Thursday, March 29, 2012

VAT on hot food

I found this entry from Liberal Conspiracy interesting to read concerning the recent budget; doubly interesting is the way that 'Pasty-gate' is slowly eclipsing the 'Granny tax'. It's a sad thing to say that this current coalition may fall due to sticking 20% on a Greggs Pasty then 'acquiring' £5m from pensioners.

The Chancellor states that this and other measures were being introduced to close down loopholes in tax law; I can relate. It may sound silly but the law and programming code are very similar - you're trying to set up explicit instructions that sometimes lead to unexpected results. In both cases you try to find the errant instruction and alter it to get the result you expected and wanted.

In fact despite both being possibly a mass of interwoven and tangled instructions the law should be the easier to 'debug' as in order to make an exception the unexpected result has to point out exactly why they don't have to follow the rules. However sometimes it's worth while to step back and then slowly step-through the instructions and assumptions that make up the code/law. Let's try that with VAT.
To start simply VAT stands for Value Added Tax; that means a Tax when Value is Added to a product. This sounds simple enough until you try to define "value".

As an example imagine a potato for sale at a greengrocer. Has value been added to it? One could say no as, in theory, one could visit the originating field and pluck out exactly the same potato being offered for sale; it's exactly the same thing.

Now take the same potato and pop it into a microwave with a jacket potato being the result. Has value been added to it? One could say yes as the product has been altered. Take the same potato, chip it, then fry it and again one could state that value has been added.

But what if we miss the last step out; just chip our potato. The product has been altered, but has that added value to it? Chipping the potato means I don't have to;which saves me time and time is money is value. So value added? But what about our raw potato; isn't selling that in a greengrocer saving me time/money/value by being delivered from the farm rather than me having to pick it myself? By that logic pretty much everything should be VATable.

If we state that preparation does not add value then, again in theory, very few things have value added to them. Clothing is simply cloth that's been prepared; cloth is simply the raw material that's been prepared. Even if we modify the rule to differentiate between skilled and unskilled preparation that doesn't help. A workshop in China making clothes is unskilled; but a tailored suit is skilled? Whose to say when skill is or isn't involved?

Perhaps it's possible to define added value as being when something with value outside of the initial product is added; that sounds a little tautological, but bear with me. If I sell beef whole or minced there is no value difference (as defined) if I heat it I'm applying an outside value to it in that it costs me money to heat it in an oven. Except I'd be using a machine to mince the beef and that also costs me money.

If I make a pasty and then cook it surely I'm adding value to it by the act of cooking regardless of whether I then sell it hot or cold?

We could say that a customer values a hot pasty over a cold pasty; but then again said customer would also value a cold pasty over being given the raw ingredients and told to make it themselves; with in turn a customer valuing being able to obtain said raw ingredients in one place rather than traipsing out to a farm to pick them themselves. At what point can we draw the base line?

It appears that we cannot define "value" as being a time-saver or even a money-saver as that would make everything sold subject to VAT. Rather than a value-added instead we really have a profit-added tax.

If my potato cost me 5p to produce and I sell it to you for 7p that's 2p 'value added' and the process can go on through the chain

The logical conclusion to draw would be that any product sold for more than it's production/purchase price is subject to VAT (really PAT; profit added tax) unless stated otherwise.

Build from that and we could exempt food. Sold raw; prepared; from a counter or at a restaurant - no VAT. Run to details and we change that exemption to unprepared food, cold food, or hot food.

Looked at in this way it makes sense that a takeaway selling pie and chips has to add VAT to the pie as well as a Greggs selling a hot pie. Yet watch the news and it's intimated that the Chancellor has taken leave of his senses.

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