This proposal is for a policy change that will help the environment, help businesses, and help level-up poorer parts of Britain.
The proposal is to reform Value-Added Tax.
Specifically, it is to replace a tax on adding value with a tax on not adding value.
At the moment, almost all food bought at a British supermarket is effectively VAT-free, even if it’s battery-farmed, picked by child-labourers, flown in from far away and wrapped in plastic.
All food from restaurants has VAT of 20% added to the price, no matter how ethically sourced the food is, whether the staff are paid a “living wage” or how beneficial the restaurant is to the local community.
At the moment, all vehicles have a 20% VAT added to their price, whether it’s a bicycle or a high-polluting car.
And VAT is applied at the same rate, no matter where in the UK the product is being made or sold, meaning the same proportion of turnover is taken as tax whether the sale happens in Hampstead or Hartlepool.
VAT is charged even when a product or service is provided to a ‘VAT-registered’ business, meaning both the seller and the buyer must complete a VAT return even though the exchequer gains nothing from it.
And the reclaimable nature of VAT allows criminals to make fraudulent claims, costing the exchequer billions of pounds.
As VAT is levied on revenues and not profits it harms low margin businesses disproportionately. Indeed, it forces most businesses with profit margins below 20% out of business.
And VAT is just one of a dozen indirect taxes, such as alcohol duties and air passenger duty, that all aim to raise tax revenue on discretionary spending and alter consumer decisions.
This means there are a dozen different compliance burdens, rules and rates, very few of which are understood by the average taxpayer.
Yet taxes should be transparent and understandable. But how many people know how much tax is on a pint of beer? Or a flight to Marbella? Or a litre of petrol? Having so many different indirect taxes removes transparency and makes ethical decision making more difficult.
Surely the businesses that should pay the most are the ones that don’t recycle, that emit carbon dioxide, that blight local neighbourhoods, that encourage addictions, and a dozen other ethical wrongs?
It seems we have this tax the wrong way round. We shouldn’t be taxing businesses that add value, but those that do not. This proposal is for Value-Added Tax to become No-Value-Added Tax (“NVAT”).
If there was a single, clearly visible “NVAT” number that was added to all goods and services then consumers could easily alter their buying choices, led not just by price but by the NVAT rate – a rate which would indicate the societal and environmental harm caused by the product.
Producers would have to alter their manufacturing and business practices to ensure they can charge a low rate. The government could still collect the same total amount of tax. Everybody would win.
Imagine choosing between two packets of salad, but one costs more because its packaging is not recyclable, and the NVAT percentage clearly shows it to be worse for the environment.
Cars would cost more as their CO2 emissions rise, and bicycles would become cheaper.
Fish from unsustainable stocks would cost more, and it would be clear to the consumer why this was.
Businesses in parts of Britain that need to be “levelled-up” would charge lower rates of NVAT than those areas that don’t need assistance.
High street stores could charge lower rates than Amazon.
Clothes makers that could prove their cotton wasn’t picked by forced labour would have lower prices.
Private schools would charge different rates depending on how much they shared their resources or offered bursaries.
This change would mean businesses become liable to pay for their “negative externalities” – that is, the harms they cause society and the world, whilst being rewarded for ethical business practices.
To reduce fraud and reduce ‘red-tape’, NVAT would only be charged (and thus become payable to HMRC) when a sale is made to a consumer who is not registered for NVAT. The purchaser of the good or service would be informed of the correct NVAT rate to use in their own onward sale.
To make the transition to NVAT as smooth as possible it could be introduced at the same rates as VAT is at currently. The NVAT rate would then be calculated as an adjustment to that base rate, depending on government policy.
For instance, imagine a business selling sunglasses online. The standard rate of NVAT would be the same as VAT is now – 20%. The seller would then select their product or service from existing classification codes, then follow a short questionnaire to determine the correct NVAT to charge, such as:
• Is this product made from recycled materials? (If no, add 6%; if yes, deduct 4%; if unsure, add 6%)
• Is your business based in an officially designated economically disadvantaged region: (If yes, deduct 5%)
Businesses over a certain size could be asked:
• Are at least 25% of your board members women?
• Is your average director remuneration less than 10 times the average pay of your employees?
And if the answer was ‘no’ a percentage point or two could be added to their NVAT rate.
If sufficient businesses improved their conduct to qualify for lower rates of NVAT then the base rate of NVAT could be raised, ensuring that the overall revenue collected from sales taxes remains the same.
With the adoption of an NVAT rate we could help make business practices fairer, we could support businesses that are more environmentally friendly, we could encourage a fairer distribution of resources, we could help consumers make more ethical choices, we could reduce fraud, we could encourage economic activity in poorer parts of the country, and we could do all of this without changing the overall amount of tax collected