VAT Rates on Consumer Goods in UK

Luxury Tax or otherwise known as Purchase Tax was a tax on ‘luxury’ goods sold in the UK. Luxury Tax was introduced in the year 1940 at the rate of 33.3% of the mark-up price of luxury goods. The primary objective of the introduction of the luxury tax was to reduce the wastage of raw materials. In 1973, luxury tax was abolished in keeping with preparations for joining the European Economic Community, and the tax rate was replaced by the Value Added Tax (VAT).

Value Added Tax

Similar to all countries in the EU, the UK has a value added tax regime. VAT is charged on the supply of goods and services in the UK made by a taxable person in the course of any business, unless the supply is an exempt supply. The rate of VAT is currently:

Based on recent OECD data, single person on an average wage in the UK would expect in total to pay 33 percent of their earnings in taxes, whereas if they were in the UK, people must currently have to pay 49 percent. Additionally, in the UK, people must currently pay a form of local taxation – the council tax – based on the value of the property they occupy, although the overall contribution that this makes to the public finances is relatively small. There are many different forms of local tax. During the 1980s in the UK there was a short-lived and deeply unpopular attempt to reintroduce a form of poll tax: a fixed tax payable by every resident. In some countries, local services are financed by levying a local income tax, rather than a property or residence tax. Overall, however, it may seem that in the UK getting on for a half of all public finances are raised through taxes on individuals.

Consumer Expenditure Tax

An alternative way of raising public revenue is by taxing not what people earn, but what they consume. The advantage of this is that it leaves people freer to spend their money as they choose. The disadvantage is that people who have little money and little choice may end up paying out a disproportionate amount of taxes. In practice, all developed countries use a mixture of individual and consumption taxes.

Consumption taxes can be levied directly on consumer spending through purchase or value added taxes, or indirectly on through excise duties or tariffs that are charged to the producers or importers of goods. The disadvantage of consumption taxes can be mitigated by charging lower levels of tan on essential products, and higher levels of on luxury goods (or, for example, on harmful products like tobacco). Historically some countries, such as the US, have in the past relied very heavily on the public revenues from charges on imported goods, a practice that has often had a significant impact on world trading patterns. In the case of the UK, something less than a quarter of government revenue is obtained through consumption taxes.

UK VAT Explained

As explained earlier, there are three different rates of VAT that businesses need to apply to their product or service:

1. Standard rate

Most goods and services come under the standard VAT rate. These services and products include:

• Solicitor Services
• Women’s’ accessories
• Jewellery
• Electronics
• Tyres

2. Reduced rate

The reduced VAT rate applies for certain goods and services:

• Fuel
• Car mechanics
• Certain Food supplies and eating out
• Home repairs and maintenance services
• Photographic supplies

3. Zero rate

The zero VAT rate is applied for certain goods and services, some of them are:

• Exports
• Drugs for medicinal purposes
• Cloths for children below the age of 11
• Certain food items
• Certain books and

The changes in VAT over the years

The Value Added Tax replaced the Purchase Tax system in 1973. The purchase tax ensured that it had a different rate for different type of goods. Since its adoption, the standard rate of tax has changed overtime depending on various factors like the economy and the government’s priority. The rates have changed considerably since 1973:

NOTE: For businesses that have a turnover of over £85,000, it’s mandatory to register and charge VAT on all their products and services. They in turn must pay HRMC at the time of filing their tax return. HRMC will accept payments in various ways like Fast Payments, various online Forms, direct debits and more. There are certain other changes made by the government in VAT Flat Rates in 2017 onwards which has primarily impacted the contractors the most.

The Tampon Tax Controversy

The tampon tax controversy is one that involves legislation that made it necessary to pay VAT on tampons and other feminine hygiene products to absorb menstrual flow. Proponents argue that these products should be considered basic necessities and therefore should be exempt from VAT. Women all over the UK protested for the removal of VAT, with other countries following suit. In a documentary published by the BBC, it was reported that more than half the population of the planet needed the use of tampon and over 1.5 million women around the world don’t have access to sanitary napkins.

In the UK alone, the VAT levied on tampons is 5%. However, proponents argued that tampons should be tax exempt and should come in the category of necessities like groceries and essential items. The matter is currently under legislation and parliament is looking to consider eliminating the tampon VAT entirely. This legislation is set to go by April 2018.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.