VAT: You Do The Math

If there's one thing (actually there are lots of things) that annoys me, it's bad maths. And this week, with the VAT rising from 17.5% to 20%, the media has been full of it.

If you can already do school-level mathematics, feel free to skip the next paragraph.

For the benefit of anyone who isn't sure, the VAT rising by 2.5% means the increase in price paid by you the consumer is actually about 2.1%. E.g. if something cost £100 without tax, then the previous 17.5% tax would be £17.50, meaning you pay a total of £117.50. Now with 20% tax that price would be £120. The extra £2.50 you've paid as a percentage of the price you used to pay is 2.50/117.50 = 2.13%.

Many of the papers still haven't learned this since the last VAT change. Furthermore, is 21p on every tenner really that much? In my opinion this is generally a good way to raise a lot of money in tax with minimal impact on most consumers - especially as many essentials for living are exempt from VAT (or at a reduced rate). By the same token I thought the VAT drop to 15% a couple of years ago was an unnecessary move. [I do openly admit throughout this post to be ignoring the impact on businesses - this is more about ignorance than economics]

Here's an example from a BBC article which captures a sadly typical level of consumer ignorance:

Andy in Rotherham says:

"I receive £65 per week in Income Support Benefit, the government gives this me with one hand but yet takes away £13.00 in VAT with the other, leaving £47 to survive on. You don't see the benefits rise, but the VAT does."

Well Andy, an easy way of working your VAT out now is that 20% VAT is £20 out of every £120, i.e. one sixth: so divide your price by 6 and that's the VAT you've paid. So assuming you've spent your £65 benefits entirely on goods and services which attract the full rate of VAT (so none of it on essentials of living such as basic foodstuffs, water and heating), you'd have paid £65/6 = £10.83 in VAT. Not £13.

"The government should bring some type of chip and pin ID card out for the poorest people on the breadline so folk can claim back limited VAT on food and utility bills."

Good news Andy! The government read your letter, went back in time, and made VAT exemptions. The full details are clearly explained on the HMRC website, but to save your clicking finger:

"Food and drink for human consumption is, in general, zero-rated", i.e. 0% VAT.

Utilities (e.g. water) are 0%.

Fuels (e.g. electricity and gas) for domestic and residential use are a reduced rate of 5%.

And it gets even better: Great Men t-shirts have stayed at their wallet-friendly price of £8 for 2011! Hey Andy, the £2.17 extra per week you didn't realise you had can buy you a Small, Medium or Large within the next 4 weeks. Style those January blues away!