The VATMOSS Threshold Paradox, Reasons Why Countries Are Wary & Why We Need Action NOW

September 17, 2015

If we’re to find a way forward to save the European digital economy – and every passing month sees yet more damage done – EU countries need to realise they can actually profit by taking small businesses out of cross-border digital VAT. On the other hand, it’s equally important to realise why different nations may be reluctant to agree to a VATMOSS threshold, despite the arguments in its favour.

Granted, at first glance, the idea that giving any businesses an exemption from tax would make any nation’s Treasury better off doesn’t seem to make much sense. Especially when countries worldwide are seeing their economies suffer from tax-base erosion and profit shifting. Which is what happens when global corporations from Amazon to Starbucks set up subsidiaries in tax havens with minimal taxation, and shuffle the paperwork to ensure they can do business worth millions of pounds/euro in the UK, France, Germany or elsewhere and only pay a fraction of the tax that would be due if those businesses were actually based in that country. These are legitimate concerns for governments and the new EU digital VAT regulations are intended as a first step to frustrate such financial fancy footwork.

But effective taxation is all a question of scale and this applies most particularly when dealing with the smallest businesses. There’s a crucial point where the fixed costs of collecting a tax are more than the money that comes in. This is a central concern with VATMOSS, given so many small-scale direct digital traders are making quarterly returns of under £/€20.

After six months of these new regulations, HMRC has revealed that 78% of the VATMOSS returns being processed in the UK only bring in 1% of the total revenue they get from this scheme. And that’s not even counting all those people submitting zero returns because they don’t happen to have made a cross-border sale in that quarter.

Is that 1% of revenue covering the cost of all that added administration? If not, then taking those smallest traders out of this system will mean the Treasury’s better off overall. It’s basic cost-versus-benefit analysis which every EU state now needs to do as a matter of urgency. They have the data. They need to use it NOW.

More than that, countries need to consider is this 1% or so worth having in the short term, compared to the losses of tax revenues that they will see in the medium and longer term?

Because there’s a tipping point for small businesses when considering the tax to be paid and the costs of paying that tax in administration and accountancy fees. There’s a point where those costs use up such a high percentage of a business’s turnover that it simply makes no sense for an individual to carry on trading for what little income is left.

If giving up their fledgling enterprise means going onto unemployment and other benefits, then that person’s government will see their social security bill go up. That country would be better off forgoing a comparatively trivial amount of tax in return for this saving on welfare.

Longer term, these small businesses which are currently being killed off with every passing month can never grow into the medium and larger companies which would have paid worthwhile amounts of tax as well as generating employment and overall economic growth.

When a small business’s income is subject to a particular tax from the very first penny, the loss of potential is even greater. The expense of compliance added to other start-up costs has now created such a forbidding barrier to entry that promising enterprises are being abandoned at the planning stage. Companies which could have become world leaders will never see the light of day.

This is especially true in the digital economy where multinational corporations have quite literally started at kitchen tables (Dunnhumby) or in garages (Apple). In the 21st century, online enterprise means investing time to start a business instead of a whole load of money up front. A single entrepreneur can turn a good idea into a digital product and take it to a global marketplace using freely available computer resources to learn new skills and the marketing reach of blogs, social media and online interest groups. As soon as a trickle of money comes in, services like web hosting and domain registration are easily affordable. As the business grows, more aspects can be contracted out, all generating economic growth and employment. All of that activity increases a country’s tax base.

But not if that business never starts up because of VATMOSS compliance costs. We already know that enterprises expecting to pay under £/€100 annually in cross-border digital VAT are facing anything from £500 to £5000 in added costs. No wonder so many people are giving up on the very idea of starting a new digital business now that they have to find that sort of money up front, before they’ve even earned a penny.

You don’t need to just take our word on all this. The OECD Secretary General has just issued a key report to the G20 Finance Ministries on taxation including VAT issues for small and medium enterprises (SMEs). You can read the whole thing here if you’re keen but these are some key points:

“… Tax compliance costs typically have a significant fixed cost component, tending to impose a relatively higher burden on SMEs than on larger enterprises which can benefit from returns to scale in complying. Tax compliance costs may affect a number of economic margins faced by the owners and operators of SMEs, notably, whether to become self-employed, whether to employ others and whether to operate in the formal economy.” (page 105 para 207)

“Along with other taxes, VAT imposes compliance costs on businesses and administrative costs on tax authorities. Although VAT is designed to be neutral for business taxpayers, VAT is often classified as particularly difficult and burdensome for SMEs to collect and comply with. Hence simplified VAT regimes for SMEs are often an efficient way to promote compliance.” (page 118, para 262)

“Exemption thresholds set a level of turnover below which there is no obligation to comply with VAT regulations. Entities under these thresholds do not account for output VAT and consequently are not entitled to deduct input tax incurred on purchases of goods and services. This is a commonly-used and straightforward option to address VAT compliance costs.” (page 118, para 264)

So why is there any debate? Why wasn’t a threshold included from the start, when the VATMOSS system was agreed?

Well, as with so much in life, it’s more complicated than that. The OECD hasn’t produced a 160 page report analysing taxation issues in detail for the fun of it. As this document also says:

“Whether to establish a threshold is an important issue for VAT design. The level of the threshold is often a trade-off between minimising compliance and administration costs and the need to avoid jeopardising revenue and/or distorting competition. Exempting small firms from the VAT system may forgo little revenue, however, the balance between cost savings and revenue losses shifts as thresholds increase and at some point the forgone revenue will exceed the compliance and administrative costs. At some intermediate point an optimal VAT threshold can be identified, at which the cost savings and revenue losses are equal. Further, there are a number of other factors including distortionary effects inherent in the application of thresholds that should be taken into account. All these considerations make the identification of the optimal threshold for each country a difficult question to determine and one which may vary across the heterogeneous SME population.” (page 119 para 271)

If identifying an optimal VAT threshold for an individual country is difficult, how much more challenging is that going to be for the entire European Union?

The 28 member states vary hugely in geographic size, location, resources and population, just to begin with. Every country’s economy has different strengths and weaknesses. Every nation sets its own priorities with regard to regulation or liberalisation of market forces and in terms of the social contract between government and citizens. Each exchequer and finance ministry sets its own budget accordingly, balancing direct taxation on income and indirect taxes like VAT, and accountable to the electorate giving its politicians their democratic mandate.

So it’s hardly surprising to see different countries oppose sweeping proposals for some one-size-fits-all, universal VAT threshold applied to all small companies’ total turnover.

This is why the EU VAT Action Campaign’s call for a VATMOSS threshold specifically states that this should only apply to cross-border digital sales. Every country’s own domestic VAT regime would still apply outside that, leaving national sovereignty over taxation unchallenged.

Working out the fine details will be a complex task and such things invariably take time. Unfortunately we have no time to spare, now that these regulations are already in operation.

The damage is already being done as businesses close, scale back their digital sales or lose income vital to their future growth in 3rd party marketplace fees. All of which erodes every EU country’s tax base and potentially adds to its welfare bill.

This is why the EU VAT Action Campaign is calling for immediate interim easements to save the small businesses worst affected from going under in the two to five years it will take before these laws can be changed at EU level.

Whether these interim thresholds or suspension come centrally from the EU Commission or individually from national governments using their discretion to protect their own economies as they see best is a secondary consideration. The primary issue is practical action to save the digital, knowledge and skills-based economy needs to happen NOW.

(reblogged from euvataction.org by kind invitation, which is very much appreciated, Juliet E McKenna)


State of play

September 16, 2015

So there are fourteen open consultations listed as relating to HMRC on the gov.uk website today.  If you filter instead for the “tax and revenue” policy area (all departments) the total comes up as 18 – four from the Treasury.  Query: why are some tax consultations badged from the Treasury and some from HMRC?  Answers on a postcard…

The first is a review of travel and subsistence rules.  It was published under the coalition government, in July 2014, but says that it closes at quarter to midnight on 1st May 2016.  I find this rather improbable, and I wish gov.uk would have a look at it.

You have until 30th September to respond on the taxation of performance linked rewards paid to asset managers, employment intermediaries and tax relief for travel and subsistence, ISA qualifying investments and crowd funding, and the IR35 discussion document

You need to get motoring to respond to the implementation of the Personal Savings Allowance and the deduction of income tax from interest in peer to peer lending which both close on 18th September.  The other handful all have closing dates in October.

But I could have read and perhaps responded to one of them in the time I’ve taken today trying to identify which one to prioritise.  Because apparently listing consultations with a visible closure date and/or in the order in which they close remains beyond the wit of a twenty first century government.  Or, as I said on Facebook yesterday, you’d almost imagine they didn’t want responses from Jo Public.



Citizens and tax justice

September 15, 2015

How are citizens to engage with tax policy?  One method, the one which led to the foundation of this blog, is to seek out and respond to tax consultations.  In theory, any citizen can find, read, consider and respond to the government’s proposals for the tax system via the list of consultations published on the gov.uk website.

In practice…?

Well, a few weeks ago I saw a couple of tweets about a proposal to charge fees for taxpayers to challenge HMRC decisions at tax tribunals.  It started here:

and more detail came from this:

Because here it is: the actual consultation document is on the Ministry of Justice site under the splendid title of “Enhanced fees for divorce, possession claims and general applications in civil proceedings and consultation on further fees proposal

Now, I don’t know about you, but to me this does not immediately say “there’s a section about tax tribunals!  You need to read this, honest!”  It does not come up if you filter the “open consultations” section of the “consultations” page on gov.uk by the “tax and revenue” policy area, for example.  How were we to know it was there?

Having found the page (from the links provided on twitter) I was rather taken aback to see it described, in the overview, as “the government response to the consultation on enhanced fees for possession claims…” and it took me a while to work out that it was the final paragraph that must refer to the tax tribunal proposals (“In addition, we have today published a further consultation on a number of new fees proposals. This consultation proposes new or increased fees in a range of court and tribunal proceedings and the detailed proposals can be found in chapters 3 and 4 of the document provided below.”

The “document provided below”??  There are some documents “below”, three listed under the heading of “previous consultations” and seven under “related documents”.  It is not at all obvious which document contains the new proposals.  Where, then, are we to look for details of the proposals on tax tribunals?

Well, I’m an Impact Assessment wonk, so I started with the final document, the Impact Assessment for the “introduction of fees” to (amongst others) the “First Tier Tax Chamber, Upper Tier Tax Chamber” (IA No: MOJ008/2015)

What do we learn from this?  Well, first of all the perceived problem seems to be that the tribunals don’t cover their own costs and that government action is required to “reduce the burden on the taxpayer”.  Now to me this is begging rather a number of questions.  When, firstly, did we require courts to cover their own costs?  Isn’t the cost of justice precisely one of the reasons for having a tax system in the first place?  Isn’t it part of the deal we make in living in a functioning state, that the state will collect money from us in taxes but in return will provide us with security including a system of justice?  In other words, I reject the basic premise of the IA: this is not a problem that requires government action.  Collecting fees from applicants for justice is not justice: it is commerce.  It is the Ritz Hotel model of equality, where we all equally have the right to dine at the Ritz but only those with sufficient cash in hand are able to exercise that right.

Next, “what policy options have been considered, including any alternatives to regulation? Please justify any preferred option.”  Now this looked promising, at least in the sense that there are five options listed.  They are, however, different strands of the SAME proposal: there is a “do nothing” option, option zero, and then there are five separate options listed, the second of which is the tax chamber proposal.  These are not alternative options, they are different elements of the same proposal, the proposal to impose fees.  There is no suggestion that the perceived “need” to make the tax tribunal cover its own costs might be met in several different ways.  Off the top of my head, you could meet the court costs by a grant from HMRC, by a charge to anyone losing a case where tax at stake was more than £x million, by a percentage levy on the losing side in proportion to the tax at stake or by, I don’t know, starting a court tv service, televising the tribunals and selling bloody advertising. My point is, those are four different alternative options.  “Do this or don’t do it” isn’t presenting options at all: it’s a statement of intent.  Particularly when you say, as the government does in the impact assessment (under “Will the policy be reviewed?”) that once charges have been introduced the decision “will not be reviewed”  Why the hell not???

Turning to the “evidence” base, the scant material has been repeated five times so it looks as if someone has given it consideration, but a cursory glance at the actual material suggests otherwise.  Look at the bottom of page 15 where the evidence base for the tax tribunal proposals begins.  It reads:

45.  When cases are first issued in the First Tier Tribunal, they are assigned a case category (Paper, Basic, Standard or Complex) by the tribunal.  This is

However if you turn to page 16 hoping to find the end of that sentence, you will see instead what appears to be a misallocated footnote numbered 11 and then section 46.

This is a miserable, shoddy excuse for an impact assessment for what seems to me from reading it to be a miserable, shoddy excuse for a policy.  The consultation closes today.  There was an article about it in last week’s Taxation, so I expect at least some tax practitioners will have been alerted to what is proposed.  But, honestly, how would it serve justice if someone wanting to challenge the imposition of a fixed penalty of £100 for a late return were to be required to pay £50 for the privilege of challenging the state’s view of the case?  Follow this link to the electronic form…. Oh.  Actually the bloody thing closed at noon today.  No, it doesn’t tell you that on the consultation website.  But it does on the gov.uk landing page.


Three more things

September 9, 2015

Three more thoughts, at a little more leisure, after Sunday night’s call to arms on the government’s consultation on the gender wage gap (see previous entry).

Firstly, how is it that gov.uk still doesn’t produce the list of open consultations in a usable format?  Seriously, look at the list here which shows you all consultations which are currently open.  At the time of writing there are 119 and, if you scroll down the list, you’ll see that they are in fact in date order.  But they are in order of the date on which they were published.  To find out when any of the consultations close, you have to click on the link to the specific consultation, open up the new page, and look for the closure date.  In the great scheme of things that might not seem like much, but it means that you can’t extract a list of open consultations, order them by date of closure, and then concentrate your efforts on the ones which are closing soon to make sure you don’t miss something.  You’d almost think they didn’t want consultations responses from individual citizens…

Secondly, on the format of the consultation, what on earth was the thing with the electronic form all about?  Why do you have to provide an email address, a snail mail address AND a contact phone number in order to respond?  Any one of three ought to be sufficient, surely?  And, while I can see it might be administratively convenient to have responses on an eform so that you can easily aggregate the responses, I can’t say that I came away from it with any sense of having contributed to a serious debate on the issues.

Third and finally, what were the issues?  In retrospect, this was a consultation on whether and how the commitment to require employers of more than 250 staff to publish their gender pay gap details was to be fulfilled.  The gender pay gap in this context is the difference between the average hourly pay of male and female employees.  So you can see that a firm with a largely female workforce in something like a caring profession, perhaps with a largely male boardroom and management cadre, might have a substantial pay gap explained by the makeup of the workforce.  You can also see how companies might be temped to game the figures by adding a few highly paid female board members to their roster, and I should mention here that I’m open to non-exec positions…  Ahem.

However the condoc tells us that the National Statistics Office uses the median hourly rate (excluding overtime and bonuses) to calculate the gap.

Why exclude overtime and bonuses?  There have been a number of high profile court cases about female high flyers in the feral professions nevertheless being denied the seven figure bonuses paid to comparable males.  Let’s add that in, surely?  And excluding overtime surely again offers chances to game the system by paying men for overtime not available to women?

The main point, though, is whether it’s more useful to have the pay gap measured by use of the average or the median rate.  Say you had 100 female employees earning £10 an hour and ten male managers on the kind of salary that averages out as £60 an hour, with three male and one female board members on an hourly equivalent of £200.  The average hourly rate for women would be ((100 x 10) + 200) / 101 = 11.88.  Most women earn £10 an hour, but the one very highly paid woman raises the average slightly.  The men average ((10×60)+(2×200))/12 = £83.  In this very crude example there are fewer men in higher paid positions and a lot of women in lower paid occupations – the wage gap is 83-11.88 = £71.12

If you use the median hourly rate, you find the one in the middle.  You rank the women in order of hourly salary and pick the middle one:





(I’m not going to list that 100 times but you get the idea.  The middle woman, the 51st on the list, still gets £10 an hour, so that’s the median hourly rate.)

The men:





60… etc etc

Again, the middle number (the seventh man) gets £60.  The wage gap is £60-10=£50.

These two figures tell you different things.  (As well as the median and the mean, you might also want the mode, the most frequently occurring number, but in this artificial example it gives the same figure as the median)

You could, for example, envisage tweaking the figures.  If the company took on some men in its general workforce and appointed some female managers it could fairly easily arrive at a median wage gap of zero.  Appoint another female board member and you might wind up with an average wage gap of zero.  And perhaps those are the kinds of actions we might want to encourage businesses to take; I don’t know.

My point is, though, that this is what the consultation ought to have been about.  What IS the real gap between men’s and women’s pay, how best can we capture and promulgate it, in order to nudge companies to do something about it?

What a missed opportunity.


Luck of the draw

September 6, 2015

I’m writing this rapidly, at around half nine on the evening of 6th September, because – while idly flicking through twitter – I saw a tweet from @Govt_Women (“the official feed for the UK Government Equalities Office”) reminding people there’s a consultation on the Gender Pay Gap closing in three hours.

Actually according to the consultation document here, it closes at 11.45pm tonight, so you’ve still got a couple of hours, just.

Here’s my brief summary of the condoc:

  • the gender pay gap is the gap between *average* salaries for men and *average* salaries for women
  • pay discrimination doesn’t wholly explain it (because “pay discrimination… is already unlawful” – bless!)
  • causes can include women being concentrated in lower paid occupations, women not being promoted to senior positions, and women losing seniority if they take time off for childcare

The consultation, however, is purely on how the tories achieve their manifesto commitment of requiring employers of more than 250 people to publish the figure.  It’s already in the 2010 Equality Act, but it’s a “power to introduce regulations” power.  The consultation is on what the regulations should contain.

Responses are requested on an eform which you can find here, and it’ll only take you a few minutes.  Let’s try to get a few hundred “just get ON WITH IT”s in the last hour???




The Taxman

August 28, 2015

Fair warning, if you ever meet me face to face and start telling me about the Laffer Curve (the idea that taxing above a certain level stops people bothering to getting out of bed) you should know that I consider this theory to be entirely exploded by history.  This history is admirably illustrated by The Beatles’ song “The Taxman“, and I will more than likely sing a few verses of it at you until you admit defeat.

George Harrison could do as he liked, of course, but for the rest of us, times have changed, and the use of the term Taxman to refer to members of Her Majesty’s Revenue and Customs, and, by synecdoche, the institution itself is now somewhat offensive.

I say “somewhat”, because there are few absolutes in linguistic useage (I am aware that I have used the term myself when I have been unable to think of an alternative) and I say “offensive” because HMRC had a 58% female workforce (when they had 74,000 staff: I’m assuming this was a couple of years ago – anyone got more recent figures?)

“The Taxman” is a term which includes female tax inspectors?  Yes, quite: and “who for us men and for our salvation came down from heaven” never bothered me in the creed either.  It’s an archaic usage: get with it grandad and just stop it please!

Let us be practical, however.  What can we say instead of the lazy sexism of “the taxman”?

Well how about:

  • HMRC
  • the Revenue
  • Customs
  • taxfolk
  • taxpeeps
  • the taxers
  • taxbods
  • tax professionals
  • taxworkers
  • the tax office
  • tax officials
  • tax inspectors
  • HMRC officers
  • tax/customs authority

Pick an appropriate one for your context (and, no, using one inappropriate to context will not persuade me that I’m asking the impossible).  And, please feel free to add your further suggestions, serious and… more left field…. in the comments.



Mischief managed

August 21, 2015

Let us put away the metaphor of comparing tax knowledge to wizardry for the moment.  What would a functioning democratic tax system look like?  How would we get from where we are now to where we would like to be?

I can’t remember whether I posted this link before, to an article I wrote in The Conversation, drawing on a piece of academic research I published over the summer.  In it I, rather impertinently, offer some advice to Meg Hillier as she takes over from Margaret Hodge as chair of the PAC.  There are two things I think are essential: first, there has to be some way of including those who don’t speak the language of tax in debates about tax.  And, second, we have to form a collective view of the morality of tax: what is and is not acceptable behaviour by businesses, individuals and their advisors.

Which is all very nice, but where would we start?

Well, if I were Meg Hillier I’d start with a concrete example – say the patent box.  (Other tax measures which annoy different people for different reasons are available).  I’d take the TIIN and look at how much it said the measure would cost.  I’d ask whether the costs and benefits had been reviewed yet.  I would ask, specifically, whether the cost for 2014/15 had in fact been £800 million or some other figure, and what economic benefit had been achieved by giving businesses this tax break.  Can the government provide details of factories built, jobs created and protected, research invested in and proving productive, products in the pipeline or other positive results that flow from this decision to allow businesses to save £800m of tax last year?  I’d want to ask what the final compliance costs to business and to HMRC had turned out to be, and then I’d want a new cost benefit analysis prepared to show whether the measure had been worth doing.  And then I’d want to advise the government that either this was an economically sound decision which – although it looks like corporate welfare – was actually doing the job of boosting the economy.  Or that it wasn’t.  So it ought to be sunsetted (or, in plain English, repealed).

Then I’d make it very clear that my committee would be looking systematically at tax changes, at the cost benefit analysis which validated the decision to introduce them, and at the evidence of whether those analyses had been accurate, and recommending repeal of the ones which weren’t working.

The general public can understand this kind of discussion, surely?  The government said it would change the rules in a way which would save businesses £800 million last year.  Was it actually £800 million?  Or more?  Or less?  And what did we, the rest of the country, get as a result?

Move the conversation into this space, using the tools which are already there in the TIIN and the other supporting documents from the introduction of a measure, and we can all look at the government’s decision making.  And, since sunlight remains the best disinfectant, this would also improve its decision making in future.  (Crosses fingers)


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