One of the most common objections to a higher VAT rate on exceptional luxury consumption is that defining a luxury product would be impossibly complicated.
We disagree.
Government does not need to maintain a list deciding whether Gucci is luxurious, whether one television is sufficiently premium, or whether a particular bottle of wine deserves to be called expensive.
Let the market establish the benchmark.
For ordinary product categories, HMRC could establish the median transaction price and set the Premium Consumption threshold at a defined multiple of that price — for example, five or ten times the median.
The precise multiple and categories would be established through consultation.
That creates a remarkably simple principle:
Normal market price = normal VAT treatment.
Exceptional price = exceptional VAT treatment.
If the median price of a particular category of children’s clothing were £30 and the threshold were ten times the median, the premium threshold would be £300.
An ordinary £30 dress would receive its normal VAT treatment.
A nicer £100 dress would receive its normal VAT treatment.
An £800 designer children’s dress would attract the 30% Premium Consumption Rate.
There is no subjective judgement about whether the designer is sufficiently prestigious. The price makes the distinction.
The same principle could apply across suitable product categories.
It also makes avoidance considerably harder. A luxury brand cannot simply declare that its product is not luxurious or restructure its marketing to escape the rate.
There is one very straightforward way to fall below a price-based threshold:
reduce the price.
If competition for customers encourages some luxury manufacturers to reduce prices substantially, that is not a failure of the policy. It is a market response to it.
This is about exceptional consumption
The Premium Consumption Rate should sit far above the spending decisions made by ordinary households.
It is not supposed to catch someone buying a good bottle of wine for Christmas, spending more on a quality coat or treating themselves to a better television.
It is aimed at purchases such as £20,000 bottles of wine, £800 children’s dresses, supercars, large yachts, private aircraft and similarly exceptional consumption.
And there is a fundamental economic reality behind the proposal.
Someone able and willing to spend £800 on a child’s dress is unlikely to make that purchasing decision based on the VAT line at the bottom of the receipt.
At that end of the market, the purchase is being driven by exclusivity, brand, quality, scarcity or status — not by whether the consumption tax is 20% or 30%.
Our VAT system should recognise the enormous difference between ordinary consumption and consumption at prices that are inaccessible to almost the entire population.