Tee hee

From The Telegraph:

Buckfast sales in Scotland surged 40 per cent after Nicola Sturgeon introduced alcohol minimum pricing, according to an official analysis that prompted more warnings her flagship public health policy had backfired...

The Tories said that minimum unit pricing (Mup) had prompted drinkers to switch from cheap drinks such as cider - the cost of which rose substantially - to stronger beverages like Buckfast. The price of the tonic wine was unaffected by Mup's introduction in May 2018 as it costs around £8 per bottle, more than 50p per unit of alcohol.

One might almost think that producers of the stronger stuff had a hand in this misguided legislation, as it sets a barrier to entry to cheaper competitors...

Who benefits from the pensions tax breaks?

Somehow, we drifted off KLNs and started discussing the taxation of/subsidies to pension savings.

Me: "The bulk of the [tax breaks] superficially goes to higher rate taxpayers (who would save up for their old age anyway, with or without 'encouragement') but is actually largely siphoned off by the FS sector."

Lola: "... as I may have said before, you can now buy pension funds with costs capped at about 0.5% p.a. Actually the worse siphoning off of tax subsidies is in cash ISA's."

Agreed to the last bit. For some mad reason, people who can afford to save would rather have 0.6% interest 'tax-free' than 1% gross taxed at 40%. Basic rate taxpayers should really choose 1% gross taxed at 20% rather than 0.6% tax-free, but the numbers are so small, it doesn't really matter in practice.

By analogy, if they scrapped tax breaks for pension savings or ISAs and cut the headline income tax/NIC rates to match, the final outcome wouldn't be much different. The pay-as-you-go state pension is still the best way to go; it's cheap, reliable and effective on whatever measure. And for about a third of actual voters (pensioners are only one-quarter of the adult population, but they have the highest voter turnout), the state pension is pretty much the number one issue - pensioners vote for whichever party makes the most generous promises (it's not their money), and this is one thing in party manifestos that they stick to if they get elected.

To my first point, the total cost/value of tax breaks for pension savings is at least £40 billion a year (trawl HMRC stat's at your leisure). The ONS says that the total value of assets held in pension or annuity funds was £6,100 billion (in March 2018 - it might have gone up or down since then).

Charges of 0.5% seem fair enough, let's round that up to 0.75% for all the extra charges they sneak in - the cheekier ones, the hidden profits they make on paying out stingy annuities, the transfer fees etc. On that basis, the total charges are 0.75% x £6,100 billion = £46 billion.

I rest my case.

Poor Widows In Mansions, part the manieth.

From The Daily Mail:

[UK Finance Minister] Rishi Sunak rejected a proposal for an emergency wealth tax to recover the staggering £280billion the Government has spent so far on the coronavirus pandemic. The Chancellor was presented with plans for a one-off levy on those with assets of more than £500,000, or £1 million for a couple, including their family home and pension(1).

But Mr Sunak has told allies that he has ruled out the suggestion because he believes it would be 'un-Conservative' and go against the party's aspirational values(2). However, he is still considering proposals to raise tens of billions from the better-off by sharply hiking capital gains tax.(3)

The Wealth Tax Commission(4) last month proposed a 5 per cent levy on housing, pension, business, equity and savings wealth that it forecast would raise £260billion. The tax would apply to every UK resident with assets of £500,000 or more and would include homes excluding mortgage debt.

About one in six adults – 8.2million people – would be liable, but the tax would largely fall on older generations who have paid off more of their mortgages and built up larger pension pots. Almost 40 per would be aged over 65, while just 6 per cent would be between 35 and 44 years old. The Commission recommended households pay the levy at a rate of 1 per cent a year for five years.

It estimated up to 10 per cent of those affected would be 'asset-rich, cash poor' and not have the ready money to pay for it. For those people, it suggested smaller payments for a longer period. (5)

1) Hooray for taxes on land and buildings, especially if they replace existing stupid taxes on land and buildings, such as Council Tax, SDLT and Inheritance Tax. Taxing pension funds is stupid because they are heavily subsidised. It it far better to simply reduce or phase out the subsidies. Taxing the value of 'business, equity... wealth' is even more stupid. If you want more tax from businesses, just reduce corporate subsidies, and if still necessary, hike the corporation tax rate. Taxing cash savings is even stupider; a proper tax on land and buildings (i.e. LVT) ignores mortgage debt and is levied on the gross rental value of the plot. So as a quid pro quo, cash savings shouldn't be taxed either, or it's heads-we-win, tails-you-lose.

2) 'Un-Conservative' just means 'won't go down well with voters'. The Conservatives are the political party with no principles whatsoever apart from staying in power as long as possible. The same applies to 'aspirational values', which is meaningless. With a full on-LVT and lower taxes on earnings and business output (which are real taxes on 'aspirational values'), people would still 'aspire' to earn more and buy a nicer house (or a nicer car or nicer holidays, or more savings, whatever, that's the whole point of earning more). And those who earn more would end up in the nicer houses and pay the LVT voluntarily.

3) This is pure tokenism. Capital Gains Tax in the UK raises about £7 billion a year, about 1% of all tax receipts (from memory - it's fairly small numbers). CGT was never intended to raise much revenue, it is basically an anti-avoidance measure to deter people from reclassifying heavily taxed earnings or profits as 'capital gains' (which were not taxed at all until 1965). The revenue-maximising CGT rate appears to be about 15% and we are already past that point on the Laffer Curve. So it is nigh impossible to raise significant extra money from CGT.

4) Wealth Tax Commission is an initiative of think-tank the Institute for Fiscal Studies. They are well-respected and influential but nothing official. Their numbers and estimates are almost certainly correct.

5) Also known as 'the roll-up and pay on later sale or death option', just to knock that KLN on the head.

Killer Arguments Against LVT, Not (480)

Here's the draft of a lead article I have written for the LVTC website (which is being totally revamped).
-----------------------------------------
The transition

We live in the real world and accept that it would take a decade or more to phase in LVT and phase out most other taxes. This is not all-or-nothing and can be done in stages. Every small step in the right direction is a step in the right direction, even if we never “get there”.

We have explained the main stages and running order for the transition under the heading “How much will I pay?”

Replacing existing taxes on land and buildings, occupation and wealth generally (Business Rates, Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee etc) with an annual LVT could be done fairly quickly (one or two years to get the basic valuations and administration in place and give people time to plan). These taxes are a mixture of the very regressive and very progressive so for most households at either end of the scale, the total tax payable over a lifetime would not change much, all that would change is the timing of payments. At the lower end, LVT would be much the same as the Council Tax (less Council Tax discounts) and the TV licence fee that they are currently paying; at the upper end there would be smaller annual LVT payments instead of large irregular payments of SDLT or Inheritance Tax at more or less random intervals. So this should not be too controversial.

Replacing the two most damaging taxes which raise significant revenues (VAT and National Insurance) would mean the LVT on a median value home increasing by about £5,000 per year. Households with two earners on average full-time salaries currently pay (or bear) over £15,000 in NIC and VAT per year and pay £1,000 Council Tax/TV licence fee, so they would see their net salaries and disposable income increase significantly.

But this need not be an all-or-nothing, Big Bang shift. We know that there are some (with only one main earner; on lower incomes; and/or in more valuable housing) who would be hit financially by an immediate shift.

We don’t know how quickly businesses will expand or how quickly employment rates and salaries will increase as a result of the shift (the Swedish experience with VAT cuts in 2009 suggest it can happen surprisingly quickly, within months rather than years).

Those who are hit (or think they will be hit) financially need time to trade down; to take in a lodger; and/or find better paying jobs. So VAT and National Insurance would be reduced by a few per cent each year for five to ten years until they are completely phased out, and in tandem, the median LVT bill would increase by £500 to £1,000 each year (or by £40 to £80 each month) for a transition period of five to ten years. Most of the households who think they will end up with significantly less disposable income at the end of this transition should be able to cope with this timetable.

Tax incidence

from Yahoo Finance:

[The SDLT holiday] will reduce many buyers’ tax bills. The chancellor said the changes meant almost nine in 10 buyers will pay no stamp duty land tax (SDLT) at all on transactions.

Treasury analysis suggests buyers would save £4,500 on the average property purchase, though analysis by estate agent Barrow and Forester indicated lower savings of £2,465 in England. But the reforms are mainly intended to drive additional sales in the property market, as a significant part of Britain’s economy...

UK housebuilders’ share prices have been rising all week after the plans were first reported over the weekend, with shares in Persimmon (PSN.L) up almost 10% since last Friday.... Several experts warned the temporary nature of the measures mean the tax cuts may have unintended consequences, however.

Observers pointed out transactions and prices may spike as buyers rush to complete before the holiday expires next March, followed by a sudden drop. In the short term, buyers may save money on stamp duty, but if tax cuts start pushing up demand they may face higher asking prices.

SDLT is, taken in isolation, a dreadful tax, but it is a bit like a lump-sum LVT paid in advance, so not the worst tax. (The same goes for Inheritance Tax - it is like a lump-sum LVT paid in arrears. Same goes for Council Tax - it is like a very low level LVT-cum-Poll Tax payable annually. Between them SDLT and IHT raise 50% as much as Council Tax, so why they don't just merge those two into an enhanced Council Tax is an enduring mystery to me.)

But the fact that the share prices of major Tory party donors land bankers home builders have risen so sharply is a bit of a clue that the 'observers' are correct - the SDLT cut will benefit sellers rather than buyers, even though it is the buyer who legally has to pay it.

Tim Martin seems to get it.

Via msn.com

Pub owners say tax reductions are needed to keep industry afloat

Wetherspoons chairman and founder Tim Martin said “tax equality” was needed if pubs and restaurants were to “survive and thrive” in the future.

He told the PA news agency: “Supermarkets pay almost no VAT on food sales and pubs pay 20%. Without equality the price gap between pubs and restaurants and supermarkets will continue to grow so that ‘on-trade’ becomes more and more uncompetitive.”

CAMRA still don't get it:

The national chairman of the Campaign for Real Ale (Camra), Nik Antona, said he would like to see the Chancellor reduce beer duty – the tax on producing and selling beer – for the “on-trade”.

Mr Antona said: “He could reduce the duty on the on-trade and make beer cheaper in pubs than it is off-site, in supermarkets, and therefore reinvigorate the industry. It would bring people back to the pub and stop them drinking at home.”

This chap knows what he wants, but doesn't know how to get it:

The pub’s licensee, Steve Boulter... told PA: “Having had three months of all being on canned beer, which is a pound a can, you do think: ‘Will people come back?’ when it’s three or four pounds a pint. I agree with Nik. Pricing makes a big difference so it needs to be the other way round – cheaper in pubs and a bit more expensive in the supermarkets.”

That can easily be achieved.

Broadly speaking, the VAT on a £4 pint in the pub and the beer duty are about 70p each. Pub landlord gets £2.60 net.

On a 80p multi-pack can (440 ml) in the supermarket, the VAT is 13p and the beer duty is 54p. Supermarket gets 13p net.

A pint costs five times as much as a can.

If they scrapped VAT completely and added 50% to beer duty, what happens?

Let's assume that the consumer bears all the tax for simplicity.

Pub landlord can drop price to £3.65, minus £1.05 duty, still gets £2.60 net.

The can now costs 94p, minus 81p duty, supermarket still gets 13p net.

A pint now costs 'only' 3.9 times as much as a can, which is what the pub landlord wants.

How to undermine your own argument.

From City AM:

Plans have been drawn up by the Treasury to hit businesses with a £2.7bn tax rise in this month's budget.

Nope. Businesses don't and won't pay any more tax. Business owners will pay a bit more tax when they sell up.

Chancellor Rishi Sunak is set to scrap entrepreneurs' relief, which gives a capital gains tax cut to people who start their own businesses.

Nope. It gives a CGT cut to people when they sell a business - whether they started it or took it over from somebody else. It comes at the end, not the beginning.

The scheme cuts the amount of capital gains tax paid, when they sell the business, from the usual 20 per cent to 10 per cent on up to £10m of lifetime gains.

Those selling now might have started their businesses pre-1998, when we had Retirement Relief. The first £750,000 of the gain was tax-exempt and the rest taxed at 40%, the normal CGT rate at the time. This didn't dissuade people then and upping the CGT rate to 20% won't deter them now.

Entrepreneurs' relief was brought in by Gordon Brown's Labour government in 2008 with the intention of encouraging people to start businesses.

Nope. It replaced - and was less generous than - Business Asset Taper Relief in 2008.

The scheme cost the government £2.7bn in tax revenues in 2018-19, up from £427m in 2009-09.

Ho hum. Is not taxing something really a "cost" and if so, to whom? How is it calculated? Compared to what?

A letter written by 150 prominent business owners...  read: "Other entrepreneurs have sold their business and are now currently considering whether to start a new business or not and the rate of tax is a very important factor."

It clearly isn't, or else nobody would have started a business pre-1998, when the very generous Business Asset Taper Relief replaced the rather stingy Retirement Relief, see above.

The Federation of Small Businesses (FSB) also released a statement today, saying that scrapping the scheme would "destroy retirements".

No it won't. Say you get lucky and sell your business for £1 million. Clearly, you'd prefer to pay 10% CGT and keep £900,000; if you pay 20% CGT, you keep £800,000. Not the end of the world.

FSB national chairman Mike Cherry said "The vast majority of those who benefit from this incentive – 38,000 each year – are everyday entrepreneurs, those who see their business as their retirement plan, and who would lose an average of £15,000 each as a result of this change."

Ho hum. That would be a good argument for reducing the £10 million limit down to £1 million (similar to old Retirement Relief), so that 'the vast majority' with smaller gains are unaffected by the change.
--------------------------------------------
What they should have said:

1. The revenue-maximising rate of CGT is somewhere between 10% - 15%. At that level, people are happy to just pay it. People don't defer sales to defer or avoid the CGT. They don't get involved in other avoidance or deferral schemes, which cause further distortions elsewhere.

2. So by all means, scrap Entrepreneur's Relief as a separate relief and just reduce the main rate of CGT to 10% - 15%, everybody's [reasonably] happy.

3. The good news is, there would be no need for all the legal deferral opportunities either, as very few would want to use them. Hooray, more simplification. And people like me out of a job.

Your occasional reminder...

From Professional Pensions:

The government will pay out £21bn in income tax relief for pension contributions this tax year, while national insurance relief payments will rise to £18.7bn, according to statistics from HM Revenue and Customs (HMRC).

The estimated figures - published yesterday (10 October) - reveal the cost of income tax relief for registered pension schemes in 2019/2020 will be higher than the year prior, estimated at £20.4bn, and five years ago at £17.9bn.

This covers relief on contributions, relief on investment returns, and tax paid in retirement - but the figures do not provide estimates on the total receipt in tax when pensions are in receipt.

That last bit isn't quite clear - isn't "tax paid in retirement" the same as "receipt in tax when pensions are in receipt"? But hey, let's run with the headline figure. 'Cost' for these purposes is the equal and opposite of the value of the tax saving to the individuals, it's the same thing.

As ghastly as taxes on earnings (income tax and National Insurance) are, if I were in charge, I would chuck the 'focused' tax savings for pensions contributions (focused on older and wealthier people, including Yours Truly; and ultimately on the insurance companies which siphon it all off again) in the bin and share out the savings more equitably:

1. Increase the NIC thresholds (primary and secondary) to £12,500 (same as the personal allowance for income tax). Tax saving per employee earning more than £12,500 = £950 or so, call it £25 bn all in. That's an important first step towards a Basic Income. The Employment Allowance and Apprenticeship Levy can go in the bin as well.

2. Reinstate the personal allowance for those earning more than £100,000 (which results in a marginal income tax rate of 60%), tax saving maybe £3 bn. Either you believe in universal entitlements or you don't, and I do.

3. Harmonise Employees' primary NIC (currently 12%) and self-employed Class 4 NIC (currently 9%) at 11%, an overall tax saving of £6 billion or so. The self-employed will squeal, but so be it. Lower earning self-employed will be up to £370 better off, and those at the upper end will be paying £300 or so more (paying £3,724 = 11% x £46,350 - £12,500, instead of £3,413 = 9% x £46,350 - £8,424), hardly a life changing amount. Employees at the upper end will be saving £800 or so a year. There are more of the latter than the former.

4. Depending on how much is left over (it gets circular and there is guesswork involved), we can start chipping away at Employer's Secondary NIC, get it down from 13.8% of wages to 12% or something...

Shocking stuff, the audience cries, but a government would just have to do it and damn the torpedoes. (As far as I am concerned, the flat rate state pension of £160 covers it, there's no need for more endless tinkering on top).

By the next election, which party would be brave, stupid or corrupt enough to pledge to reverse this? How's that going to go down on the doorstep: "We pledge to hike tax rates for most people for the benefit of large corporations who make large donations to our party and offer us cosy jobs when we retire"?

Yeah, right.

From The Register:

As many as 20 per cent of UK businesses are axing contractors completely in order to ensure they are fully tax compliant ahead of IR35 changes next year, according to a survey.

Recruitment consultancy and IT outsourcer Harvey Nash interviewed 350 businesses employing a significant number of IT contractors. It also found that 83 per cent said IR35 will negatively affect their industry.

From 6 April 2020, it will be the contracting body's responsibility to determine whether the contractor should fall within the scope of the "off-payroll working" rules, IR35.

The point is that the self-employed pay much less in National Insurance contributions (basic rate 9% and higher rate 2%) and employees pay much more (basic rate 25.8% and higher rate 15.8%). The actual income tax is much the same. So businesses and workers can save themselves a lot of money by treating people as self-employed rather than as employees.

In its infinite wisdom, instead of HRMC aligning the NIC rates (and preferably phasing out NIC entirely), they are obsessed with finding employees who are being treated as self-employed, reclassifying them as employees and collecting three year's worth of PAYE, plus penalties, plus interest. All very unpleasant and messy.

Do we really expect businesses to sack all their supposedly self-employed workers and leave everything undone? Do we really expect all the contractors to become unemployed? Or do we expect that most businesses will bite the bullet and only treat people as self-employed if they really are, and if in doubt, put contractors on the payroll and pay the extra NIC..?

Major employers including Barclays and GlaxoSmithKline have reportedly already told contractors that they will only employ them as on-payroll workers.

Which is what exactly what we expect. For sure, businesses and former contractors will have to share the extra NIC, that's an absolute cost to them.

The employer will also deduct the expected cost of certain statutory rights (holiday pay, pensions, sick pay, redundancy pay and rights, as well as less measurable things like employees having a better credit rating than contractors); all these things are of approximate equal and opposite value to the contractor/employee, so in the grander scheme of things, former contractors who are now employees won't really end up much worse off (apart from the extra NIC).

Classic Telegraph lies and propaganda

The Telegraph runs with the wildly misleading headline "New council income tax is best way to plug multi-billion pound gap in social care, says IFS". The Telegraph's motto is, of course, anything but Land Value Tax or reforming Council Tax. The linked IFS page says nothing of the sort, it just mentions it as a possibility.

Digging a bit further, IFS' own press release on the topic, from March this year, pokes gentle fun at their own report:

But implementation would mean overcoming some important challenges

A local income tax would raise significantly more in some areas than others. We estimate that revenues per person from a flat-rate tax across all tax bands would be more than six times higher in many richer parts of west London than in areas like Hull and Leicester.

A system to redistribute revenues between councils would be required in order to avoid this translating into huge disparities in funding for local services.

To sum up, it would end up as a 1% increase in the national rate of income tax. So not a 'local income tax'.

Income tax rates that varied across areas would be more complex for employers, taxpayers, and HMRC to deal with. Up-to-date records on where taxpayers live – which, at present, employers and HMRC don’t always have – would be needed.

Anything but a national tax hike would be administratively unworkable, in other words. Whatever the merits of a tax (and this has none), it has to be at least administratively workable. If it isn't, then that's usually a clue that it's a fundamentally terrible idea in the first place.

Other options for tax devolution come with more significant drawbacks though

Local corporation and value added or sales taxes would be much more difficult to administer and comply with. Moreover, differences in tax rates across councils would be more likely to distort taxpayers’ behaviour than they would for income tax.

Stamp duty land tax is much more unequally distributed – varying by a factor of more than twenty between richer parts of West London and places like Hartlepool and Blackpool. It is also a bad tax that should be abolished rather than entrenched via devolution.

Agreed to all that.

Substantial new powers over council tax, such as the ability to carry out local revaluations, could pose problems for the system of redistributing funding between councils...

Agreed. Drum-roll please...

It would be better to revalue and reform council tax at a national level – something which is overdue.

Agreed.
-------------------------------
In other words, The Telegraph is claiming the IFS said pretty much the diametric opposite of what the IFS actually said.

Ex-HMRC head goes through revolving door; forgets everything he ever knew (or should know)

From The Guardian:

The former head of HM Revenue and Customs has called on the government to scrap a controversial tax break designed to help entrepreneurs, which he said was costing the country £2bn a year in lost tax yet provided “no incentive for real entrepreneurship”.

Sir Edward Troup, who was executive chair of HMRC from 2016 until January 2018, said whichever party won the general election on 12 December should abolish the “entrepreneurs’ relief” applied to capital gains tax (CGT).

Troup’s intervention on Wednesday came in response to a Guardian report on Tuesday showing thousands of the country’s richest people were exploiting the policy to pay as little as 10% tax on billions of pounds’ worth of capital gains...

Troup, who is now a consultant at McKinsey, said there was a “very strong case for [whichever party won the election] to ramp down entrepreneurs’ relief immediately”.

Whatever your view, gut instinct tells me that if people build up a business from scratch and sell it, such gains ought to be taxed at a lower rate (aka Entrepreneur's Relief) than straight investment gains, which of necessity mainly accrue to the already wealthy. We can argue about the finer details later on (the £10 million limit for Entrepreneur's Relief seems excessively high to me, why not go back to retirement relief and just exempt the first £1 million or so and tax the rest at full rates?).

For some reason, this ex-HMRC head is homing in on Entrepreneur's Relief while missing the obvious targets.

1. Investor's Relief, which is a 10% CGT rate for people who in subscribe for new shares in the right kind of company, and

2. SEIS, EIS and VCT reliefs, which include a 0% CGT rate on shares (among many other goodies).

It's those two items which are designed to - and do - benefit the already wealthy, not Entrepreneur's Relief.

How the heck he ended up running HMRC is a mystery to me, he'd have failed the most basic tax exam. And presumably McKinsey took him on for his other marketable skills. Maybe he knows how to unblock paper jams in printers or something?

"Record capital gains means £8.8bn tax bill"

From Your Money:

Figures from HMRC show that in 2017-18 chargeable gains for CGT were £57.9bn, an increase of 13 per cent on the previous year, while CGT liabilities were £8.8bn, up 14 per cent on the year before.

The number of CGT taxpayers increased by 3 per cent to 281,000 but most CGT revenues came from a relatively small number of taxpayers. Nearly two-thirds (62 per cent) of CGT came from those who made gains of £1m or more – this group generally represents around 3 per cent of CGT taxpayers each year.

The HMRC figures suggested that people paying CGT are most likely to be aged 55 to 64, followed by those aged 65 to 74.

Fascinating.

1. Your first thought would be, why is the annual exempt amount only £12,000? They could hike it to £100,000 at least with barely a dent in overall receipts.

The reason why not is because CGT isn't actually intended to raise much revenue and certainly not to tax capital (or capital gains). That £8.8 billion is barely one percent of HMRC total tax receipts.

CGT was introduced to discourage people from dressing up income as capital gains (which were not taxable until 1965 in the UK). There's still some incentive to do so, as CGT rates are half as high as income tax rates, but this way, people are forced to report their capital gains on their tax returns, enabling HMRC to have a closer look.

2. The fact that about 8,000 individuals paid two-thirds of CGT suggests that a tiny number of people own two-thirds of the wealth (excl. the largest asset class of all, people's main residences, which is probably not quite so unequally distributed).

Value Added Tax is quite literally a tax on "value added". Why do people not think about what "value added" means?

The Tory wannabes are trotting out their tax plans, and a couple have mentioned looking at VAT (Michael Gove, article by Sam Dumitriu, and Rory Stewart, via @Sam_Dumitriu).

(Wow, Rory Stewart has "land value tax, at least for business and agricultural land" in his 'good' column and "business rates and no land value tax" in his 'current taxes' column. That's his leadership chances flushed down the toilet).

Gove and Stewart are politicians and don't know or care about economics. Dimutriu ought to know better and is the bigger fool for it. He goes along with the Big Fat Lie that VAT is some sort of harmless tax on 'consumption' or 'indirect tax' which does not affect production.

Let's take a step back and agree that income tax/NIC are taxes on wages or earnings and corporation tax is a tax on corporate profits. Their effect is pretty much the same, the percentage rates and administration is just different.

I trust we can also agree that workers and businesses 'add value', and the more value they add, the more tax they pay. So income tax, NIC and corporation tax are literally taxes on added value.

Value Added Tax  is just more of the same!

We reach an equilibrium point between gross selling prices, net wages after tax and net profits after tax, that point is fixed by the overall tax wedge. Shuffling between these four taxes makes no difference to VAT-registered businesses.

It would make no difference to gross selling prices, output, net wages or net profits (of VAT registered businesses) if we:

a) went to one extreme and scrapped VAT and increased taxes on wages and profits; or

b) went to the other extreme and scrapped income tax, NIC and corporation tax and increased VAT to a very high rate.

Here's a worked example for a typical sort of VAT registered company, which sells output for £120 gross; pays £36 to VAT registered suppliers, pays gross wages (incl. employer's NIC) of £50; employees receive net wages of £30; and has profits before corporation tax of £20.

Current system, with VAT

Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16

No VAT, 17% extra Employer's NIC and 38% corporation tax

Gross sales.........................£120
Paid to suppliers...............(£36)
Gross wages.......................(£50)
Extra Employer's NIC
£50 @ 17%...........................(£8).
Net profit before tax.........£26
Corporation tax @ 38%...(£10)
Profit after tax....................£16

No income tax, NIC or corporation tax, VAT at 46%

For the non-mathematically minded, net sales £82 x 46% = £38; £82 + £38 = £120, so gross sales £120 as before.

Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£36)
Tax-free wages.................(£30)
Tax-free profit....................£16
-----------------------------------------------
The idiots out there think that because sellers can split the total selling price up into 'net' and 'VAT' that magically, consumers pay it.

If that were true, businesses could simply split the selling price into 'net', 'corporation tax' and 'VAT'. Would the idiots then believe that businesses don't pay corporation tax?

France not entirely daft - shock

from Ecommerce News Europe:

The French Minister of Finance told newspaper Le Parisien that the proposed tax is aimed at companies with worldwide digital revenue of at least 750 million euros and a French revenue of more than 25 million euros.

He wants to target commission-based online platforms, like Amazon or Booking.com. Companies that sell their products on their own websites, like French ecommerce company Darty, wouldn’t be targeted.

Good start - the point about these platform/intermediary companies is that their value is in network effects aka rent, and rent is the main thing that governments should be taxing. You have to be able to distinguish it from true earnings, which is why companies like Darty are exempted. People only use Facebook, Twitter etc because everybody else does.

In total, there are about 30 companies that would be affected if the tax plan gets greenlighted. These companies are mostly American, but also German, Spanish and British, as well as one French company (Criteo) and several companies that are originally from France but have been bought by foreign players.

According to Le Maire, a taxation system for the 21st century has to be built on what has value today. “And that’s data”, he said. The minister also added it’s a matter of fiscal justice, with these companies paying some 14 percentage points less tax than small- and medium sized enterprises in Europe.

He misses two points. It's not so much control and ownership of "data" in itself that indicates a rentier status (some companies store lots of their own data, and good luck to them, that's not rent, that's good record-keeping), it's "other people's data" aka network effect etc. And how much tax other companies pay is irrelevant, if they are earned profits in a competitive market, then they should be taxed at lower rates (or not at all). But never mind.

Patents, taxation thereof.

Income from patents is "rent" because it can only arise as a result of government protection, so it seems fair enough to me if a government wants to collect a bit of extra tax from patents. The amounts involved are a tiny fraction of land rents, so I'm not overly bothered, but the principle stands.

The nay-sayers claim that people will just register their patents off-shore, which under current rules can produce a tax saving (because the rules are stupid). But this is similar to the claim that foreigners wouldn't pay LVT on land and buildings they own in the UK or that UK landowners would evade the LVT by registering the land in the name of an off-shore company, which is clearly drivel on the facts.

The same applies to patents. The source of the income is not the patent itself, it is the income from selling the patented products. So the best way of taxing patent income is for the UK government to levy an extra tax on the sale of patented products in the UK, the same as it collects fuel duty from fuel sold in the UK, or booze and fags duty from booze and fags in the UK. It does not matter where the booze or fags were made, or who owns the factory which makes them. The tax is the same.

(Admittedly, tobacco duty in the UK is so stupidly high that smuggling is worthwhile, and they might be past the top of the Laffer Curve, but the principle stands, and most people love bashing smokers, so politically, it is seen as A Good Thing).

Current rules on patent income are stupid, because they go downstream and try to tax the income received by the patent holder. Wrong, it is best to tax that income at source i.e. the actual sales of patented products to end users.
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I envisage something like this, taking cars as an example...

Somebody, car manufacturer or inventor, in the UK or abroad, patents some car components and wants the UK government to give legal protection against competitors embedding similar components in cars which they sell in the UK.

He notifies the UK government that car model such-and-such includes patented components and pays the tax on the selling price of the new such-and-such models he sells in the UK.

It's up to the car manufacturer (or indeed the car manufacturer and inventor together) to decide whether they are willing to pay for that protection or not; or indeed use non-patented components on UK models.
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It doesn't matter who discovered the idea; or where the patent is registered; or who has registered it; or who manufactures the products; or where they are manufactured. All we tax is patented products sold in the UK. You can invent any permutation you like, the rule is the same...

a) UK inventor gets patent royalties from a manufacturer abroad? He does not pay the tax.

b) UK manufacturer pays royalties to patent owner abroad? No tax on that, only tax on the patented products which the manufacturer sells in the UK.

c) UK inventor registers patent off-shore and is paid the royalties there? So what? Why would he even bother? The royalty payments themselves are not taxed in the UK anyway, see example a).

d) Foreign manufacturer sells patented products in the UK? The tax is on the total value of UK sales.

e) UK manufacturer makes patented products and exports most of them? The tax is only due on UK sales. Exports are not liable to UK patent tax.

And so on.
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Is it a perfect system? No of course not. But we know that fuel, booze and fags duty "work" on an administrative level. The same general rules apply here.

Is it far more coherent than the current system? Certainly: it's like a very focussed VAT, with much lower dead weight costs.

How high do we set the rates? Depends on the product. Items with low production costs and high margins (medicines, software) get a high rate (50%?) and items with high production costs and low margins (cars, consumer electronics) get a low rate (5%?).

There's a Laffer Curve to this, and we pitch the rates at something lower than revenue-maximising rate.

How much would the tax raise? No idea, but either we get more money, or we get more competition/innovation. Win-win!
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It doesn't matter what other countries do.

PR China does not care about copying and patent infringement, so were PR China to demand such a tax, people would laugh in their faces and tick the box saying "While this product is patent protected in the rest of the world, we know that you will turn a blind eye if Chinese manufacturers copy it, the protection you offer is worthless so we won't bother paying it on sales in PR China, thank you very much."

In this example, it's not like car manufacturers will say, "We don't want to pay the 5% in the UK, so we'll only sell this model in countries with no patent tax", because the 5% tax on cars will have been set at much less than the extra profits they can make as a result of including the patented components in cars they sell in the UK.

Wealthy countries with a good legal system will be able to charge higher rates of tax than poor countries with a corrupt-ineffective-expensive-complicated legal system, so it motivates governments to make sure that their country is wealthy and their legal system is accessible, quick, low cost and effective, that way they can collect more patent tax. Reward for good behaviour!
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Same goes for franchise payments. Starbucks siphons money out of the UK by charging people (franchisees) for use of the name, logo, cup design etc. The branding is clearly being exploited in the UK, it's a UK activity/UK source of income, so that would be liable to normal UK corporation tax.

"Government urged to slash business rates to save UK high streets"

This week's prize for people who completely undermine their own logic goes to...

From The Independent:

Sainsbury’s boss Mike Coupe joined the calls for reduced rates on Wednesday.

After the supermarket chain announced slowing sales growth on Wednesday, Mr Coupe said: “There isn’t a level playing field between online players and traditional bricks and mortar players, and it’s playing out in a very stark way on the high street at the moment.”

He added the government needs to review “total business taxation”. Sainsbury’s paid £560m in business rates last year, 6 per cent of its overall tax bill.

Yup, a modest 6 per cent. VAT is by far and away their biggest bill (unless you believe the crap about consumers paying it); PAYE is probably not too bad because most staff are on fairly low wages; and corporation tax is chump change.

Their total turnover is £28 billion (page 94 of latest financial statements), divide one by t'other and Business Rates cost them 2p for every £1 of sales. If they think online is so easy, why don't they do it themselves and save the 2p. Ah, they do. So what's the problem?

Boo hoo, frankly.

Something tax related was in the news a bit last week, the most recent/relevant article I can track down is a six months old Daily Mirror article, which refuses to load properly so lets go with the Daily Mail's version:

Hundreds of workers risk bankruptcy after using alleged £13m tax avoidance scheme

... The scheme, which was entirely legal, allowed AML contractors to become staff and were paid via its base on the Isle of Man.

They appear to have been paid a low salary with the rest of the cash paid as a loan with zero or little interest from its 'employee benefit trust' on the Crown dependency. Staff would then pay as little as three per cent income tax.

One client John Dickinson was paid a £11,826 salary in 2009/10 with £85,718 in the form of interest-­free loans, according to the Mirror. At the time he paid just under £9,000 in income tax - but HMRC has now asked for almost £27,000.

More crocodile tears.

Clearly, it is morally and economically wrong for employment income to be taxed at the highest rates of all forms of income, but HMRC has spent the last decade cracking down on 'workers' (i.e. employees) being paid in the form of soft/non-repayable loans, whether directly from their actual employer, or via an 'Employment Benefit Trust', an umbrella company or some even more bizarre offshore trust/company arrangement.

A couple of years ago HMRC made it quite clear that all outstanding loans would simply be treated as employment income, earned and taxable on a certain cut-off date.

The sensible thing to have done is to take money out of an umbrella company as dividends, that gives you slightly lower rate than taking it out subject to PAYE. You can always argue that in reality you were self-employed rather than employed, so you might have got away with it. Pretending that you were receiving a loan and paying next to no tax was taking the piss and was bound to blow up in people's faces later on.

As to "entirely legal", of course it is perfectly legal for an employer to lend an employee money, but there is also tax law that says how the loan will be taxed. And the law is the law, whether unfair or not, and there is no point whining now IMHO.

Trump v Amazon: War of the Rentseekers?

An interesting take from axios.com:

Trump’s deep-seated antipathy toward Amazon surfaces when discussing tax policy and antitrust cases. The president would love to clip CEO Jeff Bezos’ wings. But he doesn’t have a plan to make that happen.

Behind the president's thinking: Trump's wealthy friends tell him Amazon is destroying their businesses. His real estate buddies tell him — and he agrees — that Amazon is killing shopping malls and brick-and-mortar retailers.

Faux Lib shill gloriously missing the point.

From City AM:

DEBATE: Should tech firms be taxed on revenues, rather than profit?

Sir Vince Cable:

These large, mainly technology focused firms have been cheerfully manipulating where their profit is booked to pay minimal tax in the UK for many, many years now.

The Treasury is looking at a new tax that would be levied on these firms’ revenue, rather than profit, which is an extremely robust step – but probably one that is necessary in the current environment. A revenue-based system of taxing these firms could be used, in the short term, as a rough proxy for their economic activity and act as a strong disincentive to tax dodging in our country.

However, this is something of a stop-gap measure. In the long run, we need a proper international agreement to create a more suitable taxation arrangement that properly captures the amount of tax firms should be paying and where they should be paying it.

Note how he is being quite nuanced about it, and I have to agree.

In their published worldwide group accounts this small handful of multinationals are reasonably honest about how much profit they make in total (to keep the stock markets happy). What they can fudge to the n-th degree (and there is no scientifically right or wrong answer) is where those profits are earned. Assuming that corporation tax is a less bad tax, the only rough and ready way to work out in which country they earn their profits is to assume that profit is a certain fraction of turnover. All you need to do is multiply turnover (advertising revenues) from any country by that fraction, then multiply that by your corporation tax rate.

Countries with national and local/state profit taxes (USA, Germany) apply this method in real life and it 'works'. It is not, strictly speaking, a tax on turnover like VAT, it is a way of apportioning net profits between different geographic areas.

So if one group has a worldwide profit margin of 10%, turnover in your country of £1 billion and your country's corporation tax rate is 20%, the assumed profits are £100 million and the corporation tax thereon is £20 million (effective rate 2% of turnover). Perhaps another group has a worldwide profit margin of 30%... then the effective rate is 6% of turnover, and so on. Amazon is still in the loss-leading phase, so the effective rate of tax on turnover would be something like 0.1%.

Here comes the shill who addresses the wrong question and makes two fundamental mistakes:

Russ Shaw, founder of Tech London Advocates and Global Tech Advocates, says NO.

There is no doubt that the biggest multinational tech firms have a responsibility to contribute a fair and adequate level of tax to support the UK’s public sector. Britain’s infrastructure is a pillar of the tech ecosystem which has helped these businesses to flourish.

But officials have to recognise the positive contribution tech giants make to the thriving technology sector and critically in supporting the UK’s startups and scaleups. Just last week, Microsoft announced that it will be investing £14m and opening a new startup accelerator in the heart of east London.

In recent years, investments in tech have reached record levels, and employment in the industry has expanded rapidly. It is therefore an imperative that we ensure the UK remains an attractive destination for large investment. We must protect the digital economy by signposting the UK as being open for business and ensure that our tax policies encourage growth at a time where other European cities are gaining in appeal.

We cannot threaten prosperity by deterring world-leading tech firms.

1. These big companies are like machines that hoover up money from around the world. Clearly, they would prefer to pay the lowest amount of tax possible (same as any sane person), but as long as the overall rate is less than 100% of (unearned) profits, they are happy to hoover. They couldn't care less how the tax is calculated, they couldn't care less whether it is a "fair and adequate level of tax to support the UK's public sector" or not. Who's to say whether Vince's proposed way of working out the corporation tax bill is "fair and adequate"? The government just wants to pluck feathers with the minimum of hissing.

2. Having hoovered up the money and paid some tax, these groups have to decide what to do with it. Pay massive salaries? Pay dividends? Invest in start-up businesses? That's their decision. Having special rules that apply to a handful of multi-nationals has no bearing on whether it's a good idea for them to invest in start-ups in the UK (to whom those rules would clearly not apply) or not.

Fun with numbers: Tax breaks for pensions vs UK annual deficit

From City AM:

Figures published today by HM Revenue & Customs (HMRC) showed the cost of tax relief on pension contributions rose by £950m over the last year to £41bn.

Other tax breaks on pension saving take the total cost to £55bn, Webb said, a figure the Treasury will be studying "with great interest".

OK, here's another figure that the Treasury ought to be studying "with great interest", from The Telegraph*:

Borrowing in the 2017/18 financial year to date is now running at £50bn, down from £56.7bn at the same stage in 2016/17 and the lowest to-date total since 2007.

The figure means Mr Hammond is on course to meet the target set by the Office for Budget Responsibility, the country’s fiscal watchdog, of borrowing £49.9bn in the 12 months to the end of March 2018 - equivalent to 2.4pc of gross domestic product.

I know that it's not big and not clever to compare random items of taxation and spending; or to match the total deficit with individual items of spending (or tax breaks, or subsidies), but it puts it in perspective. We could, in theory, more or less eliminate the current annual deficit by getting rid of tax breaks for pensions (more accurately, people with spare income, more accurately than that, higher earners, and even more accurately than that, subsidies for the lads in The City who soak it all up in fees, charges and commissions).

Broadest shoulders, and all that?
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* Particularly sick-making is that the article makes great play of this factoid:

Public sector borrowing in December dropped by £2.5bn, much more than had been expected, thanks to a £1.2bn credit from the EU. It was the smallest December borrowing figure since 2000.

As if this £1.2 bn were a) some sort of triumph by the UK government and not just a drop in the ocean compared to b) UK deficits/spending or c) the massive overall drain that the EU is/will be or d) a completely made-up number.