In the United Kingdom, the value added tax (VAT)[1] was introduced in 1973, replacing Purchase Tax, 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, primarily through the Value Added Tax Act 1994.
VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the UK.[2] 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).[3] Others are exempt from VAT or outside the system altogether.
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).[4] Opponents of VAT claim it is a regressive tax because the poorest people spend a higher proportion of their disposable income on VAT than the richest people.[5] Those in favour of VAT claim it is progressive as consumers who spend more pay more VAT.[4]
Between October 1940 and March 1973 the UK had a consumption tax called Purchase Tax, which was levied at different rates depending on an assessment of goods' luxuriousness.[4] Purchase Tax was applied to the wholesale price, introduced during World War II, initially at a rate of 33.3%. This was doubled in April 1942 to 66.6%, and further increased in April 1943 to a rate of 100%, before reverting in April 1946 to 33.3%. Unlike VAT, Purchase Tax was applied at the point of manufacture and distribution, not at the point of sale. The rates of Purchase Tax for various classes of goods at the start of 1973, when it gave way to VAT, were 13%, 22%, 36% and 55%.