It is administered and collected by HM Revenue and Customs, primarily through the Value Added Tax Act 1994.
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).
[4] Purchase Tax was applied to the wholesale price, introduced during World War II, initially at a rate of 33.3%.
[4][7][8] The Conservative Chancellor Lord Barber set a single VAT rate (10%) on most goods and services.
[4][7][11] The additional revenue was used to pay for a reduction in the hugely unpopular community charge (the "poll tax").
[7][12] In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on domestic fuel and power to 5%.
Brown subsequently reduced VAT from 17.5% to 5% 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.
[18][19] In the run up to the 2010 general election there were reports that the Conservatives would raise VAT if they gained power.
[27][28] In response to the coronavirus pandemic the UK government introduced zero VAT rating for personal protective equipment (PPE), which was in effect from 1 May to 31 October 2020.
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 that relates to their own onward 'taxable' supplies (known as input tax).
[36] 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.
However, businesses that sell zero-rated goods or supplies, such as food producers or booksellers, may reclaim all the VAT they have incurred on purchases.
Estimated The UK government loses billions in revenue each year due to VAT avoidance, evasion and fraud.
Evasion also occurs when businesses do not charge VAT on goods and services they provide even though they are legally obliged to.
[51][52] Until 2012, the Low Value Consignment Relief (LVCR) meant that goods imported from outside the EU through Jersey and costing less than a set amount were not subject to VAT.
[54] The LVCR 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 included Amazon, Asda, HMV, Play.com, Tesco, W H Smith and Woolworths.
[4] Critics also argue that VAT is double taxation as consumers pay for goods and services using income that has already been taxed,[4] or that it helps to subsidise automation by not removing worker's wages from the equation.