Did you know that a gingerbread man is zero rated for VAT but only as long as the chocolate decoration is “no more than a couple of dots for eyes” add a smile, and you’ll also need to add 20 per cent VAT? Or that with Chocolate Nesquik, there is no VAT. But Strawberry Nesquik? 20 percent VAT. Both examples are hangovers from an old system that treated foods deemed to be luxuries or necessities differently. They are just two of a huge number of ways in which our VAT system is mad. These are funny examples, but, taken together, carve-outs in VAT represent £100bn in foregone revenue annually, and create a huge compliance burden.
Millions of valuable hours are spent applying and disputing VAT rules. And the rules don’t even make sense! The problems with how taxes are designed are not confined to VAT. Different types of income are taxed at different rates. Notably, employment incomes are taxed at much higher rates than investment incomes.
That adds a lot of complexity and is unfair in the sense that similar people can face drastically different tax bills, depending on how they get their income. Council tax in England is based on property values from more than 30 years ago. As such, the tax we pay bears increasingly little relation to the actual value of the property we live in.
Meanwhile, stamp duty imposes a heavier tax charge on properties that change hands more often. There is no good reason to do this. It gums up the housing market, meaning people find it harder to move to where the jobs are, young families struggle to trade up, and older people hold on to bigger properties than they need, because it costs so much to move. There is scope to reform most taxes; stamp duty should simply be scrapped.
The list goes one. There is inheritance tax, which is easily avoided by the healthy, wealthy and well advised. Corporation tax discourages some profitable investments while subsidising some unprofitable ones. A jumble of environmental levies creates inconsistent incentives to reduce emissions, making it more expensive to reach net zero. Most of these problems have been around for decades. People who had my job before I was born wrote about them. Depressingly, it’s likely my successors will say the same thing. But it’s not inevitable, and it’s time the tax system was reformed.
Our living standards will be shaped not only by how much tax revenue is raised (and what it is spent on) but also by how it is raised. Taxes could be simpler, fairer and less damaging to our productivity. And if there is one thing that will make our choices over tax and spend easier, it’s productivity. Caring for an ageing population, reaching net zero, improving public services or even cutting taxes, would all be easier if we were richer.
Missing that opportunity seems to me to be almost as silly as a tax that applies to marshmallows, unless they are intended to be eaten from a stick. (Most marshmallows are subject to 20 per cent VAT, but you can avoid the tax if you buy the mega-sized ones that are intended for roasting) There’s no shortage of choice on where to start reforming. Pick any tax. Why do we put up with such a problematic tax system? What do we get in return? Time for Rishi Sunak or Keir Starmer and Rachel Reeves to be bold. Don’t just focus on how much we pay overall. Reform the structure of taxes. We’d be more productive and wealthier as a result. I’d certainly vote for that.
Source: I NEWS
