VAT: A really useful point of sale metric

Taxation is really interesting. Oh yes it is.

In 1940, Britain was at war. The British Isles surrounded by water. Dependant on imports that couldn’t get through. Shortages everywhere.

So what did the Government do? They introduced Purchase Tax, that’s what. And they taxed everything they considered “luxuries”, i.e. inessentials, with a whopping 33.3%.

The Government wasn’t going to waste our precious resources — land, energy, water, space on board ships running through the German blockade, transportation costs — in growing or importing goods, including food that we could do without.

Essentials such as children’s clothes, books, education, banking — and (nearly all) food products were tax-free. And still are, although Purchase Tax became VAT in the 1972 Finance Act.

So what were these food products that did carry Purchase Tax (33.3%) and do still carry standard rate VAT (currently 20%)? They are the ones that have little or no nutritional value, except (for some) calories.

Standard rated VAT ‘food’ products include:

  1. Confectionery
  2. Savoury snacks such as crisps
  3. Drinks (with a few exclusions to allow, for example, for a cuppa)
  4. Ice-creams
  5. Many biscuits (all chocolate covered ones) and “items of sweetened prepared food which is normally eaten with the fingers”, so fruit bars too.

Yes, lawyers do earn money from arguing a case, including the Jaffa cake case . . .

Why, you might ask, don’t any cakes and pastries carry standard-rate VAT? A reason why is probably because manufacturing capability to make cakes and pastries was only developed in the mid-60s; in 1940, all cakes and pastries were home-made (or by the local baker in his/her own kitchen).

Last year, the CIEH carried out an analysis of the Defra statistics on our household spend for us. Going back over the years of comparable datasets, this analysis uncovered that we spent just over 30% of our household budget on VAT-rated ‘food’ products, and a further 4% (actually 3.6%); i.e. 34% of the food we buy in supermarkets and other local shops is on products that, at best, have marginal nutritional value.

What would be the effects if the 1.1M population of Birmingham reduced consumption of VAT-rated food and drink products (plus cakes and pastries!) from the current UK figure of 34% to x%

And, given that VAT has to be collected at the point of sale (POS), and a VAT receipt given on demand from the buyer, we have a very useful metric to carry out research to find out what those effects would be.

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