Ain’t nobody here but us chickens

A couple of weeks ago I went down to deepest Sussex to spend a day in the country with an American friend of mine, Sam, who was chicken-sitting for a week. And yes, that was a new one on me, too (though not apparently to everyone out there: click here).

I arrived to cries of ‘Chicken 911’ as one of the three hens was broody and was sulking in the hen-house, refusing to come out.

I got on the phone to Deirdre, a fellow judge and, more importantly, a chicken expert. Her sage advice was to get the recalcitrant fowl out of the hen-house and then ‘distract it’ in a bid to discourage it from scuttling back in again. Now, Deirdre’s son is a stand-up comedian and so I have to admit that I was sceptical, but the trick worked. What we had to do to ‘distract’ a broody chicken I’ll save for another blog…

Chicken emergency over, I repaired to the garden for a well-deserved cuppa in the company of Sam’s brother (and fellow chicken-sitter) Mel. Mel is retraining as a High School chemistry teacher and he sought my help in devising a scheme to prevent pupils turning up to class without their pencils. So much for the tranquillity of the countryside. This visit was becoming more challenging by the minute.

Luckily, I was restored to my comfort zone when Mel, knowing what I did for a living, asked ‘So, what’s the difference between value added tax and sales tax?’

The simple answer is that a sales tax is a turnover tax which is generally levied only once (on retail sales) whereas VAT (and GST, its counterpart in Australia, New Zealand and Canada) is a multi-stage turnover tax.

Whereas a sales tax is levied at the till, VAT is applied at every stage in the supply chain, with a deduction for tax paid at earlier stages. Both are intended to be borne only by the private consumer with the VAT mechanism ensuring that the end-user tax is the same as it would be with a sales tax. Somewhat confusingly, VAT is chargeable even if what is being sold has gone down in value!

So, how did we end up with VAT?

Article 99 of the Treaty of Rome (1957) which was the founding treaty of the EEC required the EC Commission to consider how best to harmonise the turnover tax legislation of the various then Member States. It was recognised that sales taxes, turnover taxes and similar charges could have an adverse effect on free movement of goods and services, as well as on competition, and a harmonised system of turnover taxes was seen as an essential aspect of creating the common market. The choice was between a single-stage turnover tax (such as the North American sales taxes and the British purchase tax) or a value added tax based on the French model. Between 1967 and 1973, a common system of VAT was introduced (and yes, Italy was the last to comply).

At this point, harmonisation did not mean uniformity. The need for a uniform system followed from a decision in 1970 to substitute a system of ‘own resources’ in place of the previous method of financing the EC budget, which was by direct contributions from the Member States. The EC’s own resources were to include ‘resources accruing from VAT and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules’.

A harmonised system of VAT serves the double purpose of completing the internal market and maximising Community revenue. There is now a Community interest in ensuring that all supplies of goods and services are subject to VAT while at the same time limiting the scope of exceptions and exemptions.

This has come home to roost in the UK with the Commission successfully prevailing on the UK to charge VAT on sales of caravans under 2.55 metres wide, whereas previously those over 2.3 metres wide were tax-free. The Commission has also taken Austria, France, Germany and Luxembourg to the European Court because they apply a reduced rate of VAT to horses, in particular, race horses. The Commission’s view is that a reduced rate cannot be applied to the supply of domestic animals normally kept as pets nor to race horses, since they are neither intended for human or animal consumption nor for use in the preparation of foodstuffs.

Then again, what do the Commission know? I can tell you from personal experience that guinea pigs are regarded as a delicacy in Peru and taste delicious. If you see conejillo on a menu you have been warned (and here’s a recipe).

Tax lawyer specialising in business tax, SDLT and VAT