United Kingdom


  • Service: Tax
  • Type: Press release
  • Date: 01/04/2013

VAT turns 40 - 10 things you didn’t know about VAT as it reaches the big 4-0 on April 1st 

Ahead of the VAT system’s 40th birthday on 1st April, Gary Harley, head of indirect tax at KPMG in the UK, said:


“Just as our current working week bears little resemblance to the 3 day working week introduced by the British Government in 1973, VAT today bears little resemblance to the “simple tax” that was introduced forty years ago. 


“In 1973, around 20 countries worldwide had implemented VAT, by the end of this year, more than 160 will have a VAT system – an eightfold increase! 



VAT enactments timeline 1973




VAT enactments timeline 1973 - 2014   



  • Note: geographical borders were not the same in 1973 as they are today but for consistency the same world map outline is used in both the graphics above.


“It is clear that VAT is here to stay.  VAT, or similar sales based taxes, seem likely to increase as governments and tax authorities search for predictable real-time revenues.  Furthermore, in times of economic uncertainty taxes on consumption may be more attractive than taxes on profits.  Every time there’s a VATable transaction (a sale), there’s a slice for the tax authorities.  Businesses charge VAT and collect it on behalf of the Government so it is a cost effective mechanism to collect tax.  It has earned a reputation of a global tax with staying power and, who knows, in 40 years’ time VAT may have replaced corporate tax?! 



“But how has the world of VAT changed in the past 40 years?



1. VAT was introduced as an EU entry requirement but will the UK still be a member in another 40 years? 


2. The standard rate of VAT was 10% when it was introduced on April 1st 1973.  It is now 20%. 


3. In contrast to the ‘simple tax’ described by Sir Anthony Barber (1973 Chancellor), in 2001 a judge, Lord Justice Sedley, referred to "Beyond the everyday world..…lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted." 


4. Everyday technology such as tablet computers, e-readers, even faxes, were not available in 1973.  eCommerce did not exist.  The pace of technological change has exceeded that of VAT legislation and in 2015, new legislation will be introduced to account for VAT on electronically supplied services to consumers.  


5. In 1973 chocolates, crisps, soft drinks, petrol and diesel bought at the pumps and all takeaway food were VAT free – unlike today.  In 1975, a new luxury rate of 25% was applied to petrol, TVs, electrical appliances, jewellery and furs.  To the relief of many consumers, this 25% rate was halved in 1976 to 12.5%. 


6. In 1984, Nigel Lawson removed zero-rating on hot take-away food, sparking a long line of controversies and legal challenges, with the pasty-tax the most recent and high profile.  Based on prior examples ranging from Jaffa Cakes to Pringles and Lucozade to Smoothies, challenges to the VAT liability of certain foodstuffs looks set to continue as new product lines are developed. 


7. In 1986 HM Customs and Excise upped the ante on policing VAT and introduced a new penalty regime that prompted businesses to really start investing in in-house capability.  More recently, HM Revenue and Customs modified the penalty regime to focus on taxpayer behaviour.   


8. In 1993 the EU single market was introduced.  With fiscal frontiers abolished, VAT was no longer payable at the border on the physical movements of goods between EU member states, whilst this eased the flow of trade, it increased the reporting obligations for businesses whilst at the same time having the unintended consequences of paving the way for VAT evasion with missing trader fraud.


9. In 1996, amid growing concerns about increased VAT refunds as a consequence of litigation on sports clubs, opticians, dentists and motor cars, the UK government introduced a cap that restricted the length of time on which overpaid VAT could be claimed to 3 years.  This resulted in 12 years of legal wrangling and as a consequence of the landmark ‘Fleming and Conde Nast’ cases the cap was overturned in 2008 allowing taxpayers to submit claims back to 1973 again. 


10. In four decades, VAT trends have evolved from an initial position of ignorance amongst taxpayers, through a period of structured planning resulting in challenges from the tax authorities (the most important being the ‘Halifax’ case in 2006 which changed the landscape and effectively brought this aggressive tax planning to a halt) to where we are now.  Today the focus among businesses is on compliance and cashflow efficiency as, with rates at 20% and heavy penalties imposed for transgressions, getting either of these wrong can be very expensive.


“Today the system is still full of quirks and wrinkles as technical tax rules are applied to an ever-evolving range of products and services.  Did you know for example:



  • Books – printed on paper and they’re VAT free, an e-book is standard (20 %) rated


  • Fruit pulp for cooking (pureed apple for example) is zero-rated but if consumed as a drink (a smoothie), it is standard-rated


  • Flapjacks are zero-rated, cereal bars are standard-rated


  • Baked Alaska is zero-rated, ice-cream is standard-rated


  • If you buy a coffin it’s standard-rated but hiring a hearse is VAT free

“KPMG will soon publish its third Benchmark Survey on VAT/GST. Previous surveys demonstrated the shift away from direct to indirect taxation and provided insights into the qualitative and quantitative measures used to manage VAT/GST.  Will the consequences of increased regulation and the global economy feature in this year’s publication?”





Follow us on twitter: @kpmguk


For further information please contact:


KPMG Press office

Tel:  +44 (0) 207 694 8773


Margot Cowhig, KPMG Corporate Communications

Tel: +44 (0) 207 694 4246 / (0)7920 274856 Email: margot.cowhig@kpmg.co.uk


About KPMG:


KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 11,000 partners and staff.  The UK firm recorded a turnover of £1.7 billion in the year ended September 2011. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 152 countries and have 145,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  KPMG International provides no client services.


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