How Much Revenue is generated by VAT in the UK?

Value Added Tax (VAT) is one of the most controversial and disliked aspects of the United Kingdom tax system.  At its most basic level, VAT is a consumption tax.  Such is the importance of VAT in the UK that only income tax and national insurance generate more in funds for the UK government.

Since January 2011, the standard rate of VAT has stood at 20%, having been raised by the Coalition government following the 2010 general election.

The sums of money raised as VAT is often the inspiration for calls to reduce the VAT rate, while opponents of the European Union (EU) in the UK often cite the EU’s law that states the standard rate of VAT cannot be lower than 15%.  Critics of VAT also regularly cite that poorer individuals are hit hardest by having to pay VAT, as ultimately the VAT burden lies with the consumer (or business) making the purchase, with the seller simply passing on the VAT raised to the government.

How Much Revenue is generated by VAT?

VAT was first introduced in the UK in 1973, replacing what was then called the Purchase Tax.  The reason for the change was again related to Europe, and coincided with the UK’s admission to the European Economic Community (EEC) on January 1st of that year.

The revenues that have been raised for each respective year refer to the UK tax year, which spreads from April 6th – April 5th of the following year.

The earliest records held at the Institute of Fiscal Studies are for the tax year 1978/79, when the UK Government raised £4.9billion in VAT.  This represented 7% of the government’s total revenue in that year.  For comparison, that sum would be worth £24.5billion today based on historic inflation.

However, the sums of money raised as VAT today are actually far higher, both in monetary terms and as a percentage of the total revenues raised by the government.  The latest figures held are for the year 2010/11, when £83.5billion was raised through VAT, estimated to be around 14% of the total figure raised.

For the last completed tax year, 2013/14, the estimated VAT receipts for the UK Government are £105.3billion.  The Institute for Fiscal Studies projects up to 2016/17, when it projects VAT revenues of £120.4billion.

It is expected that the percentage of VAT as the total of all revenues will remain consistent at around 14%, although the VAT rate could reduce dependent on the outcome of the next general election in the UK, which is likely to be held in May 2015.