I'd agree that the British Govt. adds complexity to the system (doesn't it always?), but the VAT system is already unnecessarily convoluted at the basic European level.
For a start, why does it need all the ridiculous payment and reclaiming of tax all along the chain? Why not just apply the tax to the final (non-VAT-registered) buyer and have that passed to Customs & Excise?
Perhaps a few words of explanation are in order for our American friends who have only come across VAT as the final customer in the chain.
Every business or individual registered for VAT (and registration is compulsory for turnovers over a certain amount) has to account for VAT on every sale and purchase. Supose you opened a store selling widgets. For every widget you sell, you collect 17.5% VAT and put that down in your accounts as owing to C&E. When you go to the wholesaler and buy your widgets, you also pay VAT on the purchase price, and enter that VAT as being due
back from C&E. You can also claim back the VAT you have paid on other necessary expenses, such as phone bills, stationery, cleaning materials, etc.
The wholesaler from which you bought your widgets puts down the VAT you paid as owing to C&E, while the VAT
he paid to get the widget from the manufacturer is marked as being due
from C&E. The manufacturer will take the VAT paid to him by the wholesaler and give to C&E, while reclaiming the VAT he has paid on his raw materials and other expenses.
Where the chain involves VAT-registered businesses, the VAT part of the transaction gets paid to C&E by one person and reclaimed by another. The only VAT which actually
remains with the government is when the final transaction involves a non-VAT person or business. So to collect the 17.5% VAT on the final sale price, all the people in the chain have had to shuffle VAT back and forth for nothing.
It seems to me that it would be far more sensible if VAT-registered businesses just didn't pay VAT in the first place Why not just have the VAT collected when the sale is to a private (non-VAT) individual and pass that on to the government? (Which I believe is the way that sales tax is handled in many American states.)
It's even more ridiculous when everybody in the chain is VAT-registered (which has been the case in much of my work). In this situation, every penny of VAT paid by one registered-business is reclaimed by another, right around the circle. Net result as far as VAT is concerned: Nil. Since every penny C&E has collected from one person has been paid out to another, the government doesn't profit either. Except that a few bureaucrats have been kept busy needlessly shuffling paperwork around.
The basic European element of the VAT system also specifies items which are exempt. It's then up to individual national governments (at present) to set tha actual level of tax on taxable items. That's why we have the confusion between exempt and zero-rated items, which at first might appear to be the same thing. As food (for example) is not on the exempt list, the only way the British govt. could avoid taxing food was to declare it as taxable, but with a zero-rate.
As far as a business is concerned, there is another major difference between exempt and zero-rated. Somebody trading exclusively in exempt goods and services
cannot reclaim the VAT paid on expenses. Those trading in mostly zero-rated items can.
Ireland, by comparison, has 4 VAT rates; 21% for luxury goods (like cars);
21% isn't specifically a luxury tax rate in Ireland. It is the
standard rate. In other words, anything which is not either exempt or explicitly listed under one of the reduced rates gets taxed at 21%. Just as anything ib the U.K. not listed elsewhere is liable to 17.5% VAT.
