The World of Politics

POLICY BANK RECOMMENDATIONS

VAT Neutrality

Policy idea

Remove zero-rating and reduced rates of VAT across goods and services and lower the standard rate of VAT from the current 20% to 15% so that the overall VAT tax take remains broadly unchanged.

Problem This Addresses

• UK VAT policy embeds historic preferences that are no longer justified.
• Zero-rating of food, children’s clothing, books and transport reflects outdated assumptions about “necessities” and skews tax burdens.
• Current VAT structure conflicts with public health and consumption incentives.
• Complexity distorts economic behaviour and prevents targeting support effectively.

Proposal

• Apply VAT at the standard rate to all currently zero-rated goods and services, including food, books, children’s clothing, medicines and passenger transport.
• Apply the same rate to goods currently charged at the reduced 5% rate, including domestic fuel and power and property renovations.
• Reduce the standard rate of VAT from 20% to 15%, keeping total VAT revenue broadly constant.

Why this matters

• Removes arbitrary tax preferences between goods and services.
• Aligns taxation with health and environmental objectives rather than subsidising consumption by default.
• Simplifies the VAT system, reducing administrative complexity and boundary disputes.
• Creates fiscal space to compensate lower-income households transparently rather than indirectly.

Fiscal context

• UK VAT receipts (2024/25): £171bn, implying a taxable base of ~£855bn at 20%.
• Value of currently zero-rated goods and services: ~£290bn, including food, transport, medicines and children’s goods.
• Total estimated value of goods and services (2024/25): ~£1,145bn.
• A flat VAT applied across this base would allow a reduction in the headline rate from current 20% to standardised 15% while maintaining revenue.

Distributional effects and mitigation

• VAT levelling would be mildly regressive, as lower-income households spend a slightly higher proportion of income on food.
• ONS data suggest poorer households spend around 13–15% of gross income on food, compared with 9–11% for higher-income households.
• This effect should be addressed through uprating of benefits and targeted transfers, rather than through indirect tax exemptions.

Barriers and trade-offs

• Strong political resistance to taxing goods framed as “essentials”.
• Public misunderstanding of VAT incidence and compensation mechanisms.
• Transitional inflation effects if mitigation is poorly timed although can be avoided by making changes simultaneous as tax take reduced while scope expanded.

Context

UK VAT zero-rating is a legacy of earlier political compromises rather than a coherent contemporary tax strategy. Reform has been avoided not because it is unworkable, but because it is electorally uncomfortable.

Sources and further reading
UK Food & Drink market value
UK Books & Printed Materials market size
UK Childrens’ clothes & footwear market
UK Water & Sewerage household services
UK Pharmaceutical market value
UK Transport paid journey value
Tab A5 from ONS Household Expenditure Survey 2024

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