History shows that reforming VAT is a difficult challenge that expends a lot of political capital. Timing and messaging are critical components to any successful reform. 

There are clear theoretical and practical arguments for implementing a more Scandinavian-style tax system in the UK. In an ideal world, VAT should be broad-based with few or no exemptions, and all at a single rate. The argument that VAT is a luxury tax is dangerous and could lead to endless attacks and lobbying about exemptions that should be carved out for particular products. Existing exemptions and zero ratings are largely based on historic accident rather than any grand design and these anomalies should be rectified to make the tax system more logical and efficient.

Reform challenges

However, we are not starting with a blank sheet of paper and past experience – including my own – shows that reforming VAT can be incredibly challenging. In 2012, when we in government announced a series of quite small VAT base-broadening measures – including what became known as the ‘pasty tax’ – the response was so politically difficult that governments have since been very reluctant to look at further changes. 

While there were some particular issues with the political environment and relationships with the press at the time, the evidence suggests that the electorate doesn’t see resolving these anomalies in the VAT system as a priority, particularly if they are presented with emotive arguments, as was the case with the ‘pasty tax’.

Another challenge in 2012 was that individual MPs felt they could oppose these specific measures without undermining overall fiscal policy. This was in stark contrast to the VAT rate increase from 17.5% to 20% announced in 2010; that was a big reform that sat at the heart of the fiscal argument the government was making at the time. 

Messaging and timing are critical

These experiences highlight the benefits of making the case for a big change to sort out the whole system, rather than a series of reforms to tidy up lots of small anomalies. The ‘tidying up’ argument does not work politically, particularly if people see themselves losing out as a consequence.

The message at the heart of any reform needs to be that substantially broadening the VAT base could raise substantial revenue and be more conducive to growth, offering scope for growth-friendly tax cuts elsewhere, while changes in the benefits system would protect pensioners and the poorest in society. 

However, the political difficulties of reforming VAT should not be underestimated. It would require huge amounts of ‘pitch rolling’, convincing people of the economic growth and tax simplification benefits and bringing together a large coalition of support. Yet it runs the risk of being politically friendless; criticised by those on the right and the left, while newspapers are likely to focus on any middle-income losers from such a reform. 

The question is whether VAT reforms are a good way to expend the huge amounts of political capital required. Chancellors have to pick their battles, choosing where economic benefit is greatest in return for the political pain. Very often what is theoretically the best way of raising revenue needs to be tempered with what is politically deliverable. 

Timing is important, too. It would be much easier to introduce VAT reforms in a period when inflation is low and living standards are rising strongly, rather than during the conditions we’ve experienced for the past 16 years and the current cost of living pressures.