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Poorest households spending more on VATable items than in 1986

Released: 31 October 2011 Download PDF

The poorest fifth of households in the UK spent a higher proportion of their expenditure on goods and services that attracted Value Added Tax (VAT) in 2009/10 than in 1986.

Research published today by the Office for National Statistics (ONS) examines the relationship between the equivalised disposable income of the richest and poorest UK households and the VAT spent by those households. Overall, the data shows the poorest fifth of households in the UK pay more in VAT as a percentage of their disposable income than the richest fifth.

However, the analysis highlights changing spending patterns. Poorer households in 1986 spent a smaller proportion of their expenditure, than poorer households in 2009/10, on discretionary items which attracted VAT. For example, after taking into account changes in prices, the poorest fifth of households spent, on average, around 250 per cent more on new cars, holidays abroad, meals out, audio/visual goods (including TVs) and photographic equipment combined in 2009/10 than in 1986. This is compared with an increase of 20 per cent for the richest households.

The analysis reveals that in 1986, the poorest fifth of households spent 55 per cent of their weekly expenditure on non-VATable items, compared with 45 per cent on VATable items. However, in 2001/02, this pattern had reversed. The poorest fifth of households spent, on average, 42 per cent on items which did not have any VAT levy compared with 58 per cent on items which did.

In 2009/10 this reversal was still evident, although to a lesser extent, as the poorest households spent, on average, 45 per cent of their total weekly expenditure on items which did not attract VAT, compared with 55 per cent on those which did. The research extends to 2010, but does not include the current 20 per cent rate of VAT introduced in 2011.

For the richest fifth of households there was no marked change in the proportion of their expenditure on VATable compared with non-VATable items over the period.

Background notes

  1. The full article can be found at: http://www.ons.gov.uk/ons/rel/household-income/the-effect-of-vat-on-household-disposable-income/2011/rep-vat-short-story.html
  2. Data are from the Living Costs and Food Survey (LCF), formally known as the Expenditure and Food Survey (EFS).
  3. Households have been ranked according to their equivalised disposable income and then divided into five groups of equal size (quintile groups). In this analysis only the top and bottom groups are presented, with the poorest households being those in the bottom quintile group and the richest households those in the top quintile group.
  4. Equivalisation is used in producing the household distribution used in this analysis as it adjusts incomes according to differences in household size and composition. The equivalence scale used is the modified-OECD scale. Data have been adjusted to 2009/10 prices using the implied expenditure deflator for the household sector.
  5. Follow ONS on Facebook: www.Facebook.com/statisticsons and Twitter: www.Twitter.com/statisticsons
  6. VAT Rates:
    • April 1991 the standard rate VAT increased to 17.5 per cent from 15.0 per cent.
    • April 1994 a reduced rate VAT of 8.0 per cent was put on domestic fuel. This increased to 8.5 per cent in October 1994 and has been 5.0 per cent since September 1997.
    • December 2008 the standard rate reduced to 15.0 per cent (two-thirds of 2008/09 LCF data at the higher rate, one-third at the lower).
    • January 2010 the standard rate increased to 17.5 per cent (three-quarters of 2009/10 at lower rate, one-quarter at higher rate).
    • January 2011 the standard rate increased to 20.0 per cent (not included in this analysis but will contribute, in part, to the 2010/11 results due for publication in 2012).
  7. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

Content from the Office for National Statistics.
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