Earlier this year, two distinguished gentlemen, Judge Hyde and his adviser Julian Stafford, sampled a mineral-enriched flapjack — alas, a year past its sell-by date — and pondered its qualities. (Flapjacks are slabs of oats stuck together with a glue made of butter, sugar and syrup.) The question: was this unconventional flapjack, designed as a pre-exercise snack, “of a standard to be served to guests as a treat with afternoon tea”?
Much turns on the answer, since the enriched flapjack hovers in the liminal space between a muesli bar, which, in the UK, attracts value added tax at 20 per cent, and an ordinary flapjack, which, by long-hallowed British tradition, is a cake and, therefore, zero rated for VAT purposes.
I am serious about the long-hallowed tradition. His Majesty’s Revenue & Customs notes that “at the inception of VAT, traditional flapjacks were widely accepted as cakes of common perception”. When HMRC drew the line between cake and confectionery, it nodded through the idea of flapjacks-as-cakes because to insist otherwise would be to incite a revolution. Is it absurd that a British judge found himself pondering the qualities of a flapjack and the “slightly unpleasant mouth feel” of the protein-enriched brownie with which it was packaged? Of course, it is absurd. But it is an inevitable consequence of the way the UK’s VAT rules try to draw distinctions that cannot sensibly be sustained.
FT Alphaville rightly lavished 5,000 words on the flapjack tribunal, which we can add to the infamous Jaffa Cake controversy — in which what is self-evidently a fancy chocolate biscuit was ruled to be a cake for tax purposes, and to the more recent case of the giant marshmallows, which were ruled to be an ingredient for toasted-marshmallow-and-cookie sandwiches (zero rated) rather than a standalone sweet (20 per cent rated).
It would take a heart of scone not to laugh, but there is more to the flapjack problem than mere British eccentricity. It exemplifies a fundamental unseriousness at the heart of the UK’s tax system. It says a lot that George Osborne, the UK’s chancellor from 2010 to 2016, attempted to remake the relationship between citizen and state, but is equally remembered for trying and failing to introduce VAT on warm Cornish pasties. (Hot takeaway food attracts VAT, cold takeaway food does not, so what tax should be charged on a cooling pasty? If this strikes you as ludicrous, I am not going to tell you you’re wrong.)
Set alongside Osborne’s squeeze on public spending, the pasty tax meant nothing, but it attracted attention. I suppose Cornish pasties are more relatable than austerity.
As a general rule, it is unwise to levy different rates of tax on two fundamentally similar things, because doing so generates red tape, distorts the economy and opens up easy opportunities for tax avoidance. It also attracts lobbyists.
It is often forgotten that when Lady Godiva rode naked through the streets of Coventry, she was agitating for a tax cut. That makes sense: her act was both shameless and irrelevant to the merits of the case, making her a suitable emblem for special interest pressure groups ever since.
But the real problem with all the nonsense about flapjacks and pasties is that they are a distraction. The UK’s public finances are frail. We have high debt, a chronic deficit and fragile public services. That is a trio of problems which strongly suggests a need to raise taxes.
At the same time there is a good reason to cut taxes instead, which is that tax revenues are hitting their highest level since the 1940s. The contradiction could be resolved by raising the economy’s growth rate.
With the government taking in tax more than 37 per cent of all economic output, part of any sensible effort to improve growth will involve serious tax reform, raising more revenue while imposing less drag on the economy.
In 2010, the Nobel laureate economist Sir James Mirrlees led a comprehensive review of the British tax system, which has with equal comprehensiveness been ignored by governments ever since. Mirrlees and his team argued for a “progressive, neutral tax system”.
By “neutral” they meant “a tax system that treats similar economic activities in similar ways”, be they flapjacks or muesli bars, warm pasties or cold ones, or — to pick a more consequential example — income from employment or from self-employment.
By “progressive”, the Mirrlees team meant that the rich should pay relatively more. But the word “system” is also important: while the taxman should be trying to tax the rich more than the poor, he shouldn’t do so flapjack by flapjack. The UK’s VAT system is full of flapjack-esque exemptions, often motivated as some ineffectual gesture towards helping low-income households.
This is silly. VAT could be much broader — as it is in Denmark — while allowing income tax and benefits to make the system as a whole robustly progressive.
A well-designed tax system should be able to raise more money without denting growth. The trouble is that a well-designed tax system leaves less opportunity for successive chancellors to pull metaphorical rabbits out of their hats whenever they present a new Budget or Autumn Statement. (Did I mention that rabbits are among the most tax-efficient of pets because they are also edible? I’m not joking.)
Perhaps the next government will fancy a systematic redesign of the tax system, but the political rewards probably lie elsewhere. We can expect to be chewing over the usual patchwork of nonsensical taxes for a long time to come. A slightly unpleasant mouth feel, indeed.
Written for and first published in the Financial Times on 29 March 2024.
The paperback of “The Next 50 Things That Made The Modern Economy” is now out in the UK.
“Endlessly insightful and full of surprises — exactly what you would expect from Tim Harford.”- Bill Bryson
“Witty, informative and endlessly entertaining, this is popular economics at its most engaging.”- The Daily Mail
I’ve set up a storefront on Bookshop in the United States and the United Kingdom – have a look and see all my recommendations; Bookshop is set up to support local independent retailers. Links to Bookshop and Amazon may generate referral fees.