JR did a very sensible article saying that it'd be a good idea if the government removed some of the barriers to setting up and growing small businesses. I commented thusly:
John, I’d broadly agree, especially on the de-regulation point, but you are wrong on which taxes to reduce.
The biggest barrier to entry is VAT, because a new business probably won’t be making much profit anyway, so wouldn’t pay much corporation tax – but it does have to hand over 15% of its turnover as VAT (yes I know that if it is supplying to VAT-registered businesses it flows through, but not if it is supplying to exempt businesses or the general public), even if it is not making profits, i.e. the new start-up has to pay the VAT out of its own funds that it should be investing in the business.
The same applies to Employer’s NIC (and yes I know that in economic terms, a lot of the tax is passed on to the employee as a cut in salary). Taking on your first employee is a total administrative nightmare and then you have to pay for the privilege as well (which is why the cunning cove runs his small business as a partnership!).
Corporation tax ain’t so bad – no business ever went out of business because it was profitable and hence had to pay corporation tax. And don’t forget that total corporation tax in the UK is only half as much as VAT collected, even though half of businesses are VAT-exempt or zero-rate, i.e. VAT registered businesses pay four times as much in VAT as they do in corporation tax.
And while in principle I am totally against capital gains tax as well, that is a long way down the line, it might be ten or twenty years before today’s new start up is sold on to a competitor etc. Many people set up a business without any particular intention to sell it.
Of course, two twats took the opportunity to show how decades of brainwashing had affected them:
JimF: I disagree. Corporation Tax hits just when you start getting into profit and need to re-invest to grow the business. It is a barrier to growth.
If you can’t pay the VAT you aren’t making a profit in the first place and frankly shouldn’t be in business.
Business Rates are equally as insidious as Corp Tax as you feel you get nothing for it and pay it regardless of your P/L.
alan jutson: Jim, Agree with you.
Being Vat registered actually gives you a positive cash flow as the Vat you charge is more than the VAT you pay, until you have to pay Inland revenue the difference every 3 months. Being Vat exempt (below threshold turnover) gives negative cash flow, as you have to pay VAT before you can invoice customer for work completed.
Mark Wadsworth: Wow! That is the most amazing non-logic I have ever seen.
Are you really trying to say that if a business has to hand over £400,000 VAT, that is all fine and dandy, and even better if it drives you out of business, but if it has to hand over £100,000 that is “a barrier to growth”???
As to the cash flow argument, that is even dafter – I might as well point out that corporation tax is “cash flow positive” because small businesses do not have to pay it until nine months after the year end!!
I couldn't be bothered to explain that Business Rates are the least bad tax we have and why.
Put On Your Big Boy Pants, Maybe?
4 hours ago
15 comments:
From my experience cash flow is biggest problem for small businesses. I think it was Alan Sugar who said that many a profitable business has gone bust because it ran out of cash, or words to that effect.
As for VAT, it has a disproportionately high dead weight cost for a new business both in terms of admin, cash flow (if customers are delaying payments then that includes VAT) and the fear of the power of the VAT man.
Obviously it's lacking in details yet, but if it is as the Mail reports then I'd dust off your LVT calculations and send it in. You get a £1m, or (more likely, I'm afraid) we can see why the Tories don't believe it solves problems.
http://www.dailymail.co.uk/news/article-1239372/Tories-1million-taxpayer-funded-prize-voters-wisdom.html
The biggest barrier to entry is VAT, because a new business probably won’t be making much profit anyway, so wouldn’t pay much corporation tax – but it does have to hand over 15% of its turnover as VAT (yes I know that if it is supplying to VAT-registered businesses it flows through, but not if it is supplying to exempt businesses or the general public), even if it is not making profits, i.e. the new start-up has to pay the VAT out of its own funds that it should be investing in the business.
Quite right. Good that JR would be thinking that way but he needs to get the priorities straight.
With respect to VAT, why isn't it the case that the company can pass the VAT onto the consumer?
Speaking from personal experience , I ,as others have said, actually received a cheque from HMC on the first 2 quarters of VAT after business setup due to my input tax being greater than my output tax. Very welcome they were too.
You do not have to become an unpaid tax COLLECTOR for the state if you intend to turnover less than £50k per annum in taxable supplies NOR do you charge VAT on your value added at this level.
These numbers are appropriate for a new startup business not your fanciful £400k payment to HMRC which would indicate a turnover of £1M per quarter at least, hardly new start territory . Also worth repeating at this stage that the tax is collected by you on behalf of the government , it never belongs to you , you are its custodian only. HMRC have schemes which allow deferral of tax until you have been paid also ,so the bad/slow debt need not be a problem.
Your beef is with a tax that hurts enterprise (value added) and doesn't bear down heavily enough on landlords(LVT), I agree with you in principle but you and the advocates of LVT have to get some numbers out there so that business people can weigh up the pros and cons in cash terms.How will it affect me for instance , I own my business premises personally and rent them out to a limited company I own.
y D K McGregor
JH, thanks.
M, the idea that "VAT is passed on to the consumer" is firstly a Big Fat Lie (it is largely borne by the business) and secondly, even if it were true...
a) Where would you rather start up a business - in a country where people have £100 to spend in your business, or where people are fined £15 for spending £100, in other words only have £85 to spend in your business?
b) If UK VAT-registered businesses can simply add £75 billion to their selling prices, what's to stop them adding a measly £20 billion in corporation tax to their prices and 'passing on' the corporation tax as well?
D K McG:
1. "[VAT] is collected by you on behalf of the government , it never belongs to you , you are its custodian only."
That's a Big Fat Myth, I'm afraid. You might as well argue "28% of your profits are collected by you on behalf of the government, it never belongs to you, you are its custodian only"
2. "you and the advocates of LVT have to get some numbers out there so that business people can weigh up the pros and cons in cash terms"
Please note that Business Rates is pretty close to LVT, so LVT would be a straight replacement for BR anyway. All the other taxes on business (especially VAT and Employer's NIC) would be reduced. If this drives up rents and land values, then sure, the LVT (or Business Rates) would go up. Quite by how much is conjecture, but it would be less than the amount by which VAT and Employer's NIC are reduced.
Whatever the taxation arguments the JR post was really about enterpreneurialism. Many people, and respondents on his blog, get confused between enterprise and entrepreneurialism. Essentially enterprise is a quality that most of us possess to one degree or another. Very few people though possess entrepreneurialism. To be an entrepreneur you need to see things in a new way. To spot the inneficiency or the opportunity for a new good or service. You need to be really creative.
This differentiation between enterprise and entrepreneurialism is evident in the employment statistics. About 4 million workers are self employed. But very few of those actually created a new business based on a new product or service idea. Many just do what they did for an employer on their own account.
Entrepreneurs are those that disturb the steady state economy and send it off in a new direction. Enterprising people are not necessarily entrepreneurs, but they can be very successful, and excellent job creators in their own field.
The point of this ramble is that it is genuinely possible to teach people to be enterprising, you jusy need self belief, energy and ambition; but musch more difficult, and I contend, not really possible to teach entrepreneurialism.
The root of our problem is an education system designed to create bureaucratic jobsworths and a supply supplicant and pliable cannon fodder into the maw of the bureaucratic state. It also has the added benefit of not creating people who will challenge the bureaucracy.
I was fortunate I went to one of the last true Grammar Schools. Loads of Old Boys of that school showed enterprise and some genuine entrepreneurialism.
So if you want more enterprise, liberate education. Trouble is the turn round round time for the UK is therefore generational, not just a couple of years.
D K McG, I forgot to reply to this:
"I actually received a cheque from HMC on the first 2 quarters of VAT after business setup due to my input tax being greater than my output tax. Very welcome they were too."
OK, but imagine we had no VAT, you wouldn't have had to pay the input VAT in the first place, so that's a non-argument.
Lola, sure, I basically agreed with his post; you left some fine comments; and I would agree wholeheartedly with all that, it's just that my special topic is tax, so if we are not to discourage entrepreneurialism, then shouldn't we focus on scrapping the taxes that discourage it as well?
MW, I agree that Bad Taxes discourage enterprise/entrepreneurialism but there are other things that frustrate the budding E/E. Red tape, officialdom, lack of funding etc etc. But usually the determined find a way to deal with these. A bigger problem is the education system. What most E/E's have is self confidence. The sate education system does nothing to help foster this.
Get to 'em young. That's what I say.
You move too freely between the real world as we know it and your idealised low tax society , it's not a big fat myth if I am sent to gaol for evasion because I refuse to accept myths! Another concern I have is that you advocate a new tax that will be paid for by reduction , not abolition, of two others , can you not understand the minds of politicians? You'll have to work hard to get your new tax ahead of the carbon tax , gosh , that one is supported by the landlords.
y D K Mcg
D K McG, I admit that it's two separate topics
a) replacing bad taxes with 'good' taxes (i.e. with taxes that would be collected privately anyway, so the state might as well collect them instead) and
b) reducing taxes generally.
I'm happy to campaign on either front, but preferably both.
IMHO we've already got enough 'carbon taxes', they could just be designed better - things like cap'n'trade or landfill tax are abominations, of course.
OK I'll be boring on corporation tax again. you are right that no business ever went bust paying CT but a growing economy is not just or even primarily statr ups & small businesses staying in existence, but is about successful small businesses growing. For that they need to be able to reinvest profits. CT is, as we agree, a tax paid disproportionately by the successful & if we want good growth those, in preference to the marginal businesses, are the ones to mollycoddle. Brutal but true.
NC: "a growing economy is ... about successful small businesses growing. For that they need to be able to reinvest profits."
Agreed. And as you don't pay corporation tax on reinvested profits, i.e. you get a tax deduction for what you invest in the business (although the timing is a bit faffy), corporation tax doesn't prevent businesses from growing, does it?
Anonymous seems to be confusing "Good tax" with "Low tax", which I don't think is part of the argument.
The big issue we have is the waste, waste, waste of bureaucracy and unpaid work for HMRC doing:
- PAYE: ICT, EE NI, ER NI and benefits deductions
- VAT tracking, collection and payment
- Annual corp tax returns for 1-10 man companies where they can't afford the tax advice to avoid bits of it that would be avoidable.
An efficient society would exempt small businesses from all but location value taxes and paying for the services and pollution.
We should progressively raise the compulsory VAT threshold, thereby allowing people the choice.
We should also cut out things like the differential between income tax and capital gains tax, and raise the starting thresholds for income tax with the extra money saved.
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