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VAT is fundamentally an EU-designed tax, so it is within the remit of the European Commission to look closely at the use member states make of reduced rates of VAT. In the UK and some other countries, reduced rates of VAT are used as a way of keeping down the cost of goods and services, such as domestic fuel or heating installations, which are widely consumed by low-income households. The UK also makes extensive use of VAT zero rates and exemptions for social reasons, although these are less common in most other countries.

 

One argument that is sometimes raised against deviating from the standard rate of VAT is that member states should use ways other than VAT to look after their more vulnerable citizens. These include the benefits system, or direct assistance such as domiciliary or residential care. 

 

Such subsidies might simplify tax rates but at the cost of a more complex benefits system. Benefits are too ‘scatter-gun’ in how they apply to a diverse population to compensate everybody fairly. Besides, many people who would otherwise be entitled might not claim the benefit or other subsidy intended for them. By contrast, reduced rates should automatically give a benefit to the intended consumer, provided they are used where traders pass on the reduction in VAT rather than absorbing the benefit for themselves.

 

LITRG concludes that member states should keep their ability to apply reduced rates of VAT, including zero rates and exemptions.

 

LITRG’s full response is available here. 

 

As an initiative of the Chartered Institute of Taxation, LITRG had access to the CIOT’s submission. The Group is in broad agreement with the CIOT’s submission (available here) but stresses certain matters that are of special concern to people on low incomes, which include, for example, people with disabilities, who are often unable to work.