Thursday, 3 October 2013

The TwatPayers' Alliance...

... expose their rank ignorance yet again in today's City AM

The government has done some good work to encourage new growing businesses. One measure that stands out is the abolition of stamp taxes on Aim-listed shares. This will make it easier for firms to raise equity finance.(1)

...If you build a business, you will pay a series of different taxes on your earnings: corporation tax when you first make a profit; income tax when those profits are paid out as dividends;(2) and capital gains tax on any attempt to realise the value of future profits.(3)

The same income is effectively taxed three times.(4) Taxing the same income repeatedly is always an unfair and inefficient way to raise revenue, but it is insane when we are talking about the engine of economic growth, the process that creates jobs.

... The 2020 Tax Commission – organised by the TaxPayers' Alliance and the Institute of Directors and released in 2011 – recommended going further and establishing a single tax on income when it is distributed, however it is distributed.(5)

Remove the extra taxes like capital gains tax, and you can make Britain a more competitive location for international investment (6) and create the right environment for more of the high growth businesses that create opportunities for everyone.

... There are many who will never want the worries and risks of starting their own business. Not everyone wants the bigger mortgages that government guarantees under the Help to Buy scheme make possible. They want the opportunity for a job that is better paid and more fulfilling. A job that will allow them to save up the money they need for a mortgage they can afford on their own terms.(7)

1) Stamp Duty on purchases of shares is of course a stupid tax, and Stamp Duty Reserve Tax is not just stupid but unfathomable, but there simply is no Stamp Duty when shares are issued. There is no tax on fund raising, end of.

Stamp Duty is only paid when an existing shareholder sells his shares to somebody else, so the amount that today's investor receives in future will be reduced slightly, but that money goes into the shareholder's bank account and not the company's.

2) Companies pay corporation tax at the basic rate, so if a basic rate taxpayer receives a dividend there is no further liability. It is only when a higher rate taxpayer receives a dividend that income tax is payable, which is broadly speaking the difference between higher rate and basic rate tax.

For a given total tax take, surely it is better for the actual business (the company) to pay a lower basic rate and the higher rate to be applied only on cash dividends paid out? You could abolish the higher rate and have a flat tax for individuals and companies, but of necessity that flat rate would be higher than the current basic rate.

3) Capital Gains Tax is another stupid tax, but companies/businesses are sold on the basis of their future profits, so those profits have not been earned yet and it is the next purchaser who will pay corporation tax on them.

So CGT is to a large extent a voluntary tax on unearned income (or a monopoly position) and if you don't sell your company/business, you never have to pay it, hence and why the revenue maximising rate (top of the Laffer curve) is a very low rate like 10% or something.

4) Why oh why do these Faux Lib's never mention VAT or National Insurance (the worst taxes of all), which between them raise/cost several times as much as higher rate income tax, corporation tax or capital gains tax? Or to put it in his terms, "the same income is effectively taxed five times".

The cumulative effect of all these taxes is difficult to calculate, but it comes to around half a business' total income/gross profits (taking employer and employees together), meaning that even so-called basic rate taxpayers have an effective marginal tax rate of about 50%, which is "too high" by any reasonable person's standards.

5) One of these ideas which sounds great in principle but if you think about it for a few minutes, you will realise it is totally unworkable/unenforceable.

Further, companies do not pay corporation tax on reinvested profits (subject to timing differences), they only pay it on profits not required to expand the business (i.e. cash piled up in the bank or paid out as dividends). This is not a peculiarity of the UK corporation tax system, it is a general observation. So corporation tax is, by and large, a tax on the profits which are (or could or should be) paid out as dividends.

6) He's talking complete shit now. Foreigners who invest in the UK pay no UK tax on capital gains from selling a UK company - never have done, never will - because they are not UK tax resident. If foreign companies invest here, they will probably pay no tax in their home country either. And corporates don't pay "capital gains tax" anyway, they pay corporation tax on the capital gains they make.

7) That last bit is actually very sensible, I'd go along with that sentiment entirely.


ageing man said...

Taxation for business owners is pants. I worked out the other day that for every £1,000 my business earns I get to play with about £120. So what happens to that £120 ? I go and spend it and the next business who get my £120 go through their merry go round of taxation. We have strict money laundering laws in this country. I just wish the HMRC abided by them and stopped laundering their money through me. I am sick of being an unpaid tax collector.

You see crap peddled through the media how business owners are money grabbing fat cats who always try to evade paying tax and pull every scam. I wish someone would start feeding me whiskers and provide me with the tax avoidance hand book because so far I must be doing something wrong.

Mark Wadsworth said...

AM, only £120 left? That's a marginal tax rates of 88%.

AFAIAA, the highest marginal rate is about 60% (taking four main layers of tax), ignoring the nasty steps when you cross VAT threshold or go over income of £100,000/year.

ageing man said...

noooo no no.... I didn't say it is all taxation... because any business has costs associated with it which are not all tax, but it's about what you are left with as a bottom line. Of course that is measured by profitability, but even seemingly non direct taxed out goings have a tax impact. So say we spend money on office rent, that goes to the landlord he pays tax, he is left with a net yield, he spends that for which tax is skimmed on and so forth....The point is this, in my company there are 2 shareholders, but do we get each 50% of the spoils ? well we get 50% of what is left but before then the bigger slice of the pie has gone to HRMC directly and then indirectly thereafter.

Last time I looked I didn't recall seeing at companies house that HMRC owned shares in my company; but each year they sit on their arses and do nothing for my business but get a very healthy dividend.

So after the business has paid all it's bits out of the £1,000, I get £120 of which £60 goes to my wife.... HMRC gets a damn sight more than £120 let alone £60.

Kj said...

I don´t get the big yahoo about corporation tax vs. personal income tax. Sensible, low tax capitalist countries have territorial taxes, i.e. you pay if your actual business activity is done in the jurisdiction. You do that through corporation tax. You treat foreign and domestic investors equally that way.

Lola said...

Huh. You should run and FS business. First, as the gummint consumes 50% + of GDP you suffer the standard 50% loss - i.e. Cost of Government Day falls at the end of June. Then we suffer a further 20% Cost of Compliance dead weight costs. So, for every £100 we charge we get to keep 30 quid. It's pants.