It’s no secret that taxes play a significant role in shaping the economy and funding public services. In the United Kingdom, both direct and indirect taxes contribute to the country’s financial well-being. While direct taxes like Income Tax and Corporation Tax tend to grab the headlines, it’s time to shed light on the often overlooked, yet substantial, burden of indirect taxes. Brace yourself as we delve into the world of hidden costs and explore the impact of indirect taxes on the average Briton.

 

Unveiling the Indirect Tax Landscape

Indirect taxes, as the name suggests, are levied on goods and services rather than directly on individuals or businesses. In the UK, the main forms of indirect taxes include Value Added Tax (VAT), excise duties, and customs duties. These charges are stealthily embedded in the prices we pay for everyday products and services, often without us even realising it.

 

 

The Value Added Tax (VAT) Conundrum

VAT, introduced in the UK in 1973, is the most significant contributor to indirect taxes. Currently, the standard VAT rate stands at 20% on most goods and services. Though it may seem like a fair system, VAT disproportionately affects lower-income households, as they spend a larger portion of their income on essential items that are subject to VAT.

Hidden Costs on the Shelves

Take a stroll down your local supermarket aisle, and you’ll encounter a hidden world of indirect taxes. From your daily essentials to indulgent treats, products bear the burden of VAT, which often goes unnoticed. Consider this: for every £1 spent on a VAT-inclusive item, approximately 17p goes directly to the government’s coffers. Over time, these seemingly insignificant fractions add up, weighing heavily on consumers.

I recently booked a return flight from Heathrow to Hannover and the combined UK and German indirect taxes totalled £72 and there was no VAT charged!

 

 

Fueling the Fire: Excise Duties

While VAT stealthily eats into our wallets, excise duties, another form of indirect tax, can have a more pronounced impact. The taxation of goods such as tobacco, alcohol, and fuel has seen successive hikes over the years. These duties aim to discourage consumption and promote healthier habits, but they also take a toll on the average citizen’s budget.

Crossing Borders: Customs Duties and International Trade

As the UK charts its course outside the European Union, the issue of customs duties comes to the forefront. These taxes apply to goods imported from non-EU countries, increasing the cost of products that were once easily accessible. Although customs duties mainly affect international trade, the higher costs are eventually passed on to consumers, squeezing their purchasing power.

The Ripple Effect: Indirect Taxes and Inflation

Indirect taxes have a more pervasive impact on the economy than we may realise. As businesses face higher costs due to VAT, excise duties, and customs duties, they often pass these expenses on to consumers through price increases. This phenomenon can fuel inflationary pressures, leading to a rise in the overall cost of living.

Indirect taxes are hidden because you do not realise how much you are spending on such taxes.  It is shocking to discover  that HMRC raises more money from indirect taxes than from National Insurance https://researchbriefings.files.parliament.uk/documents/CBP-8513/CBP-8513.pdf

 

 

Conclusion

While direct taxes may take the spotlight, it’s crucial to acknowledge the hidden burden of indirect taxes in the UK. VAT, excise duties, and customs duties all contribute to the high cost of living and impact individuals, families, and businesses across the country. Recognising these hidden costs is the first step toward addressing the issue and striving for a fairer tax system that minimises the impact on lower-income households. As consumers, it’s important to stay informed and advocate for transparency and equity when it comes to our financial obligations.  You know it makes sense.*

 

*RISK WARNING

The Financial Conduct Authority does not regulate taxation advice, estate planning or inheritance tax planning. The information provided in this article is for educational purposes only and should not be considered financial or investment advice. Please consult with a qualified professional before making any investment decisions. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.

 

 

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