Friday, 24 February 2012

Reader's Letter Of The Day (2)

It's ages since I've had one in the FT:

Sir, Andrew Harvey-Smith (Letters, 23 February) recommends a tiered rate of corporation tax to help small and growing businesses.

The UK already has slightly lower rates of corporation tax for businesses with smaller profits, but corporation tax in itself is not really a barrier to growth. By definition, it cannot push a marginal business into making losses, or increase the losses of a start-up.

The real barrier to growth is value added tax. It is not just that crossing the registration threshold can leave a growing business worse off than before: the real issue is that VAT is payable whether a company is making profits or not, so in relative terms it is a lighter burden on large, established businesses than it is on marginal or growing ones. By acting as a barrier to entry, it could even be argued that taxing turnover rather than net profits is a subsidy to large businesses.

So a far simpler and better alternative to tiered corporation tax rates would be to reduce the standard rate of VAT and increase corporation tax rates accordingly.

Mark Wadsworth, etc


Staffordshire man said...

Surely if CT is reduced then there is more profit (assuming there is one) which can be re-invested.

As for VAT, if you reduce the rate then the seller will pay less to the government only because he will receive less; unless of course he doesn't pass on the reduction which - in effect - is simply raising his prices. This is the same whether you're big or small

Mark Wadsworth said...

SM, as a matter of fact, observation and logic, VAT is mainly borne by the supplier/producer. It is a tax on gross profits (the clue is in the name). So cut VAT, and there's more profit all round.

But that is not the point, if your turnover is £100,000 and your expenses are £90,000, then you are profitable... until you knock off £16,666 VAT (which you either pay to HMRC or pay to your suppliers); your business doesn't just not make profits, it makes losses but you still pay £16,666 tax.

So the incumbent, who has established himself and has £150,000 turnover and £90,000 expenses pays over £25,000 VAT and £10,000 corporation tax.

Sure, on the face of it, the incumbent is paying VAT - but he also gets the hidden subsidy that his potential competitor - i.e. you - can't overcome the losses for the first couple of years until you are also established, so a large chunk of his turnover is what he receives because of reduced competition, i.e. barriers to entry.

Staffordshire man said...

Companies don't pay VAT - they collect it.

Mark Wadsworth said...

SM, yes, that's what the politicians want us to think, and most people blindly believe it. It's also what i tell my clients at work. But it's not actually true.

If you look at actual figures and compare prices, gross margins, relative price inflation between VAT-able and non-VATable items before and after VAT increases or reductions etc etc, you will notice that about two-thirds is borne by the supplier - VAT is, after all, a tax on 'value added' or 'gross profits'.

This two-thirds is exactly what you would expect if you apply the logic which says relative elasticity of supply and demand determines who bears a tax.

Just click my 'VAT' label until you find the relevant posts.

Bayard said...

SM, Fror example I am a small builder. I am not VAT registered. I price a job at £5,000. 80% of my costs is labour, on which I do not pay VAT. My competitor is also a small builder. He is VAT registered. He also prices the job at £5,000. 80% of his costs is labour, on which he does not pay VAT. Cost to the customer, £5,000. Given that the costs of labour and materials is roughly the same to both of us, I make more profit than he does, as I do not have to hand over £1000 to the government out of my income. Sure, my competitor can reclaim his input VAT, but that is only 20% of £1000, less his markup. Thus he is paying, if he gets the job, about 85% or more of the VAT.

Mark Wadsworth said...

B, ta for back up.