mind seems set on returning to the status quo as soon as it can, rather than showing ambition to try and differentiate the UK within the international community. 

This is not just about reducing the base levels of VAT paid on goods and services in this country, but could also about simplifying the tax system to make sure it does not create mountains of additional bureaucracy for businesses, distracting them from contributing to our economy. At the moment, VAT compliance costs an average company 4% of their turnover – a significant amount for smaller businesses desperately trying to stay afloat in the current economic climate – yet the Government continues to sit on its hands. It seems content with a system which as recently as 2017, was spread across 42 Acts of Parliament and 132 statutory instruments, with many more no doubt added throughout the Pandemic. How is such a complicated system sustainable? 

Even if the Government’s refusal to cut VAT rates or abolish this tax entirely, is about trying to refill the Treasury’s coffers after the Pandemic, surely at a time when interests rates are at record lows, shouldn’t our focus be on lowering the cost of living and helping the country reach optimum growth as we venture out into the wider world as Global Britain?

With the savings it brings customers and businesses alike, is it worth considering cutting VAT permanently, or perhaps removing it entirely now we are no longer required to enforce it as part of our previous EU Membership? Only by pushing the boundaries can we hope to find an optimum point of allowing our economy to achieve its full potential.

A complicated tax system inevitably means some people are able to find loopholes to get out of paying the correct amount. Some simply do not understand how to fill in the relevant complicated forms, leading to items being left undeclared and the Government missing out on money owed. The difference between the actual amount of VAT collected and the theoretical tax liability according to tax law, is known as the ‘VAT Gap’ – in the tax year 2019-2020 (the most recent year available) the UK had a VAT Gap of £12.8 billion, equating to 8.4% of potential VAT revenue.

Is this really a hole in our budget which is not worth working to eliminate? Instead of choosing to simplify our tax system, we continue to plod along, happy to stay aligned to what became the norm under EU regulations. Too often the Government has ignored chances to break away from the EU’s status quo. Is this just about not wanting to rock the boat – or just being too lazy to make changes? 

Lord Frost finally seems to be taking the fight to Brussels. EU counter-proposals, while promising, have so far done nothing to relinquish their legal control over Northern Ireland – including on VAT charged in the country. The new, far more aggressive mentality Lord Frost has adopted, will be key to the future of this country. If we are to avoid ending up as a mirror image of the EU, without any of the benefits Brexit can provide, we must make sure part of our country does not remain under the control of Brussels. 

To gain the maximum advantages of leaving the European Union, the United Kingdom needs to seriously reconsider the reform of taxes, such as VAT. Taxes in general are already far too complicated, and the Chancellor, Rishi Sunak’s only focus at the moment seems to be on increasing taxes for young people, as well as penalising savers and pensioners – this is not going to go down well with Conservatives at the next election. It’s all well and good focussing on riding his exercise bike – but perhaps Rishi will be riding down the opinion polls in future if he carries on like this, instead of encouraging fresh thinking and innovation inside Global Britain.

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