How to fix VAT

Why are chocolate-covered shortbread and plain shortbread taxed differently? The UK’s VAT system is full of bizarre inconsistencies that make it complex, inefficient, and unfair.

In this episode, we dive into how VAT works, why economists tend to love it in theory, and why the UK’s version falls short in practice. We explore zero and reduced rates, exemptions, and myths about regressivity, and discuss how simplifying VAT could make it fairer and less distortionary.

In the fourth and final episode of our tax mini-series, Helen, Ben and Stuart look at how to fix one of the UK’s most important and misunderstood taxes.

Become a member: https://ifs.org.uk/individual-membership

Find out more: https://ifs.org.uk/podcasts-explainers-and-calculators/podcasts]

00:00 - Introduction
2:31 - What is VAT?
4:50 - Why is VAT good in principle?
8:50 - VAT exemptions
15:12 - The 90k VAT threshold
19:20 - VAT zero rates
26:10 - The challenges of boundaries
28:26 - Is the UK unique?
30:55 - Supporting poorer families
33:26 - Is VAT regressive?
38:14 - Does VAT affect work incentives?
39:00 - How to fix VAT
42:30 - Conclusion