Archive for the ‘SFIT’ Category

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The scores on the doors

March 6, 2017

In February the Bristol East MP Kerry McCarthy asked whether HMRC had “assessed the effect” of MTD on “freelance workers in the creative industries” and “other specific sectors”.

The answer from Jane Ellison refers her to the impact assessment which, she says,

estimated the impacts averaged across the entire unincorporated business population, using established models, consultation feedback, stakeholder engagement and internal insight.

Well yes, up to a point.  There are three different fields in the impact assessment which might be relevant to the question.  First of all, is there any assessment of how much extra tax might be expected from different sectors?  Is there a particular group whose tax behaviour is causing particular concern?  We don’t know, because HMRC won’t give us the analysis of the tax figure.

I assume, though, that the question was angled more towards the costs imposed on businesses by the requirement to keep digital records.  This is contained in the “administrative burden” figure, sometimes referred to as “red tape” – the cost of compliance with government regulation.

This is deep into policy wonk territory, of course, but there is a neat summary of the figures and how they’re arrived at here.  Essentially HMRC spent half a million pounds in 2005 on getting KPMG to conduct a research project producing a “standard cost model”: assessing a baseline figure of how much it cost averagely competent averagely compliant businesses to fulfil the obligations the tax system placed on them.  The result is better thought of as a score than an actual amount: it’s how HMRC scores its work on reducing the admin burden on business.  It reduced the burden by ten per cent overall between 2006 and 2011 – but that is an average.  It doesn’t mean that any one business would have felt a reduction of ten per cent of its costs from dealing with its tax.  A lot of the result came from changes to the construction industry scheme, for example, so contractors and subcontractors in construction would have noticed huge changes: other industries may not have felt any benefit at all.

So Kerry McCarthy’s question isn’t answered at all by reference to the admin burden figure: the standard cost model doesn’t tell you whether the creative industries, or any other specific industry, will gain or lose by a change.

The more interesting field in the impact assessment, for these purposes, is the “other impacts” section.  In a government divided into departments, with different departments having different priorities, the “other impacts” section is a kind of checklist.  If the government says it wants to reduce its carbon footprint, for example, it can add a “carbon impact” assessment to the list of things that all departments have to think through before they introduce a regulatory change.

In this instance, it’s the small firms impact test – or, as it’s now called, the small and medium business assessment or SaMBA which is where the answer to Kerry McCarthy’s question might lie.  This is where you might expect to find some granularity about how the policy might impact differently on different kinds of businesses…

…except if you look at the latest instructions HMRC staff are given on how to do this (taken from these instructions) it says

Small and Micro Business Assessment:

Small businesses (up to 49 FTE employees) – including micro-businesses (up to 10 employees):

  •   why they are included in the change
  •   what amelioration you have considered, and
  •   what consultation you have carried out.

So what does it actually say in the SaMBA in the MTD impact assessment…?

Small and micro business assessment: the MTDfB changes will improve the quality of record keeping, reducing the likelihood of mistakes (and attendant risk of unwelcome and costly HMRC compliance interventions) and help businesses to manage their cash flow more effectively. In the longer term, we anticipate a reduction in administrative burdens for these businesses.

The government recognises by their very make-up that this group includes businesses which are likely to be more affected by one-off transitional costs and digital capability issues, and may therefore find it more difficult to move to the new digital requirements.

In the consultation the government said that it wanted to consult on financial support to help some businesses make the transition to MTDfB. It sought views on the support required and what form this should take. Final decisions will be made before legislation is laid later this year.

Does this sound as though they have done some serious research into how different types and sizes of business will be affected?  As if they have the granular data that would allow them to answer the question on how creative industries will be impacted?

No, I didn’t think so either.

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Crickhowell: the town that went offshore

January 22, 2016

“Either we all pay tax, or none of us do!”

There are just three things I want to say about The Town That Took on the Taxman, the show originally trailed as the “Town that Went Offshore“.  I missed it when it was on BBC2 (9pm on Wednesday 20th) but caught up with it on iplayer.  If you haven’t seen it yet, I recommend doing the same.

First of all, I enjoyed it enormously.  We have seen the same material before: the production team fancies a quick weekend somewhere sunny so they pick their tax havens carefully.  Oh look, there are supposed to be thousands of companies in that little house with all the brass plates on the door… Yes, but this time the explanation of the Dutch Sandwich avoidance scheme was done by ordinary small traders from the Welsh town of Crickhowell.

Which is, really, my second point.  Arise, tax muggles!  The USP for this programme was that the avoidance scheme was devised and operated by a group of ordinary people, not tax specialists.  Crickhowell is, apparently, a small town with a unique high street ecology made up of local small traders, not multinational chains (except for Boots, who at least they managed to shame into joining in with the Christmas lights).  But by the end of the show they were also tax campaigners.

The production team set them up with meetings with tax professionals who explained how multinationals reduce their corporation tax bills with items like payments for intellectual property.  But it seems to have been the small traders themselves who came up with the idea of creating intellectual property in the form of the Fair Tax Town brand and then parking it in the Isle of Mann company they’d opened.

In other words, tax really doesn’t have to be taxing: ordinary people are perfectly able to understand tax schemes and issues when they are motivated to understand them and have someone able to communicate with them clearly.  HMRC’s stakeholder model involves talking to “stakeholder” groups: usually to tax professionals in accountancy and law firms and those employed by industry groups.  What they need to do, in my view, is talk to small traders like the Crickhowell independents, too.  One of the main grievances the group raised with Jim Harra was, indeed, the HMRC “relationship managers” large businesses have and why aren’t small traders treated to the same level of customer service.  Money, is the simple answer.  But it’s also an excuse: HMRC’s customer service offering needs a really good re-think in my view.  Good on the Crickhowell team if they can disrupt the system enough to get that done.  (And, bring back the Small Firms Impact Test!)

Finally, the elephant in the room.  You didn’t notice?  Well, there was an engaging team of Crickhowellians throughout the programme, men and women, so I suppose you could be forgiven.  But the presenter’s constant reference to “the taxman” grated, and made me notice. That they spoke to tax barrister David Quentininvestigative journalist Tom Bergin, author of The Great Tax Robbery Richard BrooksJim Harra, an actual taxmansceptical voice Richard Murphy , tax barrister Jolson Maugham

You see the common thread? #wherearethewomen?  It’s not as if Women in Tax are hard to find!

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Small firms impact: not waving but drowning [Part 3 of 4]

February 18, 2015

We have finally reached page A113 of the TIIN, the second half of the table of impacts.  In terms of the seven questions, we are now past “what does it cost/raise” to the final three questions which are:

  • What will it cost the customer?
  • What will it cost the department?
  • Are there any other impacts?

“What will it cost the customer” can be a bit hard to fathom if you aren’t used to dealing with TIINs, but start with the section on “impact on individuals and households”.  In this case, you could summarise it as:

  1. Individuals who buy ebooks from abroad will have to pay UK VAT on them
  2. There won’t be any compliance costs

Now, if you are an individual with a kitchen table business affected by this change you might object to this, but  “individuals and households” in this context means “customers” rather than suppliers.  The impact on one-woman businesses is covered in the business impact section, further down.

So all of us who buy ebooks – or music downloads, or pdf knitting patterns or any of the other things covered by VATMOSS – will feel the impact because the things we buy will have VAT charged on them at the 20% UK rate and not at, for example, the Luxembourg rate of 3%.  But the total amount of that VAT is captured in the “exchequer effect” field I looked at in part 2: the “impact on individuals” field is for any extra compliance costs the individual might incur.  And of course when you buy an ebook you don’t, as a customer, have to DO anything to pay the VAT at the right rate.  It’s up to the seller to work out the correct rate, charge it, collect it, and hand it over to the tax authorities.

(One of the interesting things about this whole mess has been the lack of any particular interest from small vendors in other European countries.  The rates of VAT are here, on page 3 of this EU document.  The interesting bit isn’t the main rate.  It’s the table of reduced rates on page 4.  Books are zero rated in the UK, and so it feels annoying to us that ebooks aren’t zero rated but charged VAT at 20%.  But look at other countries.  There are very few zero rated items, but many countries charge a reduced rate of VAT on books… so if you’re charging 3, 4 or 5% VAT on books already, why not charge 3, 4 or 5% on ebooks too, to harmonise your rates?  Maybe they should just cut the VAT rate on ebooks all round???  As I understand it, you can keep your zero rates but you can’t increase their scope or number.  So we haven’t asked for a lower VAT rate on ebooks in the UK because we have a zero rate on hard copy books and we’re afraid that the EU would insist on changing that if we changed the rate on ebooks.  Would it be worth paying say 5% VAT on all books to harmonise the rate between hard copy and ebooks?  I genuinely don’t know.)

The main thing to note in this section of the TIIN, though, is the “impact on business including civil society organisations” (in other words, the impact on businesses and charities)

Here we have the lovely suggestion that there are only five thousand businesses who will really lose out by the changes.

This is on the assumption that most small businesses will sell their electronic wares via Amazon or another big platform.  I already have an outstanding Freedom of Information Act review request asking whether HMRC really can get away with not telling us who they consulted in arriving at their decisions on this issue.  But I was always taught that the data used in calculating an impact assessment were subject to disclosure under FoI and I wonder whether it would be interesting to look at just how, exactly, the figures of “up to 34,000 businesses, of which about 5000 are not currently registered for VAT”  were arrived at, because from the face of the TIIN it looks as if they have been plucked from the air.

The estimated compliance cost for these businesses is £40 per business per year for the businesses already registered for VAT and £220 per business per year for the estimated 5000 unregistered businesses which HMRC thought would have to join MOSS.  Again, that’s not the cost of the VAT itself, just the cost of administering the tax – the time cost of filling in the VAT returns.  Even on these figures, 29,000 x £40 plus 5000 x £220 (£1,160,000 + £1,100,000) you get an increase in admin burden just on the very small businesses of around two and a half million a year.  The question the TIIN raises in my mind is, does the £300m putative tax raised from the large businesses like Amazon warrant imposing the £1.5m putative admin burden on micro businesses?

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VAT on ebooks

November 25, 2014

As it says on my twitter bio, I’m

By day, PhD Law student researching tax simplification and better regulation; by night, writer of science fiction and fantasy.

so today my Facebook and twitter feeds are suddenly full of people from the science fiction side of my life talking about tax.  Why?  Well, take a look at the hashtags #VATMOSS and #VATMESS.

Essentially from January the loophole that lets Amazon avoid charging VAT on e-books has been closed.  VAT will now apply at the rate applicable where the customer is located, and not at the place where the business selling them an ebook has been registered.

Except…

Except what about all of those authors who make a few quid selling their back catalogue as ebooks?  Do they have to register for VAT in France just because someone in their holiday home in Normandy logs on and downloads a single copy of their ebook for some poolside entertainment?

Ah, says HMRC, we’ve thought of that.  There’s a thing called the “mini one stop shop” – MOSS – which means you can register for VAT in just one country, the UK, and pay your French and German and Italian and Spanish VAT direct to the UK every quarter.

Wait a minute, though.  Doesn’t the UK have the highest VAT registration rate in Europe (£81,000) so they won’t have to worry about it till they are in the Big Seller Who Can Afford An Accountant category, right?

Wrong.  The MOSS threshold is zero.  Yup.  Any european sales and you have to register, make returns, keep records…

Now there are two issues here (yes, I know, there are dozens, but there are two that I want to highlight)

First of all, does the MOSS zero threshold apply to ALL sales, or just to MOSS-eligible sales (i.e. to business-to-consumer sales in European countries other than the UK)?  In other words, does selling the odd ebook to someone in the EU mean you have to start charging and accounting for VAT on all your sales, to everyone, for ever?

Secondly…. well, I’m a retired tax inspector.  I Speak Tax (up to a point).  I have spent some time this morning trying to find out the answer to the first question.  Yeah.  The HMRC VAT instructions are copious, but incredibly badly written.  (You don’t believe me?  Try this page and then tell me whether MOSS sales and non-MOSS sales go on the same return?)  The blogosphere and commentariat suggest the sky will fall on the heads of small business and HMRC sounds utterly clueless and complacent.  The Guardian’s small business network has a piece which includes a quote from HMRC which seems to answer my question:

A spokesperson for HMRC says the changes should only have a “small effect on administrative burdens.”

“Although a business needs to have a UK VAT registration number before it can register for the Mini One Stop Shop (MOSS) online service, provided it separates the cross-border part of its digital services business from the domestic part, it can voluntarily register for VAT on the cross-border business only.”

Which seems clear enough, although HOW someone who sells the odd e-book off a web site is supposed to know how to do that is a bit harder to fathom.  But the press office are quoted in the same article as saying:

The HMRC spokesperson says that it has provided a “significant amount of information” about the VAT rule changes and MOSS on the GOV.UK website. “We have worked closely with stakeholders and representative bodies to publicise the changes, been involved in various webinars, held a conference that was streamed on the web, and regularly issue Twitter alerts. We have issued regular updates over the last 12 months in the quarterly VAT Notes and we are organising a Twitter clinic that anyone can join to ask questions.”

Really?  This is a change which affects micro businesses, the muggles who don’t speak tax and don’t belong to any of your “stakeholder” organisations.  It seems to have been badly thought out, badly explained, and badly handled.  And now to have come up against an organised set of articulate and well connected tax muggles who aren’t going to stand for any nonsense.

*sits back and fetches popcorn*

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A Modest Proposal

August 5, 2013

The problem with actors is that they never know whether they’re going to make any money or not – like a minimum wage worker on a zero hours contract.  The work they do is usually significantly more enjoyable and fulfilling than zero hours contract work, and there is the faint but real possibility of making lottery-winner money out of one successful contract.  After all, someone has to be Obi Wan and walk away with 2% of the Star Wars gross, even if most of us know our fate is to be the equivalent of the unfortunate stormtrooper who bashed his head on the doorway.

But think about this for a moment.  Alec Guiness died in 2000.  His estate still receives his 2%.  But should the payer deduction National Insurance before they pay it?

Yes, you may boggle.  The vexed question of actors, musicians and other entertainers comes up again in the HMRC consultation (which closes tomorrow) on “National Insurance and Self-employed Entertainers“.

What’s it about?  Well, actors are usually self employed for income tax purposes… but because they often need to claim benefits in the early stages of their careers when they are between engagements, they are employees for National Insurance purposes, so that they build up sufficient contributions to be able to claim JSA.

But, well, times change.  There’s a fundamental question about whether the royalties Sir Alec Guinness’ estate is receiving now from Star Wars is actually income from his engagement on the production (the work of acting itself) or from the intellectual property inherent in his performance.  And – not to put too fine a point on it – there’s a growing tendency for films and tv productions to be financed by special purpose vehicles (companies set up just for the duration of the production itself) and for the income stream then to come from various sources like dvd sales and downloads, and there’s an argument that making a cable tv company in Seattle, say, pay a few pence of residuals to an actor in Notting Hill under deduction of NICs is both administratively burdensome and damaging to the UK creative industries’ competitiveness.  And since the government has just introduced a tax break for the creative industries, it makes some sort of sense to make sure you’re not giving with one hand and taking away with the other…

Actually it’s rubbish.  There are two fundamental difficulties with this consultation: the difficulty of distinguishing between employment and self employment, and the difficulty in having different rules for Income Tax and National Insurance contributions.  Instead of faffing about with a piecemeal change like this one, how about doing something radical about simplicity?

So I have a Modest Proposal.

Abolish the differences between employment and self employment.

All of them.

Employment is under PAYE and self employment under SA , and the government couldn’t do without the steady cash flow it gets from PAYE receipts?  Easy!  Make PAYE a requirement of Limited Company status – if you’re a limited company, you can’t pay anyone – and I mean anyone – without deducting the tax first.  If you’re an individual, you don’t have to operate PAYE, you pay any employees gross, full stop.

Expenses are calculated differently for employed and self employed people?  Easy!  Make them the same.  Currently it’s expenses “wholly and exclusively” incurred if you’re self-employed, and “wholly, exclusively and necessarily” if you’re employed.  Abolish “necessarily”.  But if you work for a company and you are paid under PAYE you won’t have to make a tax return… unless you want to claim expenses.  And if you want to claim expenses they’d better be legitimate expenses, because HMRC will have a new squad of auditors who will examine a random selection of PAYE expense claims and you’ll be heavily penalised for, well, taking the piss.

Tax and National Insurance have different rules?  Abolish them!  Abolish the different rates of National Insurance, and instead decide what National Insurance is for.  Does it actually still pay for pensions, maternity pay, unemployment benefits and sickness pay?  Fine.  Calculate how much that came to in the last tax year, divide that by the amount of employment pay and self employment turnover there was in the last tax year, and multiply by 100.  That gives you what percentage NI will be charged at.

Hypothecate it.

Charge the NI rate that will produce the sum you need, and the tax rate that you think you can get away with (where “you” = “the government of the day”)

Employees have different rights from the self employed?  Why?  If I’m employed by a multinational and a piece of their equipment falls on me, I’ll sue them and (depending on the circumstances) they’ll pay me compensation.  If I employ a cleaning lady for a couple of hours and my stepladder breaks under her, she’ll sue me – and my household insurance will cover me (if I read the small print correctly)

Benefits?  You get jobseeker’s allowance, to be replaced by universal credit, if you lose a position as an employee, but not if you’re going through a bad patch as a self employed person.  Why?  (And, if we went with a Citizen’s Income, instead of universal credit, it would be even less of an issue.)

Now wouldn’t THAT be a simplification worth having???

Sigh.

(Here’s what I sent in response to the consultation, if you’re still interested…) Read the rest of this entry ?

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Language, Timothy!

March 4, 2013

Back to the Mail Online again today for the story about the top dozen UK companies that pay no tax.  Serendipitously, there’s some thoughtful material on the same subject from Robert Maas in the last issue of Taxation (behind a paywall, sorry) where he asks “Are organisations really dodging tax, or are they just following the rules?”

This brings me back to the language of tax; Maas makes some reasonable points

  • Amazon makes its UK sales through a Luxembourg subsidiary.  It has warehousing in the UK, but under the 1968 Double Taxation agreement with Luxembourg a warehouse doesn’t constitute a “permanent establishment” that would make the sales from that warehouse taxable in the UK.
  • Starbucks has its intellectual property in a Netherlands company (in other words the know-how of how to run a branch of Starbucks) and it franchises UK shops.  So the profits made by an individual franchise would be payable by the franchisee in the UK, but would be decreased by the amount it pays to Holland for the know-how.

but his conclusion – “Most of the so-called avoidance schemes that are being publicly criticised are not avoidance at all” is a bit more difficult if you’re not a tax expert.

The fact is that the person on the Clapham omnibus – the tax muggle, if you will – doesn’t care about the complexity of tax legislation but applies the “it’s not fair” test.  It doesn’t feel fair that I have spent £100 on books without leaving my chair and that a British postman has brought them right to my door, but because I bought them from Amazon instead of [insert name of non-Amazon book seller here.  There must still be one somewhere, right?] then the profits the seller made aren’t taxed here but in Luxembourg.

Similarly it feels wrong if I’m sitting in Sheffield drinking a caramel macchiatto and eating my red velvet cake but somehow the profits from selling them to me get taxed in Holland.

But if we talk about tax avoidance in these terms it seems to me we’re generating heat without light.  “It’s not the firms, it’s the system” yes, maybe – but where does that get us?  The interesting thing to me is the government’s ambition to make the UK a “competitive” tax system, to show that it’s “open for business”.  That’s where I can shrug and agree with Maas that it’s not necessarily a “fault” for a company to arrange its trade in a way that takes advantage of the “competitiveness” of the different tax regimes in different countries: the issue isn’t with the actions of the company but with the people who designed the system in which they operate.

Perhaps, though, the issue takes us back to the one which didn’t really get bottomed out in the PAC hearings – if the fault is in the way the government makes its tax legislation, then the whiff of something smelly comes from the involvement of the same big businesses that profit from “tax competitiveness” in designing the competing systems.  That’s why we shouldn’t have a revolving door between industry and civil service, and why we should have records of meetings between Ministers and civil servants and industry representatives.

And, while we’re at it, why we ought to have the Small Firms Impact Test back in the list of things that must be included in the work of policy development, rather than archived at the back of the bus and replaced by some meaningless warm words.

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Starbux redux

October 19, 2012

So the original Reuters investigation into Starbucks’ tax position reported that

There is no suggestion Starbucks has broken any laws. Indeed, the group’s overall tax rate – including deferred taxes which may or may not be paid in the future – was 31 percent last year, much higher than the 18.5 percent average rate that campaign group Citizens for Tax Justice says large U.S. corporations paid in recent years.

But on overseas income, Starbucks paid an average tax rate of 13 percent, one of the lowest in the consumer goods sector.

After the press furore earlier in the week there was also, as you would expect these days, a bit of a twitter flurry about the circumstances around the whole position.  The point I hadn’t picked up on earlier was that the 31% tax figure in the US consolidated accounts may not represent tax actually paid.  It might simply be a provision for the tax that they would have to pay if they eventually distributed the profits back to the US.

Which is the same as paying it, right?  Just paying it next year rather than this?

Well no, actually, or at least not necessarily.

In 2004 there was a weaselly-named piece of US legislation called the the American Jobs Creation Act of 2004.  The premise was that, if US-based multinationals repatriated the profits they were keeping offshore they would use the money to create jobs, no, honest, guv.  So wouldn’t it be a good idea to offer them a tax break to do so?  Instead of charging them, say, 35% tax, just charge them 5 and a quarter per cent.  Because, you know, half a loaf is better than none, so 5.25% of a squillion is a lot better than 35% of nothing, and look at the jobs that would follow!

Yes, look.  Apparently – and I’m shocked, shocked! to read it – the companies took the money AND cut jobs at the same time.  Stellar!  As the Congressional Research Service politely puts it,

While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment.

I don’t know much about US politics except what I see on the news or read online, but I gather that there is lobbying afoot to introduce a similar tax break again…

But I stress, this isn’t about Starbucks or any other multinational.  It’s about regulatory capture of nation states by multinationals, so that tax arbitrage – finding the jurisdiction with the lowest effective tax rate and putting your profitable operations there – becomes a legitimate way of structuring your business.  And for governments it becomes routine to be offering a ludicrously low tax rate in the hope that multinationals who relocate will at least let you have crumbs from their table in sales taxes (VAT)  and the personal taxes you can levy on their employees (PAYE).

But as Richard Murphy points out, this is privileging large multinationals over indigenous small businesses.

Hmm… has anyone else noticed the disappearance of the Small Firms Impact Test from the BIS website since Michael Fallon took over from Mark Prisk?  (Was it something I said?)  I put in an FoI request a while ago to see the minutes of the cross Whitehall Better Regulation, consultation and economist networks’ meetings and am being fobbed off that they need time to think about it, because it may be exempt under the “formulation of government policy” exclusion, apparently.

What policy could they possibly be formulating?

Well, the coalition have already thrown away the rules about consultation, quietly slipping a new set of guidelines onto the Cabinet Office website.  And, if you look very, very closely at the last line (item 9) of this very boring and obscure document about Changes to Impact Assessment and Regulatory Policy Scrutiny, you’ll see that

A full update to the IA Guidance will be issued in the autumn, following the conclusions from the Better Regulation Framework Review.

Google “Better Regulation Framework Review” and you’ll find one hit, the link above (actually you may now get two, one being this blog)   But my point is you won’t find a public announcement of any such review.  Who’s conducting it?  What external input are they having into it?  And who will lay me a tenner on the Small Firms Impact Test making it into the next version?  Interesting times!