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Earlier this yr, two distinguished gents, Choose Hyde and his adviser Julian Stafford, sampled a mineral-enriched flapjack — alas, a yr previous its sell-by date — and contemplated its qualities. (Flapjacks are slabs of oats caught along with a glue made from butter, sugar and syrup.) The query: was this unconventional flapjack, designed as a pre-exercise snack, “of a regular to be served to visitors as a deal with with afternoon tea”?
A lot activates the reply, for the reason that enriched flapjack hovers within the liminal house between a muesli bar, which, within the UK, attracts worth added tax at 20 per cent, and an abnormal flapjack, which, by long-hallowed British custom, is a cake and, due to this fact, zero rated for VAT functions.
I’m critical in regards to the long-hallowed custom. His Majesty’s Income & Customs notes that “on the inception of VAT, conventional flapjacks have been extensively accepted as truffles of frequent notion”. When HMRC drew the road between cake and confectionery, it nodded by means of the concept of flapjacks-as-cakes as a result of to insist in any other case could be to incite a revolution. Is it absurd {that a} British decide discovered himself pondering the qualities of a flapjack and the “barely disagreeable mouth really feel” of the protein-enriched brownie with which it was packaged? In fact, it’s absurd. However it’s an inevitable consequence of the way in which the UK’s VAT guidelines strive to attract distinctions that can’t sensibly be sustained.
FT Alphaville rightly lavished 5,000 phrases on the flapjack tribunal, which we are able to add to the notorious Jaffa Cake controversy — through which what’s self-evidently a flowery chocolate biscuit was dominated to be a cake for tax functions, and to the newer case of the large marshmallows, which have been dominated to be an ingredient for toasted-marshmallow-and-cookie sandwiches (zero rated) relatively than a standalone candy (20 per cent rated).
It could take a coronary heart of scone to not chuckle, however there may be extra to the flapjack downside than mere British eccentricity. It exemplifies a basic unseriousness on the coronary heart of the UK’s tax system. It says so much that George Osborne, the UK’s chancellor from 2010 to 2016, tried to remake the connection between citizen and state, however is equally remembered for making an attempt and failing to introduce VAT on heat Cornish pasties. (Scorching takeaway meals attracts VAT, chilly takeaway meals doesn’t, so what tax needs to be charged on a cooling pasty? If this strikes you as ludicrous, I’m not going to let you know you’re fallacious.)
Set alongside Osborne’s squeeze on public spending, the pasty tax meant nothing, nevertheless it attracted consideration. I suppose Cornish pasties are extra relatable than austerity.
As a normal rule, it’s unwise to levy totally different charges of tax on two basically related issues, as a result of doing so generates pink tape, distorts the financial system and opens up straightforward alternatives for tax avoidance. It additionally attracts lobbyists.
It’s typically forgotten that when Girl Godiva rode bare by means of the streets of Coventry, she was agitating for a tax lower. That is sensible: her act was each shameless and irrelevant to the deserves of the case, making her an acceptable emblem for particular curiosity stress teams ever since.
However the true downside with all of the nonsense about flapjacks and pasties is that they’re a distraction. The UK’s public funds are frail. We’ve excessive debt, a persistent deficit and fragile public providers. That may be a trio of issues which strongly suggests a necessity to boost taxes.
On the similar time there’s a good motive to chop taxes as a substitute, which is that tax revenues are hitting their highest stage for the reason that Forties. The contradiction could possibly be resolved by elevating the financial system’s development charge.
With the federal government taking in tax greater than 37 per cent of all financial output, a part of any wise effort to enhance development will contain critical tax reform, elevating extra income whereas imposing much less drag on the financial system.
In 2010, the Nobel laureate economist Sir James Mirrlees led a complete assessment of the British tax system, which has with equal comprehensiveness been ignored by governments ever since. Mirrlees and his group argued for a “progressive, impartial tax system”.
By “impartial” they meant “a tax system that treats related financial actions in related methods”, be they flapjacks or muesli bars, heat pasties or chilly ones, or — to select a extra consequential instance — revenue from employment or from self-employment.
By “progressive”, the Mirrlees group meant that the wealthy ought to pay comparatively extra. However the phrase “system” can also be necessary: whereas the taxman needs to be making an attempt to tax the wealthy greater than the poor, he shouldn’t accomplish that flapjack by flapjack. The UK’s VAT system is filled with flapjack-esque exemptions, typically motivated as some ineffectual gesture in the direction of serving to low-income households.
That is foolish. VAT could possibly be a lot broader — as it’s in Denmark — whereas permitting revenue tax and advantages to make the system as a complete robustly progressive.
A well-designed tax system ought to be capable of elevate more cash with out denting development. The difficulty is {that a} well-designed tax system leaves much less alternative for successive chancellors to drag metaphorical rabbits out of their hats every time they current a brand new Funds or Autumn Assertion. (Did I point out that rabbits are among the many most tax-efficient of pets as a result of they’re additionally edible? I’m not joking.)
Maybe the following authorities will fancy a scientific redesign of the tax system, however the political rewards in all probability lie elsewhere. We are able to count on to be chewing over the same old patchwork of nonsensical taxes for a very long time to return. A barely disagreeable mouth really feel, certainly.
Written for and first revealed within the Monetary Instances on 29 March 2024.
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