UK – VAT 40 years old today a brief history…

Value Added Tax (VAT) is a tax on consumption levied in the United Kingdom by the national government. It was introduced in 1973 and is the third largest source of government revenue after income tax and National Insurance. It is administered and collected by HM Revenue and Customs.

VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the European Union. There are complex regulations for goods and services imported from within the EU. The default VAT rate is the standard rate, 20% since 4 January 2011. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children’s clothing). Others are exempt from VAT or outside the system altogether. Under EU law, the standard rate of VAT in any EU state cannot be lower than 15%. Each state may have up to two reduced rates of at least 5% for restricted list of goods
and services. The European Council must approve any temporary reduction of VAT in the public interest. VAT is an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer). It is also a regressive tax: the poorest people spend a higher proportion of their disposable income on VAT than the richest people.

History Prior to 1973:

The UK had a consumption tax called “Purchase Tax” which was levied at different rates depending on the goods’ luxuriousness. On 1 January 1973 the UK joined the European Economic Community and as a consequence “Purchase Tax” was replaced by “Value Added Tax” on 1 April 1973. The then Conservative Chancellor Lord Barber set a single VAT rate (10%) on most goods and services. In July 1974, Labour Chancellor Denis Healey
reduced the standard rate of VAT from 10% to 8% but introduced a new higher rate of 12.5% for petrol and some luxury goods. In November 1974 Healey doubled the higher rate of VAT to 25%. Healey reduced the higher rate back to 12.5% in April 1976. Conservative Chancellor Geoffrey Howe increased the standard rate of VAT from 8% to 15% and abolished the higher rate in June 1979. The rate remained unchanged until 1991, when Conservative Chancellor Norman Lamont increased it from 15% to 17.5%. The additional revenue was used to pay for a reduction in the hugely unpopular community charge. During the 1992 general election the Conservatives promised not to extend the scope of VAT, but, in March 1993, Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994 and the full 17.5% from April 1995. The planned introduction of VAT on domestic fuel
and power went ahead in April 1994, but the
increase from 8% to 17.5% in April 1995 was
scuppered in December 1994, after the
government lost the vote in parliament.
In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on
domestic fuel and power to 5%. After gaining power, the new Labour Chancellor
Gordon Brown announced in June 1997 that the lower rate of VAT on domestic fuel and
power would be reduced from 8% to 5% with effect from 1 September 1997. In November 1997, Brown announced that the VAT on installation of energy saving materials would be reduced from 17.5% to 8% from 1 July 1998. Brown subsequently reduced VAT
from 17.5% to 8% on sanitary protection products (from 1 January 2001); children’s
car seats (from 1 April 2001); conversion and renovation of certain residential properties (from 12 May 2001);
contraceptives (from 1 July 2006); and smoking cessation products (from 1 July
2007)

In response to the late-2000s recession, Labour Chancellor Alistair Darling announced in November 2008 that the standard rate of VAT would be reduced from 17.5% to 15% with effect from 1 December 2008. In December 2009, Darling announced that the standard rate of VAT would return to 17.5% with effect from 1 January 2010. In the run up to the 2010 general election there were reports that the Conservatives would raise VAT if they gained power. The party denied the reports. Following the election in May 2010, the Conservatives formed a coalition government with the Liberal Democrats and in June 2010 Conservative Chancellor George Osborne announced that the standard rate of VAT would increase from 17.5% to 20% with effect from 4 January 2011.

Operation:
All businesses that provide “taxable” goods and services and whose taxable turnover exceeds the threshold must register for VAT. The threshold has been £77,000 since April 2012. It is by far the highest VAT registration threshold in the world. Businesses may choose to register even if their turnover is less than that amount. All registered businesses must charge VAT on the full sale price of the goods or services that they provide unless exempted or outside the VAT system. The default VAT rate is the standard rate, currently 20%. Some goods and services are charged lower rates
(reduced or zero). Registered businesses must pay over to HMRC the VAT they have charged on their goods or service (known as output tax) but they may offset this with the VAT they have incurred on goods or services they have purchased (known as input tax).

A separate scheme, called The Flat Rate Scheme is also run by HMRC. This scheme allows a VAT registered business with a turnover of less than £150,000 per annum to pay a fixed percentage of its turnover to HMRC every 3 months. The scheme is designed to reduce red tape for small business and allow new companies to keep some of the VAT they charge to their customers.

Businesses that sell exempt goods or supplies, such as banks, may not register for VAT or reclaim VAT that they have incurred on purchases. Businesses that sell some exempt goods or supplies may not be able to reclaim the VAT on all of their purchases. However, businesses that sell zero-rated goods or supplies, such as food producers or bookseller, may reclaim all the VAT they have incurred on purchases.

Rates:
There are currently three rates of VAT:
standard (20%), reduced (5%) and zero
(0%).In addition some goods and
services are exempt from VAT or outside the
VAT system.[1]
The following are the rates applicable to
some common goods and services:
Standard Rated
Alcoholic
drinks
Biscuits
(chocolate
covered only)
Bottled water
(inc. mineral
water)
Calendars &
diaries
Carbonated
(fizzy) drinks
CDs, DVDs &
tapes
Cereal bars
Chocolate
Clothes &
footwear (not
for children
under 14)
Confectionery/
sweets
Delivery
charges
(postage &
packaging)
Electrical
goods
Electricity,
gas, heating
oil & solid fuel
(business)
Food & drinks
supplied for
consumption
on the
premises (at
restaurants,
cafes etc)
Hot take-away
food & drinks
(inc. burgers,
hot dogs,
toasted
sandwiches)
Ice cream
Fruit juice &
other cold
drinks (not
milk)
Nuts (shelled,
roasted/
salted)
Potato crisps
Prams &
pushchairs
Road fuel
(petrol/diesel)
Salt (non-
culinary)
Stationery
Taxi fares
Tolls for
bridges,
tunnels &
roads
(privately
operated)
Water
(industrial)

Reduced Rated:

Children’s car
seats
Electricity,
gas, heating
oil & solid
fuel
(domestic/
residential/
charity non-
business)
Energy
saving
materials
(permanently
installed in
residential/
charity
premises)
Maternity
pads
Mobility aids
for the
elderly
Sanitary
protection
products
Smoking
cessation
products

Zero Rated:

Aircraft (sale
charter)
Bicycle &
motorcycle
helmets
Biscuits (not
chocolate
covered)
Books, maps
& charts (no
ebooks)
Bread, rolls,
baps & pita
bread
Brochures,
leaflets &
pamphlets
Building
services for
disabled
people
Cakes
(including,
Jaffa Cakes)
Canned &
frozen food
(not ice
cream)
Cereals
Chilled/froze
ready meals,
convenience
foods
Clothes &
footwear (for
children
under 14
only)
Construction
& sale of new
domestic
buildings
Cooking oil
Donated
goods sold a
charity shop
Eggs
Equipment
for disabled
people (inc.
blind/partiall
sighted)
Fish (inc. liv
fish)
Fruit &
vegetables
Live animals
for human
consumptio
Meat &
poultry
Milk, butter,
cheese
Newspapers,
magazines &
journals
Nuts & pulse
(raw for
human
consumptio
Prescription
medicine
Protective
boots &
helmets
(industrial)
Public
transport
fares (bus,
train & tube)
Salt
(culinary)
Sandwiches
(cold)
Sewerage
(domestic &
industrial)
Shipbuilding
(15 tonnes o
over)
Tea, coffee &
cocoa
Transport in
vehicle, boat
or aircraft
(not fewer
than ten
passengers)
Water
(household)

Revenue

VAT revenue since 1978/79 as a percentage
of total government revenue:[27]
Year VAT
(£bn)
% Year VAT
(£bn)
1978/79 4.9 7.02% 1988/89 27.2 13.
1979/80 8.0 9.41% 1989/90 29.6 14.
1980/81 11.1 11.00% 1990/91 30.9 13.
1981/82 11.9 9.95% 1991/92 35.3 15.
1982/83 13.8 10.63% 1992/93 37.2 16.
1983/84 15.3 11.09% 1993/94 39.2 16.
1984/85 18.6 12.59% 1994/95 41.7 16.
1985/86 19.4 12.29% 1995/96 43.1 15.
1986/87 21.3 12.94% 1996/97 46.6 16.
1987/88 24.2 13.53% 1997/98 50.6 16.
Estimated Avoidance:

Evasion and fraud

The UK government loses billions in revenue each year due to VAT avoidance, evasion and fraud. In 2006 the loss was estimated to be between £13bn and £18bn, equivalent to £1 for every £6 of VAT due. The bulk of the lost revenue, about £1 in every £8 of VAT due, is due to evasion.[29] Evasion, which is illegal, occurs when registered businesses pay over to HMRC less than they should. This can be done by understating sales or overstating purchases. Evasion also occurs when businesses do not charge VAT on goods and services they provide even though they are legally obliged to. Cash-in-hand jobs by tradesmen may indicate VAT evasion.

In recent years carousel fraud (also known as missing trader fraud) has increased. Criminal gangs trade goods, such as mobile phones, across EU countries. They do not have to pay VAT, as imports from the EU are exempt. The fraud occurs when the criminals sell the goods with VAT in the UK but fail to pass the VAT to HMRC. The goods are often repeatedly shipped round EU countries by criminal gang networks, hence the “carousel” name. According to the HMRC, between £1.1bn and £1.9bn tax revenue was lost in 2004/05 due to carousel fraud.

The European Union Emission Trading Scheme has been plagued by carousel fraud. A loophole in VAT law – the Low Value Consignment Relief (LVCR) – means that goods imported from outside the EU and costing less than a set amount are not subject to VAT. When the LVCR was introduced in 1983 it was set at about £5 but gradually rose to £18. In March 2011 the government announced that the LVCR would reduce from £18 to £15 from 1November 2011.The LVCR has allowed online retailers of DVDs and CDs to avoid VAT by importing the goods from the Channel Islands, which are not part of the EU.
Major retailers involved in this tax avoidance include Amazon, Asda, HMV, Play.com, Tesco, W H Smith and Woolworths. The tax avoided each year due to LVCR was estimated to be £85m in 2005, £110m in 2008, £130m in 2010 and£140m in 2011.
The government has announced plans to close the loophole

Criticism:

Opponents of VAT claim VAT is regressive and is paid by all consumers whether they be rich or poor, young or old The poorest also spend a higher proportion of their disposable income on VAT than richest.

An Office for National Statistics report showed that in 2009/10 the poorest 20% spent 8.7% of their gross income on VAT whereas the richest 20% spent only 4.0% of their gross income on VAT. Similarly, the poorest 20% spent 9.7% of their disposable income on VAT whereas the richest 20% spent only 5.2% of their disposable income on VAT. Supporters of VAT claim VAT is progressive as consumers who spend more pay more VAT. The zero rating of food and allowing businesses to reclaim input VAT means that the government in effect subsidises the food industry. Critics also argue that VAT is double taxation as consumers pay for goods and services using income that has already
been taxed. It is also argued that VAT is an inefficient tax due to the numerous
exemptions and concessions.
It could also be argued that, compared to its predecessor Purchase Tax, VAT has encouraged the “throwaway society”.Purchase Tax imposed high rates on
new goods (especially luxury goods) but did not apply to repair services.VAT has
increased the cost of repairs and encouraged consumers to replace goods rather than
have them repaired.VAT also covers second- hand goods (which Purchase Tax did not)
and has discouraged the re-use of goods through the second-hand market.

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Money-web.co.uk Expand UK Debt Solutions Business

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Lords claim RDR reforms will widen ‘advice gap’

Peers in the House of Lords have blamed forthcoming financial reforms for worsening an ‘advice gap’ that could leave the poorest stranded at retirement.

Originally posted on Citywire.co.uk by William Robins on Nov 28, 2012 at 11:08

Peers said in a debate last night that the retail distribution review (RDR) reforms, combined with high pension charges, would hurt savers with small pension pots.

The RDR reforms will abolish the payment of commission to financial advisers and require them to hold higher qualifications from the end of this year.

Cross-bench peer Sally Greengross, who led the debate, said the RDR would lead to those on a modest income being priced out of the advice market.

‘There is a big chance that [the poorest] are exactly the set of people who will receive no advice at all, as costs are made transparent and IFAs follow more high net worth clients,’ she said.

‘We must narrow the advice gap. Much more should be done to ensure consumer information is delivered but that must be from a consumer, rather than a compliance, perspective.’

She added that a fragmented government savings policy, split between the work of the Treasury, the Department for Work and Pensions and the FSA, was contributing towards the problem.

Tory peer John Patten added that it was possible for cost-effective investment and advice options to be made available to savers with small pots. ‘We could use the buying power that a million people would have to negotiate for good advice or a better deal when they invest,’ he said.

‘There may be market driven options. They have £2 billion to invest – the market could come up with a process to get a better deal for pensioners.’ Government whip Tina Stowell said the Department for Work and Pensions would consider his idea.

Patten also harshly criticised charges taken from pension pots. ‘These charges have just abolished any chance of getting these rates. People talk about the magic of compound interest but [there is a] tyranny of high charges.’

Labour peer Patricia Hollis added that self-interest among pension providers was also hurting the drive to create a savings culture.

‘I argued for small pots to be transferred to Nest [the National Employment Savings Trust] but this was batted away by the self-interested howls of the industry who would lose money under management,’ she said.  ‘In much the same way they have batted away any early access to a slice of pension savings that would also help transform savings culture.’

‘Many will be left with a portfolio of small pots which will be inaccessible to them at retirement. Those pots have gone AWOL, stolen by the structure of the pension industry we have helped to create.’

Labour peer Lord Lipsey added that the Financial Services Authority had failed to engage politicians in its efforts to reform financial services with the RDR.

‘I did not get a briefing from the FSA – this is extremely neglectful. It’s the FSA’s RDR that’s created the advice gap. Surely those here have a right to hear from the FSA. I don’t know whether this is FSA incompetence or FSA contempt of Parliament.’

Lipsey, who is the president of the Society of Later Life Advisers, said it would be wrong to assume advisers would not write unprofitable business at retirement as ‘winning the trust’ of a pensioner could mean getting other work, such as on inheritance tax issues, later on.

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Never Trust an IFA?

‘Never trust an IFA, they are commission-grabbing ******s.’

By Mike Deverell – Posted from  www.citywire.co.uk

This is a typical comment on Citywire’s forums – often underneath one of my articles – and seems fairly representative of the average Citywire reader’s opinion of Frankly, many of those in the industry have only themselves to blame for this shoddy reputation. Although I have come across many fantastically professional, diligent and honest individuals during my career, I have also met my fair share of salesmen only interested in earning the maximum commission.

Despite this, I believe financial advice is severely undervalued in this country. The value it can add, both in pound-note terms and in terms of comfort and confidence, is seriously underestimated.

I normally write about investment matters, but I thought it was time I set the record straight about our industry, the sharp practices to look out for, the changes that are afoot, and the value that good-quality financial advice can add.

It’s all about incentives

As anyone who’s ever read Freakonomics can tell you, people respond to incentives whether consciously or unconsciously.

Commission is an incentive that misaligns the interests of the client with that of the adviser (salesman). A commission-based adviser’s objective is to sell a financial product since he or she will not be paid otherwise. This product may well meet the client’s objectives, but it may not. The commission incentive ensures that client and adviser have a different objective.

If paying by fee, the adviser gets paid whether or not a product is sold. A fee-based adviser is much more likely to recommend a client keeps their money in cash, or uses it to pay off a mortgage, for example.

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Mis-selling scandals

Commission has been a major component of almost every mis-selling scandal, whether it involves IFAs or not. For example, the Financial Services Authority (FSA) recently expressed concerns about how poorly constructed incentive schemes caused mis-selling of payment protection insurance (PPI) at banks.

Luckily, commission is about to be banned under the retail distribution review (RDR). This comes into play from the beginning of 2013, and will go a long way to cleaning up our industry.

However, an inappropriate fee structure can also wrongly incentivise advisers or discretionary managers. For example, a typical trick by many wealth managers is to charge a relatively small annual management charge, but also charge, say, £25 for each trade.

This gives firms an incentive to trade, which might not necessarily be in the clients’ best interests. At Equilibrium we worked out that a single switch (which remember is actually two transactions – a sale and a purchase) for all our clients could earn us £200,000 if we charged £25 per trade! That is an incentive we do not want to have.

Even after RDR you will need to think carefully about whether the fee structure being proposed offers an inappropriate incentive.

The value of advice

Although it is important to be aware of the potential for sharp (or just poor) practices, professional financial advice can be invaluable.

Financial advice covers a wide range of areas, but quality advice can, among many things:

  • Reduce the amount of tax you pay, whether that be on income or gains from investments.
  • Help protect your family against the unknown with appropriate insurance.
  • Help you plan for the future, knowing how much you need to save for retirement and work out when you can afford to retire.
  • Reduce inheritance tax on your estate.
  • Build appropriate investment portfolios to match your risk tolerance and objectives.

Most Citywire readers have as much chance of selecting decent investment funds as the average IFA. Unfortunately, selecting a good fund manager is a fairly minuscule piece of the investment jigsaw, with asset allocation accounting for more than 90% of the variance of investment returns. Quality investment advisers therefore focus on asset selection rather than fund selection.

Do advisers avoid investment trusts?

One myth that I consistently see repeated on Citywire forums is that advisers only recommend investing in unit trusts or open-ended investment companies (Oeics) instead of investment trusts. They do so – so the story goes – because they get paid trail commission.

Quality advisers who use wrap platforms rebate trail commission back to their clients. They also get a discount on annual management charges, which makes unit trusts similar in cost to investment trusts, often cheaper. We find that the discounts we can obtain on funds often pay for a large part of our fees.

After RDR, trail commission will be banned, and to call themselves independent, advisers will have to consider investment trusts, exchange-traded funds (ETFs) and a much broader spectrum of products as well as unit trusts.

Some may decide they haven’t the time or resources to review all the relevant types of investment. These advisers will no longer be allowed to call themselves ‘independent’, but rather they will offer ‘restricted’ advice.

Qualifications

The RDR also means advisers must now achieve a much higher level of qualification before being allowed to give advice. The previous benchmark for financial advisers was the Certificate in Financial Planning. This was a level-three qualification. From next year, all advisers must be qualified to level four as a minimum. All advisers will also have to sign up to a code of ethics and be a member of a professional body.

To be sure of professionalism, look for chartered financial planners who have qualifications equivalent to degree level. Chartered financial planners must also have a certain amount of experience and carry out a set amount of learning each year to maintain their chartered status. The same can be said for certified financial planners, although their qualification is equivalent to the first year of an undergraduate degree course.

Frankly, most quality financial advisers can’t wait for these new rules to come into play since this will force the unscrupulous and the unprofessional to either clean up their acts or go out of business.

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