ES1.3.1 Purport of VAT

The purport of VAT (in other words, its legal nature), as elaborated in the VAT Directive and the VAT Act 1968, is that of a tax on turnover and also a tax on consumption. This explains the generality of the tax, the proportionality of its effect on prices of goods and services, and the avoidance of distortions of competition, as shown in the following diagram:

It is important, in my view, that consumption within the meaning of VAT assumes that goods and services are created by the adding of value – production – by enterprises. The requirement for consumption to be the result of production by enterprises means that consumption cannot exist in the case of money held in trust, equities and comparable abstractions. Disposals and transfers of equities and money, along with the granting of credit, consequently do not, as such, result in consumption from a VAT perspective, and similarly do not represent the production or propulsion of goods or services in or through a production or distribution chain.