Governments around the world love VAT. From the increasing number of countries now levying the sales tax to the surge in the overall share of VAT in total tax revenues, the data speaks for itself.
According to the Organisation for Economic Co-operation and Development (OECD), VAT alone now accounts for more than 20% of the total tax revenues in developed countries. The percentage goes up to 25–30% in developing countries.
But it is by analysing the trends in the four major European economies (Germany, France, the UK and Italy), with over 50 years of history in administering the tax, that the enormous growth in popularity of VAT becomes evident.
In the UK, for example, a study published in 2023 by the House of Lords found that in 1973 (its first year of collection), VAT accounted for 6% of central government revenues and 1.7% of GDP. In comparison, in 2022 it accounted for 20% of central government revenue and 7.3% of GDP.
The total VAT take in Europe’s big four economies is about to exceed €1 trillion
In 2023/24 it was the third largest revenue raiser for the UK Treasury, behind income tax and national insurance contributions (NICs), and last year’s NIC cuts mean that VAT may become the second-biggest revenue raiser in the UK this financial year.
Up and up
In fact, while other tax rates have fallen, the standard rates of VAT across Europe have continued to increase from their lows in the late 1970s.
The four European powerhouses in 2013 collected a net combined €538bn in VAT. In 2021 the total was €776bn (up 44%). Considering the levels of inflation experienced in Europe in the past couple of years (when inflation goes up, VAT receipts tend to shoot up too), it is reasonable to assume that the total is about to exceed €1 trillion for the first time.
The UK’s Office of Budget Responsibility has estimated that, on average, every British household now pays more than £6,000 every year in VAT to the Treasury (indirectly, of course, given the nature of the tax, via VAT-registered businesses).
Wider trend
Outside Europe, the past two decades have seen a huge number of countries adopting VAT and to some extent replicating the rules in force in the European Union. Even countries in the Middle East such as the United Arab Emirates and Saudi Arabia have recently introduced VAT, with Saudi Arabia tripling its standard rate from 5% to 15% in 2020.
According to a recent OECD study, the number of countries around the world that levy an indirect tax on the value added at each stage of production and distribution of goods and services, which is then passed along and ultimately paid by the end consumer, has grown from 50 in 1990 to 174 in 2022.
All but one of the OECD countries now have VAT or goods and services tax (GST), the exception being the US.
A simpler-sounding tax like a purchase tax is much more open to abuse
VAT’s many hooks
So why do governments love VAT so much? An analysis by the UK’s Institute for Fiscal Studies published last year, on the 50th anniversary of the introduction of VAT in the UK, provides a clear and concise answer: ‘VAT is in effect imposed on the value of the final product but is collected in small chunks from each link in the supply chain. So even if one firm in the chain tries to evade it, most of it should still get paid.
‘By contrast a simpler-sounding tax like a purchase tax, which just adds on tax at the point at which a good is sold to the final consumer, is much more open to abuse. That’s why VAT is so popular among revenue authorities around the world.’
