Value Added Tax (VAT) was always intended to be a pragmatic and easy to understand. It was even billed as ‘the simple tax’ when it was introduced more than 40 years ago. VAT is essentially a consumption price that is added to the overall production price.
Sounds pretty reasonable, if you ask me. Well, this is where it gets complicated. Certain goods are considered essential and therefore VAT is not charged on them, whereas other goods qualify for a reduced rate. Other goods, like your car, electronics, or other consumer goods fall under the standard rate, which is currently 20%.
How ‘essential’ is essential?
Initially this seemed to all make sense. But it soon developed into a bit of a fiasco, with vague and ambiguous regulations popping up left, right and centre. And there is probably no better way to illustrate this than by walking down to our local bakery and checking out the gingerbread men.
Believe it or not, HMRC considers cakes and biscuits to be essential goods (whew, I thought I was the only one). As a result, you won’t need to pay VAT for these when you buy them.
Well…to an extent. Because the minute you start adding ‘non-essential’ accessories, like a chocolate tie or belt, they suddenly become standard rated, meaning you’ll need to pay an extra 20%. Looking smart has never been so expensive. Poor gingerbread men. And what about gingerbread women and little gingerbread children? Do you have any needlessly ambiguous legislation for them, HMRC?
When is a cake a cake?
The same illogical thinking is applied to other cakes, which has led to some rather bizarre scenarios. You might have heard the story of how McVities, the producers of Jaffa Cakes, went to court to prove that their cake was indeed a cake. Their case was built, quite literally, around a special 12-inch Jaffa cake that was baked to persuade the court of its cake-status. The result? No VAT tax for Jaffa cakes. I don’t know about you, but maybe the cake samples helped sway the court in their favour…
Confusion about VAT
Despite its introduction over 40 years ago, VAT seems to be getting more confusing ever year. Dense rules and regulations are contrived almost out of thein air and oftentimes, it’s the average Joe that pays the price. But one thing is certain: whether you’re a gingerbread man, a Jaffa cake, or just a real-life person or business looking to make ends meet, VAT shouldn’t be as complicated and convoluted as it is now.
But there’s a silver lining. If you’re a business and you want to feel confident knowing that you have an accountant that can deal with your VAT returns properly, get in touch with Defacto-FD.