UK consumers burdened with highest sales taxes in G8

Publications that covered this story include City AM and the Daily Telegraph online edition, 10 December 2012.

  • High sales and consumption taxes weigh on consumer spending
  • Over half of price of petrol at the pump is due to government taxes and duties – UK fuel taxes 5th highest in study

UK consumers are suffering under some of the highest levels of consumption and sales taxes in the G8*, according to our new research.

We studied data from 22 countries* across its international network, including all members of the G8 and the BRIC economies. We calculated the percentage of the total price of a representative basket of 16 goods and services that was made up of taxes and duties (see below for basket).

The UK government takes 16%* of the total price of the basket of goods and services through taxes. This compares with an average of 13.8% across the countries surveyed. The European average is 15.5%, the G8 average is 12.3%, and the Asia-Pacific average is 8.2.

Simon Newark, VAT Partner at our London office, says: “Like all countries with high sales taxes, the UK’s sales and consumption taxes are holding back the economy by putting pressure on disposable incomes. Although the Government had little choice but to raise VAT given the basket-case of our economy, raising VAT from 15% to 20% in such a short period of time no doubt had a significant effect on the faltering recovery.”

“VAT in the UK is now higher than even traditionally higher taxing economies like Germany, where VAT is 19%, and even France, where VAT is 19.6%. The UK also compares badly with other major economies, like Australia.”

The global average percentage of petrol prices made up of taxes and duties is 36.2%.

The UK has the 5th highest taxes on petrol in the study, with 57.7% of the price of a litre of petrol being made up of tax. Ireland (60.5%), France (59.1%), Germany (58.5%), Italy (57.8%), and the Netherlands (50.2%) are the other countries where over half the price of a litre of petrol is made up of taxes.

Simon comments: “High sales and consumption taxes will have a particularly heavy impact on low earners, especially if they are on ‘necessity’ goods like petrol. The UK’s taxes on fuel are already comparatively high, so it was important that the Chancellor cancelled the planned 3p fuel duty rise.”

“There’s very little justification to keep adding to fuel duty; ordinary consumers just end up getting hit in the pocket with a price rise they can’t avoid. Green fuel alternatives to petrol aren’t widely available or affordable yet, while public transport costs are steadily climbing too.  Adding to this the fact that high fuel costs impact directly upon businesses and inflation, it is an area where all Governments should reconsider their revenue policies.”

He adds: “Certain ‘necessity’ goods, like bread, children’s clothing, or energy bills have lower VAT rates, but the benefits these reductions provide to consumers are wiped out by the high levels of taxes on much more expensive items, like petrol.”

The UK’s standard 20% VAT rate means that the point-of-sale prices of ordinary consumer goods or services are much higher than in many other countries.

In the UK this means that 16.7% of the price of an iPad is made up of taxes, compared to just 5.7% in some states in the US, or just 9.1% in Australia. In Germany, 16% of the price of an iPad is made up of taxes, while the global average is just 14.9%.

UK taxes on cigarettes and wine are the 5th and 3rd highest in the world, respectively. 76.8% of the price of a packet of cigarettes is made up of tax in the UK (the global average is just 51.25%), while 36.4% of the price of a bottle of wine is tax (compared to the global average of 22.8%).

Simon adds: “Whilst there may be some justification for these rates of tax on health grounds, tax policy is notoriously bad at changing social behaviour.”

eCommerce creates competition between domestic sales tax rates

Simon says: “Low sales or consumption taxes give businesses a great deal more flexibility on price and means goods or services can be cheaper for consumers. This is particularly important given the rise of eCommerce: consumers can use the web to purchase products from other countries where lower taxes mean cheaper prices. This has been a real problem not only within the EU but also with internet retailers based outside the EU being able to seriously undercut EU pricing.”

The study shows that some countries’ tax systems have struggled to catch up with the rise of e-commerce.

In several countries, including India, Malaysia, Israel, the US, and Italy, sales taxes were levied on physical CDs but not on the mp3 versions of the same albums. Conversely, physical books are sold at reduced rates of VAT in many countries yet ebooks are often subject to the full standard-rate. Those countries that have reacted faster to the internet revolution and focused their tax systems accordingly have benefitted enormously.

Simon adds: “New technologies and globalisation have caused plenty of problems for unwieldy and complex tax systems. Tax systems can be very slow to react to the rise of new ways of doing business, and can leave traditional locally-based businesses – like physical stores – at a huge competitive disadvantage.”

The highest level of sales taxes in the study were levied in India and Brazil, where the governments take 28.7% and 38% respectively of the total price of our basket of goods and services through taxes. At the other end of the scale, the UAE and Malaysian governments took 2% and 3.9% respectively.

Our basket of goods and services

Item Average % of price that is tax – all countries
Loaf of bread 6.01
Newspaper 9.14
Child’s T-shirt 10.95
Cinema ticket 11.09
International Flight 11.14
Restaurant Meal 11.21
MP3 Download 11.24
Fruit Smoothie 11.45
Box of chocolates 11.47
Professional Service 12.04
Electricity Bill 13.08
iPad 14.85
Physical album 15.2
Bottle of Wine 22.77
Litre of Petrol 36.22
Cigarettes 51.25

Percentage of the total price of our basket of goods that is tax, by country (including excise duties and consumption taxes)***

perc-basket-by-tax_2

 

Percentage of the total price of a litre of petrol that is tax, by country****

perc-petrol-tax-country_2

 

*UK, France, Germany, Italy, USA, Canada, Russia, Japan

 

**Including full, reduced, and zero rates of VAT

 

**Taxes may vary between states or cities in some countries. Representative states or cities have been taken for the US (Michigan); China (Beijing); Australia (Perth); and Canada (Toronto). Michigan’s standard sales tax rate of is 6% whilst the US average rate is 5%.

 

***Nigeria, UAE, Malaysia do not levy taxes on fuel