VAT, or Value Added Tax, is a tax on consumers collected by businesses. It was developed in the last century and was widely adopted in Europe from the 1950s onwards. It is the tax most closely associated with the European Union; having VAT is a prerequisite for EU membership. Despite its relative youth in taxation years, VAT is now a global phenomenon, and has become a vital source of revenue for governments across the world. Most nations now have VAT, or a similar form of indirect taxation, as part of the revenue raising portfolio.
VAT is a consumption tax It is paid on all goods and services throughout the varying stages of production and until the final sale to consumer. In the UK, VAT generates over £100 billion revenue annually for the exchequer. These significant sums are consistent in neighbouring nations. At the end of 2018, the OECD confirmed that over the last two years, VAT revenues have been the largest source of consumption tax revenues in the OECD. In short, VAT is a vital part of life.
EU VAT legislation – discord and harmony
VAT is not intended to be a burden on businesses. The original concept – a tax on consumers, levied by companies – is simple. But as systems and structures evolve, so too do VAT practices.
In recent decades the semi-harmonisation of VAT systems across the EU have succeeded in simultaneously generating easier trading frameworks, and labyrinthian complexity in rules and regulations. In Europe, all countries (at present, including the UK) are subject to the European VAT Directive (EVD). The EVD has a direct and over-riding effect on member states. However, there are aspects of the EVD which can be selectively applied by each nation. Added to this, member states are free to interpret aspects of the legislation in differing ways.
The upshot is that, while we have an overarching system which simplifies trade across the EU, in practice there are vast differences across nations including in terms of rates, registration and reporting requirements, and refund procedures. For those operating cross border, this can feel like a minefield.
VAT and society
What has become the European Union began life in 1951 as the European Coal and Steel Community. It was a response to the horror of the second world war. The core intention of the ECSC was to create an interdependent market in Europe which would ‘make war not only unthinkable but materially impossible’.
The aspiration to promote peace through cross-border trade has remained a defining element of the EU vision. VAT, by creating some consistency in the application of sales taxes across the EU, is intended to support that aim.
As globalisation and digitisation make ‘traditional’ corporate and income taxes harder to collect, public spending is growing ever more dependent on VAT. VAT is a regressive tax (it applies equally to all, irrespective of income) that we have come to rely on for progressive ends (like the European social model). All EU member states pay a proportion of their VAT receipts directly to the EU.
The reality now for both the UK and EU is that welfare systems, nationalised or part nationalised health care and social security structures all owe their existence, in part, to VAT. Despite its sometimes counter – intuitive complexity, and despite the levels of intricate interaction between different VAT systems and procedures, VAT has been and will continue to be vital to the future of the European social project.
Taxation is regularly in the firing line of criticism – either for being too high, too low, too poorly enforced or too selectively applied. A key election winner and frequent go to manifesto promise, income and corporate taxation policy is constantly under the cosh. But VAT usually escapes the same level of scrutiny. This, coupled with the vast sums that it generates, mean that it is vital to the future delivery of services which have come to define western liberal democracies.