Archive for the ‘Uncategorized’ Category

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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)

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Have your say…?

July 22, 2015

“Have your say on the Finance Bill” is the headline on the Parliament website.  The Finance Bill went through its first and second readings in the Commons and is now to be scrutinised by the House of Commons Public Bill Committee.  Question for scholars: does anyone have an example of a Finance Bill being amended as a result of a submission to the scrutiny committee by a member of the public?

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Autumn Statement of Get Knotted

December 3, 2014

They weren’t even trying, were they? Couldn’t be bothered even with the minimalist adjustment to the visual of getting a woman to sit in the “doughnut” around the Chancellor. You could kind of see a woman’s elbow, some of the time, in the top left hand corner of the screen. Someone wearing the kind of blue suit that Margaret would have worn in her heyday. You could print out a screenshot and flog it as an allegorical artwork of the Dead Hand of Thatcherism.

Yes, well, I was watching it with The Women’s Budget Group, wasn’t I, so maybe I noticed these things more than usual. (Disclaimer: this blog post represents my own personal view and not the WBG’s. The WBG’s can be found at http://wbg.org.uk)

But really, wasn’t that the theme? Aside from the puerile insults, the smidgin of good news for orchestras, children’s TV and picturesque worthy causes, the usual promises to cut tax avoidance… The rest was machismo.

Big butch infrastructure projects. A Northern Powerhouse. Ken-doll hard-hat projects that will give good photo op.

Yes, the infrastructure needs some work. But not just the physical infrastructure: the civic infrastructure. The carers need more money and stable employment, not a morsel of NICs relief for their employers. Yes, businesses need rates relief. But local councils need the money to employ carers and social workers and keep the libraries and the sure start centres and the lunch clubs and the care homes open. Yes, householders need a sensible stamp duty system, but renters need security of tenure, reasonable rents and certainty of repairs – and some more houses available to rent and buy at reasonable prices wouldn’t go amiss, too.

The one attempt to spike the feminist guns was the early claim that the gender pay gap was closing. Well, yes, I suppose it is – there’s downwards convergence. Men aren’t getting cost of living rises and neither are women. So we all get poorer but we’re all poor together? Um, I hate to break it to you, boys, but that’s really not what we had in mind!

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Update

January 17, 2014

By the power of twitter,

turns out that the Budget Representations page is now open.  Thinking caps on!

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Guest Bloggery: Most Wanted

November 12, 2013

This is a guest post by Banderillero.  Welcome!

I must admit I did not pay a lot of attention to the list of Most Wanted Tax Fugitives when it was published.  But I have just read an update from HMRC which said the following:

A convicted cigarette smuggler who featured on a list of Most Wanted tax fugitives this summer has been found.

After being named on HM Revenue and Customs’ (HMRC) Most Wanted list, Michael ‘Arthur’ Fearon, 21, from Newry, handed himself in to the authorities in Northern Ireland. He is now in HM Prison Magheraberry serving a sentence for tobacco fraud.

… Donald Toon, Director of Criminal Investigation, HMRC, said: “Fearon thought he could go on the run to avoid facing justice – but he was wrong. We relentlessly pursue tax fugitives and ensure they face the consequences of their criminal activity, and after over a year on the run, Fearon has done the right thing.”

(read the whole report here )

So we can now sleep more safely in our beds, with this high profile criminal safely behind bars.

Except …

I then read the “More Information On The Case.

And it transpires that:

At the time of his arrest Michael was a boy of 17, who appears to have been working in a warehouse which was raided.  There were millions of counterfeit cigarettes, and lots of people working at the warehouse.  Most of them fled, but the youngster, Michael, was caught.

He was tried for smuggling – but as he ran away before the trial it seems that the trial went ahead without him and he was “found guilty in his absence”.

Having been made such a high profile criminal, he has decided that life on the run is not for him and he turned himself in and was promptly locked up.

Now, don’t misunderstand me, I am not condoning criminal activity.  But it seems to me that as a teenager (and legally still a minor) Michael got a job working for some counterfeiters.  On a scale of serious criminal activity I would not put this very high – and I don’t really think that it does HMRC’s work on tax avoidance justice by highlighting this lad as one of the Most Serious Tax Avoiders in the UK.

But I would be interested to know what others think?

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A week may be a long time in politics, but in TAX???

June 6, 2012

So, it’s off with the union jack nail polish and back to work. A week in the States, a couple of days’ jet-lag and then the long bank holiday weekend… Did you miss me?

I had a couple of emails from the admirable They Work For You site while I was away, including one which notified me that David Gauke was announcing a consultation into the taxation of controlling persons (following the review into the tax arrangements of Civil Service appointees)  I’m going to have to come back to that one later in the week.

There was also a new version of the Tax Consultation tracker published on 31 May.  Oddly, it doesn’t seem to contain the Controlling Persons consultation… but it does now contain 22 “due to be published in June” consultations.  Um… weren’t there 22 “due to be published in May” consultations in the last iteration?  What happened?

No, seriously, I’m not just being amusing at the expense of my former colleagues.  Seriously.  The government intended to publish no fewer than 22 consultations before the end of May and now it has put them off to some time in June.  Why?  Has there been some change of heart?  Is it a political reaction to the idiotic “U turn on pasty tax” headlines?  (Altering your plans as a result of consultation is a feature, not a bug!  Say it with me!)

Or is it the result of a lack of resource in HMRC?

Anyone?

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Blogging against disablism day 2012

May 1, 2012

As today is Blogging Against Disablism day I thought I’d take a break from looking at tax measures and, instead, give my personal experiences of disablism.

Wait a minute, says the pedant in the corner, you’re not “disabled” – and what is this “disablism” thing anyway?

Disablism is to people with disabilities what racism is to people who are any other race than white and sexism is to people being disadvantaged by their gender.  But while most of us will remain the race and gender we were born with, most of us – whatever our health and ability – will wind up with some kind of disability in the end, if only by way of age.  My own problems are a minor hearing impairment and a dodgy back that makes climbing stairs a problem.  I’ve just taken early retirement so I don’t have to wrestle with the question of whether or not to register myself as “disabled” on the Civil Service’s personnel systems but believe me I angsted over it for some time over the last few years.

Getting a back supporting chair was an absurd struggle but at least I had a supportive physio who, ten or fifteen years ago, wrote a stern letter which said something to the effect of, buy this woman a decent back-supporting chair and she can work; don’t, and I’ll keep signing her sick certificates and by the way have you worked out how much sick pay that will cost you lately? Once I’d actually obtained the chair, a succession of supportive managers meant that I managed to keep the chair.  (I wonder where it is now?  Because, you know, they have rules that mean when you leave you can’t buy the chair from them and take it home.  No, it sits in the “furniture available for someone else to use” room until they give up and pay someone else to take it away!)

So the back?  Fine.  The hearing impairment?  Not so much.  It’s only a mild impairment – the hospital audiologist apologised and said that, although I would benefit from a hearing aid, the NHS no longer considered me impaired enough to provide me with one, and I either have to get deafer or buy one myself…

My job was in London but the last three or four years of my career I also worked remotely from Sheffield.  And there were lots of things that might have made my life easier and saved wear and tear travelling up and down.  Ninety per cent of the job could be done by email and online; the rest was face to face meetings and telephone conversations.

Which is fine.  A one to one phone call gives me no problems.  But conference calls…  It’s entirely useless to have one speakerphone (and so only one mike) available in a room with twenty people in it.  It’s entirely useless to have a presenter say “I don’t need to use the mike, do I?” so he can privilege his need to bounce around the stage being spontaneous over my need to, you know, hear what the hell he was talking about.  It’s entirely useless to have a “four corners” event where the “buzz” of activity – of everyone talking at once about four different things at the four corners of the room – is preferred to the old fashioned syndicate room where the four different conversations are, well, audible.

I could go on.  But my point is that I’m a pretty assertive middle aged battleaxe of a tax inspector and even I got tired of reminding people that I couldn’t hear what they were damned well saying if they dropped their voice like that.

And I guess that’s all I’m saying.  If there’s a binary “disabled/not disabled” categorisation (not that I think there is, but that’s a whole other story) then I sometimes think of myself on one side of the line and sometimes on the other.  But if it wears me out trying to hear what people are talking about, how tiring must it be to live with something more disabling than that?

I only once (or at least once that I can recall – feel free to remind me of others in the comments!!) blew up and had a full scale row with someone, when I had asked three times for people to speak up in a large meeting in a room with bad acoustics, and in the end threatened to walk out altogether if it happened again.

No-one should have to take the nuclear option.  If someone explains to you that they can’t hear what you’re saying, see what you’re writing, get to the room up the stairs, sit for the length of the meeting – stand for the length of the meeting [coughs and makes a noise that sounds suspiciously like “Pacesetter”] – then please adjust your behaviour.

To all the people I have encountered in my working life where I have failed to do this, please accept my apologies.  A failure doesn’t mean you’re a bad person; it’s like having snot hanging from your nose.  Once someone points it out to you, by all means get embarrassed.  And then use a hanky, wipe your nose – and try not to let it happen again.