The Daily Mail and misinformation about VAT
Posted by Christie Malry on January 2, 2012 at 9:45 am
The Coalition government raised the VAT rate to 20 per cent in January. However there is an exemption for food, children’s clothes, tap water, passenger travel, books, newspapers and some other products.
No there isn't. These items are all subject to VAT, but at a rate of 0%. Some other goods and services are classified as 'VAT exempt', which means that VAT isn't charged on them at all.
This might look like meaningless sophistry to some, but it really does matter. Because a business that sells zero-rated goods and services can claim back its input VAT from HMRC. A business that sells exempt goods and services cannot, meaning that it must reclaim the VAT on its input costs via higher prices instead. It's for this reason that Ritchie made an idiot of himself last year when he claimed, wrongly, that banks get a tax break because of their VAT exempt status. They don't, because they suffer VAT on all their inputs.
So what the EU is actually proposing is that various country provisions for differential rates should be removed, which is a totally different proposition. Is it really too much to ask that a national newspaper get this sort of thing right?
It's certainly far too much to expect the Daily Mail to get it right.
I tried to explain the VAT exemption on financial services to various people - it is a cost to banks, not a relief - and was variously told that a) I didn't know what I was talking about b) if there was a cost to banks it probably wasn't much c) there should be VAT on financial services, shouldn't there, duh d) good, tax the banks lots more. Sigh.
Exempt goods and services do not fall within the VAT regime at all. Zero rated goods and services do fall within the VAT regime and for the time being the rate has been set at zero percent. This rate may be changed whereas the rate on exempt goods may not be changed.
The input VAT paid on exempt goods may not be reclaimed - it forms part of the purchase cost of a firm's inputs. An attempt may be made to RECOVER the input VAT by charging customers accordingly but it cannot be RECLAIMED.
Yes, sorry for the lack of precision in my article. And thank you for putting it straight.