The latest announcement by the Labour Party to fund free school meals for all children of primary age seems, at first glance, a reasonable one.
After all, the rich can afford school fees, so they can afford a further 20% tax can't they?
Labour say that the schools can afford it, but as a sales tax VAT has to be charged on the sales ( ie added to the selling price )
Well, look at the actual way this might work.
Any business has to register for VAT if they make taxable supplies over a certain ( registration) limit. The VAT that that business charges becomes output tax and is passed on to HMRC on the (usually) quarterly VAT return.
But, any VAT incurred by a registered business in making taxable supplies becomes recoverable as input tax. So the business only passes on the nett amount of tax after deduction of input tax.
So, in this scenario, the VAT raised is reduced by the VAT now recovered by the school.
But, what if that school decides to build a new extension, or refurbish the inside , or buy new furniture? Great for the suppliers of those services, but the school will be able to recover the VAT incurred and if that capital cost is greater than the income in a particular quarter the school has a VAT repayment situation.
I know that this won't happen every quarter, but has it been considered in the announcement?
Figures that are being bandied about show that VAT on fees could raise 1.5 billion pounds in a year, but that free school meals would actually cost about half of this ( £700 million has been mentioned)
So what happens to the surplus?
This plan is a great headline grabber, and I applaud the attempt at striving for free school meals for all, but I am definitely not convinced by the practicality of it.