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Brexiteers’ not very scary VAT scare story

by Sam Ashworth-Hayes | 20.06.2016

Vote Leave has come up with a marvellous scare story. It says the EU could use its “control of the UK’s tax system” to abolish zero and reduced rates of VAT, costing “each household over £2,600”. Not only does the campaign somehow forget to mention that the UK can veto any tax changes, it omits the inconvenient truth that the EU has actually proposed making it easier to set reduced VAT rates.

Vote Leave says the EU “has made no secret of its plans to abolish the UK’s zero and reduced rate of value added tax (VAT)”. But the “evidence” for the EU’s nefarious schemes is slender at best.

The out campaign cites the 1985 White Paper that launched the single market – proposed by British commissioner Lord Cockfield – as saying there were “strong arguments in favour of a single rate” of VAT. As no such rate has been introduced in the last 30 years, it can safely be disregarded.

The second bit of “evidence” is a 2010 paper that says “exemptions are contrary to the principle of VAT as a broad-based tax”. But the paper wasn’t a list of policy decisions or concrete plans. It instead aimed to launch a broad-based consultation on the VAT system.

The final piece of “evidence” is a statement from Pierre Moscovici, the EU’s economics commissioner, on a review of VAT rules. Moscovici said a “zero rate is not the best idea”.

As a statement of economic theory, this is entirely correct. The Institute for Fiscal Studies, in a review led by Nobel prize-winning economist Sir James Mirrlees, recommended scrapping most VAT exemptions and rate reductions because they distort the taxation system and make it needlessly complex.

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But Moscovici also pointed out that it was “far too early to talk about what proposals” might come from the review. Moreover, any decision would require “unanimity by member states”.

Interestingly, Vote Leave neglects to mention the commission’s actual proposals. In March, British officials announced that a deal had been reached to scrap the so-called “tampon tax”, removing VAT on sanitary products.  

In April, the commission presented an “action plan” that outlined two scenarios on the future of reduced rates.

The first suggestion was to abolish minimum rates of VAT and give countries complete freedom to set reduced rates, with some safeguards to prevent unfair tax competition. The second, less radical option was to regularly review the list of reduced rates, with member states submitting their views on the need for tweaks.

In both cases, all existing reduced rates would be maintained, but the option to apply them in all member states could be added. Perhaps Vote Leave’s next “Bombshell” will be the huge savings that households could make from these reductions in VAT.

Contacted for comment, a Vote Leave spokesman said “We’ve had this conversation many a time and I’m going to end this phone call now”.

Tags: , , Categories: Economy

One Response to “Brexiteers’ not very scary VAT scare story”

  • Also conveniently omits the fact that there is a subtle but significant difference between ‘exempt from VAT’ and ‘zero rated for VAT purposes’ under current UK legislation.