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There have been calls to end the "tampon tax" on sanitary products. But why do some products have a lower rate of VAT than others and who decides?

More than 250,000 people have called on the government to "stop taxing periods" and reduce the 5% rate of VAT on sanitary items such as tampons. The government says it cannot scrap the VAT because of EU law, although the European Commission has responded to the row by saying that a review of the VAT rules will take place in 2016.

"It is absurd that while men's razors, children's nappies and even products like Jaffa Cakes, exotic meats and edible cake decorations are free from VAT, women are still having to pay additional costs on what is already an expensive yet vital product," said SNP MP Alison Thewliss.

The list of products with zero-rates of VAT is extensive. Men's razors are not one of them despite claims to the contrary. They are subject to the standard rate of VAT at 20%. But products from Marks and Spencer's teacakes to bicycle helmets are included on the list so why are some vital items like tampons being left out?

It goes back to the 1970s, explains David Wilson, a technical director at RSM. VAT replaced the UK's tax scheme when the country joined the European Economic Community. "When we joined we already had zero-rates on things like food and transport," says Wilson.

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The UK was allowed to keep on applying them. But there was one big condition. "The rules would be as they were applied then and that would be it," explains Rita de la Feria, professor of tax law at Durham University. No new zero-rates would be able to be introduced. The UK would be "in direct breach of EU law" if it tried, she says.

Tampons were not given a zero rate of VAT in the 1970s. "We can't turn round now and make it zero-rated because we're only allowed to keep the zero-rates that we had in place at that time," adds Wilson.

Back then, the government was making its decisions about what counted as a basic item and what did not. "Basically the idea was to protect lower income households," says de la Feria. "Anything that was a luxury was subject to VAT, anything basic was exempt." Decisions were also made on what was "healthy" and those items were zero-rated.

"The decisions were based on evidence available in 1972," adds de la Feria. "In order to keep the zero rates, the UK basically had to stop in time."

Being stuck in the 1970s has led to a whole host of court cases about what to do with certain products. It took years to resolve the question of whether a Jaffa Cake was an actual cake or a chocolate-covered biscuit.

A great deal of money depended on the answer because cakes have a zero-rate of VAT. "The idea in 1972 was that cakes were wholesome and basically made at home, while biscuits were a luxury product made in factories," explains de la Feria.

At first it was ruled that Jaffa Cakes were biscuits partly-covered in chocolate. But McVities, the manufacturer of Jaffa Cakes, argued against this. Many aspects of the product were considered when deciding its fate, including its name, ingredients and size.

They were eventually ruled to be cakes. But the old definitions do not always have room for new things. "Back in the 1970s we never thought of the concept of electronic books," says Wilson.

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Books are zero-rated in the UK. But this was meant for items consisting of paper and ink. Not a digital file on a Kindle. It has been decided that electronic books are different enough to mean that the original description does not extend to them.

Some of the zero-rated items can seem surreal. Nuts are included on the list but only if they still have their shell. This means that pistachios are usually regarded as zero-rated products even if salted because they are sold in their shells. But nuts sold out of their shell and salted or roasted are subject to the standard rate.

"What is surreal about this is that we are actually spending money in the court debating this stuff," says de la Feria.

There are other oddities. Some children's clothing made with fur skin is zero-rated, including rabbit, gazelles and dog skin. But Tibetan goat is standard-rated for VAT.

Because there cannot be any new zero-rated products, some items have inevitably been left out. Tampons were not on the original list and the 5% rate applied to them is already at the lowest possible rate of VAT.

Although the EU has a huge list of items that can be given a reduced rate, it cannot be less than 5%. There are items that are exempt from VAT such as burial and cremation services. But these exemptions are decided at an EU level, explains Wilson.

"There is an argument to make them [tampons] exempt on the provision that healthcare is exempt," he says. But he adds that there are drawbacks to removing VAT because it's a positive rate. "By that I mean that when a business makes an item that is zero-rated it can recover the VAT of some of the associated costs of production.

"The manufacturers making an exempt supply wouldn't be able to recover any of the manufacturing costs or the advertising costs. The cost could go up for the consumer."

The UK government has said that any change to get a zero-rate on tampons would need a European Commission proposal and the agreement of all 28 member states.

A UK treasury minister has already promised to lobby Brussels for an end to the "tampon tax". But the government seems less sure of success. As a spokeswoman said earlier: "What is being proposed is not something that, being looked at, we think is achievable."

The Magazine on tax

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The rise of "tax shaming" (May 2013)

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