This article is from the Lotus Cars FAQ, by firstname.lastname@example.org (Alan F. Perry) with numerous contributions by others.
From John O'Connor (email@example.com):
In the UK, for most of the post war years, one of the main forms of
tax used by the government was purchase tax. This was a sales tax
levied at various percentages on a wide range of goods.
In this environment, cars were considered to be a luxury item and
thus a high level of purchase tax was levied against them. For some
reason, along with food, childrens clothing and books, kit cars
were not taxed with the purchase tax. Thus, in the UK, kit cars
were a lot cheaper than fully assembled cars and the market
In the early 1970s, the UK joined what was then called the European
Economic Community (now known as the European Union). One membership
condition of the EEC was the imposition of a tax known as Value
Added Tax or VAT. This is another sales tax and is used by the EEC/EU
as a revenue gathering instrument for it's own purpose. To gain
equity across the organisation, each country must levy a similar
rate of VAT on a similar range of items and a proportion of that tax
is then taken by the EEC/EU to fund its activities.
One thing that happened in this process was the the tax rate on kit
cars was made the same as the tax rate on assembled cars. Thus,
assembled cars cost less and kits cost more, narrowing the price gap
between them. This had a major impact on the sales of kit cars in the
UK. many kit car manufacturers disappeared at this time.