The History of VAT in the UK

VAT feels like a permanent fixture of UK business life, but it's younger than most of the taxes it replaced, and its rate has moved more often than people assume. Understanding where it came from explains a lot about why today's system is shaped the way it is.

Before VAT: Purchase Tax

Before 1973, the UK's main sales tax was Purchase Tax, introduced in 1940 to help fund the war effort. It was charged at the wholesale stage rather than at the point of sale, at varying rates depending on how "essential" or "luxury" a product was considered — rates could run as high as 100% on some luxury goods. It sat alongside Selective Employment Tax, a separate tax on employing staff in service industries, introduced in 1966.

1973: VAT arrives

Value Added Tax was introduced on 1 April 1973, replacing both Purchase Tax and Selective Employment Tax, as a condition of the UK joining the European Economic Community. Unlike Purchase Tax, VAT is charged at every stage of a supply chain rather than just at the wholesale point, with businesses able to reclaim the VAT they'd paid on their own purchases — the input/output structure still in use today. The initial standard rate was set at 10%.

How the standard rate has moved

The headline rate has shifted more often than most people realise:

1973: VAT introduced at a standard rate of 10%, alongside a higher 25% rate on petrol and some luxury goods (removed in 1979).

1979: Chancellor Geoffrey Howe's budget nearly doubled the standard rate to 15%, funding cuts to income tax.

1991: Raised to 17.5% under Norman Lamont, partly to offset the abolition of the Community Charge ("poll tax").

2008: Temporarily cut to 15% for 13 months as a stimulus measure during the financial crisis.

2010: Returned to 17.5%, then raised again to the current 20% from January 2011 under the coalition government's austerity budget, where it has stood ever since.

Alongside the standard rate, a reduced 5% rate was extended to domestic fuel and power in 1994, and the modern three-tier structure of standard, reduced and zero rates gradually took shape as more product categories were reclassified over the following decades.

VAT after Brexit

Leaving the EU in 2021 changed how VAT applies to cross-border trade, even though the domestic VAT system stayed largely intact. Imports from the EU began attracting import VAT in the same way imports from anywhere else in the world always had, and new schemes — the Union OSS, Non-Union OSS and IOSS — were introduced to simplify VAT reporting for businesses selling to consumers across borders. We cover how these show up in Sage in our post on OSS and IOSS VAT schemes.

Why this matters today

The 20% standard rate, 5% reduced rate and 0% zero rate in use now aren't a fixed design — they're the result of five decades of individual budget decisions, each responding to the economic pressures of its moment. Knowing that history is a useful reminder that VAT rates are a policy lever, not a constant, and worth watching for change at every Budget. For what the current system actually means for a specific transaction, see our companion piece on what VAT is and how it works today.