How VAT may dog your day

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The Independent Online
IT SEEMS likely that the Budget will increase the VAT base by imposing the standard rate (17.5 per cent) or a reduced rate on some goods and services now zero-rated.

Most people react to Budget changes by examining the effect on their own income and expenditure. So what would be the effect of the abolition of most of the UK's zero-rating?

7am: Wake up, wash and dress, head for the kitchen.

Domestic water and sewerage services are zero-rated. If you don't like tap water but reach instead for Scottish Spring, the Vatman will have you in his sights. Bottled water is already liable to VAT at the standard rate: so much for the zero-rating of food] The fuel to heat the water is zero-rated, but only until April of next year when VAT will be applied at 8 per cent, before increasing to 17.5 per cent in April 1995. Or will the Chancellor change his mind and apply the standard rate sooner?

Your 2.4 children do likewise.

Children's clothes are zero-rated for the under-14s. (Perhaps if you had another child we could apply averaging.) Maybe the Chancellor will tax flares and platform shoes on the grounds that they are damaging to the nation's health.

You breakfast on orange juice, tea, coffee, cereal, toast and bacon and eggs.

'Freshly squeezed' orange juice will be liable to VAT from 1 December 1993 to bring it in line with the treatment of other fruit juices. All the other breakfast items are zero-rated and are likely to remain so in the immediate future.

8am: You take a bus to the station, buy a paper and catch the train to town. You switch to the tube and travel to work.

Bus, train and tube fares are zero-rated. So are newspapers. Should you walk a couple of stations and pick up a used newspaper from the train at the other end?

8.45am: You get coffee from the machine and start work.

The money you put in the vending machine includes a VAT element, always has. (Maybe that's why it tastes so awful.)

10.00-4.30pm: You take a taxi to the airport and fly to Cardiff for a meeting with a potential customer. You have a late lunch at a restaurant in Cardiff.

Taxi fares have always been liable to VAT, providing the driver or his company is VAT registered. Domestic air fares are zero-rated. VAT will be charged on the restaurant meal.

Your company will be able to recover the VAT on the taxi fare and the air fare providing the company normally recovers all its VAT on expenditure. This will not apply to most businesses in the financial and property sectors so the VAT will be an additional cost. Your company should be able to recover the VAT on the cost of your meal but not that of your customer: that VAT will be disallowed as an entertainment expense.

4.30-6.00pm: You fly back, having bought a book to read during the flight.

The air fare and the book are zero-rated; or they were when you left this morning. Books and newspapers are likely to be top of the hit list. (Any airline that makes in-flight magazines novel could be on a winner])

6.00-8.00pm: Taxi to the station, train and bus back home.

Again, all the transport except the taxi is zero-rated. Perhaps you should share the taxi.

8.00-11.00pm: Play with the children, have supper, a cup of tea and a chocolate biscuit, a nightcap and go to bed.

Children's picture books are zero-rated as is the food for your supper except the chocolate biscuit. The nightcap is VAT liable (and subject to excise duty), sleep is VAT-free - and funerals are exempt too.

Report by George Michie, head of the VAT Dept at KPMG Peat Marwick

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