Pros & Cons of VAT

Written by alistair wilkinson
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Pros & Cons of VAT
VAT is all but unavoidable. (fattura 2 image by Rido from

In the U.K. the standard rate of Value Added Tax (VAT) stands at 17.5 per cent as of August 2010. That tax is to rise to 20 per cent in January 2011. VAT is the tax you pay on almost all goods and services in the U.K.--see the HM Revenue & Customs (HMRC) resource for the various rates of VAT on goods and services--so it's all but unavoidable. However it's not all doom and gloom as there are advantages as well as disadvantages to the tax.

Business VAT Pros

A business has to register to pay VAT if its taxable turnover is above £67,000. The goods and services produced by the VAT-registered business are called taxable supplies. The business charges VAT on its product. A business may volunteer for VAT registration if its turnover is less than £67,000. Why would anyone do this? VAT registration gives a business increased credibility in the marketplace; in other words with VAT on the bill the business looks more professional and perhaps even bigger than it actually is. The chief advantage, however, is that once registered any VAT paid out by the registered company can be claimed back using a VAT return claim form. You'll need proof of purchase--receipts and invoices--and a certificate confirming that you and/or your company are registered for VAT. See the London Guide reference for more details.

Business VAT Cons

Once registered for VAT the product's price rises by 17.5 per cent, a significant increase. If the business is over the threshold then there is no choice but it's a major drawback for those below. This could be negated if selling to other VAT-registered clients but if it's private consumers or businesses small enough to opt out then the full 17.5 per cent is added. There is also an increase in administrative responsibilities with quarterly VAT returns.

Individual Purchaser or Consumer VAT Pros

VAT is a straightforward tax and most of the time the individual is unaware of it. The money gained through VAT means that governments can take less in income tax meaning that an individual has a choice about how much tax he pays because he can avoid goods and services that charge the highest rate of VAT. Public services are funded through VAT. Society is better off and that benefit is paid through the purchase of (mostly) luxuries rather than necessities.

Individual Purchaser or Consumer VAT Cons

Goods and services are more expensive. Some of those can arguably be seen as essential such as a vehicle, private or public, and/or fuel for a commute. The 17.5 per cent is paid by all so the lowest earners, the poorest in society, pay more relatively than those better off. In June 2010 acting leader of the Labour party Harriet Harman, speaking in the Daily Mail, claimed, "The richest 10 per cent spend £1 in every £25 of their income on VAT, while the poorest 10 per cent spend £1 in £7."

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