Brexit and VAT: Why the UK Will Likely Keep VAT Intact

Contrary to the claim that all VAT once went to the EU, this is not accurate. As of now, the UK government collects about ￡160 billion in VAT annually, a figure that dwarfs the UK’s annual contribution to the EU, which stands at less than ￡10 billion per year. This raises the question: if VAT is an EU tax, why wasn't it abolished after Brexit?

The answer lies in the practicality and efficiency of VAT. This tax has been in place since World War II, and every industrialized country uses it. The paperwork required for this tax is streamlined, making it a preferred revenue strategy for governments. Abolishing VAT would simply result in the government having to find alternative ways to generate this significant income. This makes the repeal of VAT highly unlikely.

Why Not Now?

Given its financial importance, it is highly improbable that the UK government would repeal VAT in the near future or even in the next 100 years. VAT serves as a crucial revenue source for the UK government, making it a reliable and adhesive fiscal tool. In the immediate post-Brexit period, the most likely scenario is that the VAT rate will remain unchanged.

Alternatively, there is a chance that the government might even increase the VAT rate further. Since the VAT rate is currently 5% above the EU minimum and was raised by this amount when David Cameron became Prime Minister, this indicates a strong indication that the government does not plan to scrap VAT altogether. However, while it is theoretically possible for a future government to consider such a move, it is not on the immediate horizon.

VAT and the EU

Leaving the EU does not mean the UK is no longer required to have VAT as part of the EU Single Market framework. The real danger is that a financially constrained UK government might increase VAT to garner more revenue, such as including food in the taxable range. This would be the most straightforward way to boost VAT receipts, especially if the government faces financial pressures.

Moreover, VAT is not a replacement for the UK's previous purchase tax. While the EU has certain stipulations regarding the VAT rates within its regulations, a significant portion of the income from VAT goes to the UK Treasury, making it the third largest revenue source for the government. The small percentage of VAT income that funds the UK's contribution to the EU is minuscule compared to the large sum collected through VAT, which is roughly equivalent to the cost of the National Health Service (NHS).

High Cost of Change

Repealing VAT would not be a cost-effective solution for the UK government. Shifting to a different tax system would be both extremely expensive and time-consuming. For this change to be justified, the new tax system would need an extraordinary advantage. Globally, VAT remains one of the most effective and easiest-to-administer taxes, with both parties in a transaction reporting it, which makes it self-enforcing to some extent.

In conclusion, the UK is highly likely to retain VAT for the foreseeable future. While the possibility of VAT repeal cannot be entirely ruled out, the financial benefits and practicality of VAT make it a preferred choice for current and potential future governments. The UK’s financial and administrative landscape is far too reliant on VAT to consider its replacement lightly.