With the publication of an update to VAT Notice 701/18 on 4 January 2021, the government confirmed that sanitary products would be zero-rated from 1 January 2021. This was met by loud rejoicing from campaigning groups (as the BBC reported here), and claims of a ‘Brexit bonus’. But does it really matter?
It has bemused me that this has become such a high profile issue. Of course there is period poverty, and it is dreadful that some women – and young girls, in particular – have not been able to afford sanitary protection. But I am far from convinced that a 5% VAT charge is a major contributor to that poverty, or that abolishing it will make things much better.
First, let’s look at the scale of it. Since 2016, proceeds from VAT on sanitary products have gone to the tampon tax community fund (charities can apply for grants from £15m tampon tax fund), with a total of about £75m being donated to women’s charities. That is clearly good news for the charities, but if we assume there are about 15m women of menstruating age (roughly 25% of the total population of the UK), then that is £5 per woman, over a five year period – a mere 2p per person per week.
And there is also an assumption that the savings will be passed on to customers – which is far from certain. When e-books were zero-rated, did your newspaper subscription come down in price? Mine didn’t. Anecdotal experience (a discussion on Twitter, led by Professor Judith Freedman and with input from Ireland where sanitary products are already zero-rated) suggests that suppliers will keep some or all of the savings.
Is the zero-rating a result of Brexit? While it is true that the UK government committed to a zero rate ‘as soon as this is consistent with our EU obligations’, the EU had already agreed that sanitary products can be zero-rated from a date to be confirmed (probably 1 January 2022). So, at best it saves people about £1 over the next year, which pales into insignificance compared to other costs of Brexit. (Full details of the history of the tampon tax are set out in a House of Commons research paper.)
Another myth is that sanitary products have been subject to VAT because they are ‘luxury items’. This is not how the VAT system works. All products are standard-rated, unless they are within a limited range of products subject to VAT at the lower 5% rate (for example, energy sold to domestic customers) or are within the UK’s list of zero-rated items. Zero-rating is not generally permitted under the EU VAT system, but the UK was permitted to retain zero-rating on items that had not been subject to tax prior to the UK joining the EU in 1973. It could not, however, add new items to the list. There was, briefly, a luxury rate of VAT applied to certain items in the 1970s but that was abolished in 1979.
In deciding which items should originally be zero-rated, the then chancellor, Anthony Barber, referred to concerns that ‘the change from purchase tax, with its high rates on so-called luxury goods and low rates on so-called essentials, to a single rate of VAT might bear more heavily on the poor than on the rich’. He reassured MPs that VAT ‘has been deliberately designed with the interests of low income families in mind’, relieving food and housing from the tax. However, the list of zero-rated products has never included all ‘essential items’, with an obvious omission, for example, being toilet paper.
The question of whether specific items should be zero-rated has led to many tax cases over the years, particularly in relation to food items – not only the famous Jaffa Cake case, but also Pringles, smoothies and cereal bars. The difficulty is that the original list of zero-rated foods was based on the purchase tax list of 1973, which in turn had its origins, at least to some extent, in wartime rationing, I believe (although David Massey, a tax lecturer at UCLAN, tells me that the detailed rules were, of course, more complex than that). So each new food product needs to be compared to a list which is more than a little out of date. My favourite absurdity is the one highlighted by Paul Johnson and Helen Miller of the IFS: plain gingerbread men are zero-rated, but if they are fully iced then they are standard-rated.
Part of the problem with tax policy is that every change is assessed for its impact on different sectors of society as if that was the only tax that people pay. So it is often suggested that putting up VAT will hit the poor hardest (think ‘pasty tax’), even though those with more income spend more and so pay more VAT. But if the government were to standard rate all zero-rated items, and spend the extra revenue on improving universal credit and child benefit, the combined effect of the changes would almost certainly be progressive, not regressive.
A recent paper – The impact of public perceptions on general consumption taxes (Professor Rita de la Feria & Michael Walpole), 4 December 2020, British Tax Review 67/5, 637-669 – explains that, while the public perception is that a reduced or zero rate makes VAT more progressive, in fact ‘applying more than one rate of VAT gives rise to significant legal difficulties, creates economic distortions, and it is at best unclear whether it actually has the social and distributional effects that it aims to achieve.’
So, I’d give no more than one cheer for the zero-rating of sanitary products. Increasing universal credit (and particularly not withdrawing the ‘temporary’ £20 top up) would be a better way to support those in poverty, in my view.
With the publication of an update to VAT Notice 701/18 on 4 January 2021, the government confirmed that sanitary products would be zero-rated from 1 January 2021. This was met by loud rejoicing from campaigning groups (as the BBC reported here), and claims of a ‘Brexit bonus’. But does it really matter?
It has bemused me that this has become such a high profile issue. Of course there is period poverty, and it is dreadful that some women – and young girls, in particular – have not been able to afford sanitary protection. But I am far from convinced that a 5% VAT charge is a major contributor to that poverty, or that abolishing it will make things much better.
First, let’s look at the scale of it. Since 2016, proceeds from VAT on sanitary products have gone to the tampon tax community fund (charities can apply for grants from £15m tampon tax fund), with a total of about £75m being donated to women’s charities. That is clearly good news for the charities, but if we assume there are about 15m women of menstruating age (roughly 25% of the total population of the UK), then that is £5 per woman, over a five year period – a mere 2p per person per week.
And there is also an assumption that the savings will be passed on to customers – which is far from certain. When e-books were zero-rated, did your newspaper subscription come down in price? Mine didn’t. Anecdotal experience (a discussion on Twitter, led by Professor Judith Freedman and with input from Ireland where sanitary products are already zero-rated) suggests that suppliers will keep some or all of the savings.
Is the zero-rating a result of Brexit? While it is true that the UK government committed to a zero rate ‘as soon as this is consistent with our EU obligations’, the EU had already agreed that sanitary products can be zero-rated from a date to be confirmed (probably 1 January 2022). So, at best it saves people about £1 over the next year, which pales into insignificance compared to other costs of Brexit. (Full details of the history of the tampon tax are set out in a House of Commons research paper.)
Another myth is that sanitary products have been subject to VAT because they are ‘luxury items’. This is not how the VAT system works. All products are standard-rated, unless they are within a limited range of products subject to VAT at the lower 5% rate (for example, energy sold to domestic customers) or are within the UK’s list of zero-rated items. Zero-rating is not generally permitted under the EU VAT system, but the UK was permitted to retain zero-rating on items that had not been subject to tax prior to the UK joining the EU in 1973. It could not, however, add new items to the list. There was, briefly, a luxury rate of VAT applied to certain items in the 1970s but that was abolished in 1979.
In deciding which items should originally be zero-rated, the then chancellor, Anthony Barber, referred to concerns that ‘the change from purchase tax, with its high rates on so-called luxury goods and low rates on so-called essentials, to a single rate of VAT might bear more heavily on the poor than on the rich’. He reassured MPs that VAT ‘has been deliberately designed with the interests of low income families in mind’, relieving food and housing from the tax. However, the list of zero-rated products has never included all ‘essential items’, with an obvious omission, for example, being toilet paper.
The question of whether specific items should be zero-rated has led to many tax cases over the years, particularly in relation to food items – not only the famous Jaffa Cake case, but also Pringles, smoothies and cereal bars. The difficulty is that the original list of zero-rated foods was based on the purchase tax list of 1973, which in turn had its origins, at least to some extent, in wartime rationing, I believe (although David Massey, a tax lecturer at UCLAN, tells me that the detailed rules were, of course, more complex than that). So each new food product needs to be compared to a list which is more than a little out of date. My favourite absurdity is the one highlighted by Paul Johnson and Helen Miller of the IFS: plain gingerbread men are zero-rated, but if they are fully iced then they are standard-rated.
Part of the problem with tax policy is that every change is assessed for its impact on different sectors of society as if that was the only tax that people pay. So it is often suggested that putting up VAT will hit the poor hardest (think ‘pasty tax’), even though those with more income spend more and so pay more VAT. But if the government were to standard rate all zero-rated items, and spend the extra revenue on improving universal credit and child benefit, the combined effect of the changes would almost certainly be progressive, not regressive.
A recent paper – The impact of public perceptions on general consumption taxes (Professor Rita de la Feria & Michael Walpole), 4 December 2020, British Tax Review 67/5, 637-669 – explains that, while the public perception is that a reduced or zero rate makes VAT more progressive, in fact ‘applying more than one rate of VAT gives rise to significant legal difficulties, creates economic distortions, and it is at best unclear whether it actually has the social and distributional effects that it aims to achieve.’
So, I’d give no more than one cheer for the zero-rating of sanitary products. Increasing universal credit (and particularly not withdrawing the ‘temporary’ £20 top up) would be a better way to support those in poverty, in my view.
