VAT History

Origins of VAT

The idea of taxing only the value added at each stage of production goes back to 1918, when the German industrialist Wilhelm von Siemens suggested it as a replacement for the cascade-style turnover tax. Nothing came of it at the time — Germany kept its turnover tax until 1968.

The first working version of VAT was introduced by the French tax official Maurice Lauré. It went live in the French colony of Ivory Coast on 10 April 1954, and France adopted it domestically in 1958, starting with large businesses before rolling it out across the economy.

VAT Across Europe

The European Economic Community saw VAT as a way to level the playing field between member states, whose different indirect taxes were distorting cross-border trade. A 1962 report by the Neumark Committee recommended the French model, and in 1967 the EEC issued the First and Second VAT Directives requiring all members to adopt the tax.

Belgium, Italy, Luxembourg, the Netherlands and West Germany were among the first to make the switch. Denmark had already introduced VAT independently in 1967. By the early 1970s the question for Britain was not whether to adopt VAT, but when.

Global Spread

By 1973 thirteen OECD countries had a VAT system in place. Through the 1980s and 1990s the tax spread to New Zealand (1986, with a broad base and few exemptions that became a model for other countries), Canada (1991, as the Goods and Services Tax), Japan (1989) and many developing nations. Former Soviet-bloc countries adopted it as they moved to market economies during the 1990s.

Today more than 170 countries collect VAT or a close equivalent. The United States remains the most notable holdout, relying on state-level sales taxes instead.

VAT Comes to Britain — 1973

VAT replaced Purchase Tax and Selective Employment Tax on 1 April 1973, shortly after Britain joined the EEC. Purchase Tax had been a single-stage tax applied at the wholesale level, with rates that varied wildly — some luxury goods were taxed at 55% while essentials were exempt. The system was complicated and riddled with anomalies.

Chancellor Anthony Barber introduced VAT at a standard rate of 10%. The government chose a relatively low starting point to ease the transition. A zero rate was applied to food, children's clothing, books and other essentials — a deliberate political choice that remains in place today and distinguishes the UK from many other countries.

Around 1.8 million businesses needed to register for the new tax. Customs and Excise (the predecessor to HMRC) ran a large-scale education programme in the months before launch.

The 1970s — Early Adjustments

In July 1974 Chancellor Denis Healey cut the standard rate to 8% and introduced a higher rate of 12.5% on certain goods including petrol, electrical appliances and furs. This two-rate system was intended to make VAT more progressive, taxing luxuries more heavily.

The higher rate proved difficult to administer. Retailers had to classify every item at the till, and disputes over which rate applied were common. The experiment lasted until June 1979.

1979 — Geoffrey Howe's Big Increase

The incoming Conservative government under Margaret Thatcher made a significant shift in tax policy. Chancellor Geoffrey Howe's June 1979 budget abolished the two-rate structure and set a single standard rate of 15%. At the same time, the basic rate of income tax was cut from 33% to 30%.

The logic was straightforward: reduce taxes on earnings and increase taxes on spending. The move raised around £4 billion in extra revenue and caused a short-term spike in inflation, with the Retail Price Index jumping from around 10% to over 20% within a year. The zero rate on food and other essentials was kept, softening the blow for lower-income households.

1991 — Rise to 17.5%

Chancellor Norman Lamont raised the standard rate to 17.5% in his March 1991 budget. At the same time he reduced the Community Charge (poll tax) by £140 per person, effectively using one tax to pay for a cut in another.

The 17.5% rate would remain in place for the next seventeen years — the longest stable period in UK VAT history. Businesses and consumers became accustomed to it as the settled rate.

1993–1994 — VAT on Domestic Fuel

Chancellor Norman Lamont announced in 1993 that VAT would be extended to domestic fuel and power. It was charged at 8% from April 1994, with plans to rise to the full 17.5% in 1995. The proposal was deeply unpopular and the government lost a Commons vote in December 1994, forcing the rate to stay at 8%.

The incoming Labour government in 1997 cut VAT on domestic fuel to 5%, which is where it remains today. This episode showed how politically sensitive changes to VAT coverage can be, even when the rate change itself is modest.

2008–2010 — The Financial Crisis Cut

On 1 December 2008 Chancellor Alistair Darling temporarily cut the standard rate from 17.5% to 15% as part of a stimulus package during the global financial crisis. The cut was intended to boost consumer spending and ran for thirteen months.

Retailers had to reprice everything — twice, once for the cut and again for the return. Opinions differ on how effective it was. The Institute for Fiscal Studies estimated it brought forward around £1 billion in spending, mainly on large items like cars and electronics. The rate returned to 17.5% on 1 January 2010.

2011 — The Current Rate of 20%

On 4 January 2011 the standard rate rose to 20% under Chancellor George Osborne. The increase was part of the government's deficit reduction plan following the financial crisis and was expected to raise an extra £13 billion per year.

This is the rate that applies today. It sits slightly above the EU minimum of 15% and roughly in line with the OECD average of around 19.2%. Several European countries charge more — Hungary at 27%, Denmark, Norway and Sweden at 25%.

UK VAT Rate Changes — Full Timeline

Brexit and VAT

The UK left the EU on 31 January 2020, with the transition period ending on 31 December 2020. While inside the EU, the UK had to comply with the VAT Directive, which set minimum rates and limited zero-rating. After Brexit the government gained the freedom to set its own rates and exemptions without EU approval.

In practice, very little has changed. The main structural differences so far are in cross-border trade: goods imported from the EU are now subject to import VAT (previously handled through acquisition tax), and the EU's Mini One Stop Shop for digital services has been replaced by a UK equivalent.

Northern Ireland operates under the Windsor Framework (formerly the Northern Ireland Protocol), which means EU VAT rules still apply to goods in Northern Ireland, while UK rules apply to services. This creates a dual system that businesses trading across the Irish Sea need to navigate.

Current Rates — 2025^[1]

Three rates apply in the UK today:

• 20% — standard rate. Applies to most goods and services.
• 5% — reduced rate. Covers domestic energy, child car seats, certain energy-saving materials, sanitary products and smoking cessation products.
• 0% — zero rate. Covers most food, children's clothing, books, newspapers, public transport and new-build residential property.

Some supplies are exempt from VAT entirely, including financial services, insurance, education and health services. Exempt is not the same as zero-rated — businesses making only exempt supplies cannot reclaim input VAT.

VAT raised approximately £170 billion for the Treasury in the 2023–24 tax year, making it the third-largest source of government revenue after income tax and National Insurance.

Frequently Asked Questions

Why was VAT introduced in the UK?

Joining the EEC required the UK to adopt a common system of indirect taxation. VAT replaced Purchase Tax, which only applied to certain goods at inconsistent rates, and gave the government a broader, more even-handed revenue base.

Has the zero rate ever been under threat?

EU VAT rules did not allow member states to introduce new zero-rated categories, but the UK kept its existing ones under a grandfathering arrangement. After Brexit, the government can technically zero-rate additional items. It has not done so on a large scale, though sanitary products moved from 5% to 0% in January 2021.

How does British VAT compare internationally?

At 20%, the United Kingdom sits close to the OECD average. Hungary has the highest standard rate in the world at 27%. The US has no federal VAT — individual states charge sales tax instead, typically between 4% and 10%. Japan charges 10%. Australia charges 10% GST.

How does VAT affect the economy?

VAT is a significant revenue tool — it brought in around £170 billion in 2023–24. Because it is a consumption tax, it tends to be regressive: lower-income households spend a larger share of their income, so they pay more VAT as a proportion. The zero rate on food and children's clothing is designed to offset this to some degree.

What is the VAT registration threshold?

As of April 2024, the threshold is £90,000 of taxable turnover in a rolling twelve-month period. It was £85,000 from April 2017 to March 2024. Below the threshold, registration is voluntary.