2010 July » Tax Research UK

Why the Channel Islands’ VAT wheeze is illegal and has to stop

Jul 092010

I have been banging on about the Channel Island’s VAT abuse for years.

Labour decided to do nothing about it when in power even though it costs the country at least £100 million a year – and I suspect somewhat more.

Now the ConDems seem to be turning a blind eye – as I noted earlier.

And yet the UK government has a duty in law to close down this abuse and the right to do so. The reasoning is his:

Article 189 of the EC Treaty makes a Directive binding on states as to the result to be achieved from an [LVCR] exemption but leaves the form and method to their choice. The Sixth VAT Directive permits exemptions from VAT on importation but requires states to ensure that their method of implementation “prevents any possible evasion, avoidance or abuse” (Sixth VAT Directive (77/388/EEC) Article 14 paragraph 1) It also gives states the option of not granting exemption “where this would be liable to have a serious effect on conditions of competition” (Article 14 Paragraph (d)) This is in line with a fundamental intent of EC law “to promote throughout the Community‚Ä¶development of economic activities (EC Treaty Article 2) The Council Directive allows states to exclude goods from such exemptions which have been imported on mail order” (VAT Directive 83/181 EEC Article 22)

I am aware that HMRC have confirmed in writing that:

“if relieving mail order consignments under the relevant provisions of the Sixth VAT Directive and Directive 83/181/EEC affects the conditions of competition within the home market the UK is under a community obligation not to grant the relief.”

So the only question is whether competition in the home market has been affected by Channel Island’s VAT abuse. As a recent article in trade magazine Cue entertainment reported:

The rise in VAT in the emergency budget last month has further tipped the balance in favour of the larger entertainment retailers able to take advantage of Low Value Consignment Relief through their Channel Islands operations. Adrian Morrison reports.

The independent music retail sector has been hit hard in recently years. Almost 60% of stores operational in 2000 had closed down by 2009. The sector’s demise was concurrent with the rise of operations such as Jersey-based Play.Com, HMV Guernsey Ltd and others including off-shore supermarket operations.

A recent survey by consumer watchdog Which? found that only 11% of CD buyers purchased from independent record shops. Tellingly, the vast majority of these stores cannot take advantage of LVCR. The other 89% use online retailers, followed by high street chain stores and then supermarkets, which frequently can.

A spokesperson for a high street retailer, which also takes advantage of VAT relief from off-shore operations, said: “If there was a change to the hierarchy and VAT had to be paid, it would not be an issue for us because it would hit people equally and, in fact, would bring online prices closer to our store prices. A level playing field would actually help multi-channel players.” Indicative of the sensitivities surrounding this issue, he didn’t want to be named.

Of curse he didn’t. But I will talk real numbers that show that the trade is having a serious effect on competition – which si the grounds for it being closed. This data comes from ERA – The Entertainment Retailers Association:

INTERNET SALES VOLUMES

2005

Total Internet sales of CDs – 20 million units with a total value of £200 million

Total Internet sales of DVDs – 28 million units with a total value £335 million.

2009

Total Internet sales of CDs – 34 million units with a total value £280 million (increase on 2005 of 40%)

Total Internet sales of DVDs – 70 million units with a total value £700 million (increase on 2005 of 209%)

TOTAL MUSIC MARKET VALUES (BOTH INTERNET AND TRADITIONAL SHOPS)

2005

Total CD Sales £1,856m

Total DVD Sales £2,214m

2009

Total CD sales £1,314m (decline of 29% on 2005)

Total DVD sales £2,111m (decline of 5% on 2005)

TOTAL NUMBER OF RETAIL OUTLETS ON UK MAINLAND

2005

Music Retailers 5,621

DVD Retailers 6,040

2009

Music Retailers 4,644 (19% decline on 2005)

DVD Retailers 5,181 (14% decline on 2005)

TOTAL NUMBER OF INDEPENDENT RETAIL OUTLETS ON UK MAINLAND

2005

Music Retailers 734

DVD Retailers 251

2009

Music Retailers 269 (63% decline on 2005)

DVD Retailers 175 (30% decline on 2005)

That’s a tale of tax abuse inspired decline in an industry facing unfair competition that the government has a duty to stop.

That abuse has to end now.

And it’s a government obligation to do so.

LVCR – so what happened Mr Osborne

Guernsey, Jersey, Tax avoidance, VAT 11 Responses »

Jul 092010

The Tories have taken no action to tackle Low Value Consignment Relief (LVCR) since being in office – despite the fact that abuse of this relief means that more than £100 million a year is lost in VAT as a result of the round-tripping of CDs, DVDs and other materials from the UK to the Channel Islands and back again, all in the name of tax avoidance.

George Osborne was keener on the issue when in opposition, as is clear here:

So how about it George?

When are we going to see the action to close this loophole that you were so keen to tackle when in opposition?

The Office for Tax Responsibility

Tax gap 1 Response »

Jul 092010

The Office for Budget Responsibility is in a mess.

The government’s finances are in a mess.

The most obvious solution for solving the mess – resolving the tax gap – is being ignored.

I offer this solution, which I know at least one MP tried to table as an amendment to the Finance Bill yesterday:

COMMITTEE OF THE WHOLE HOUSE

FINANCE BILL

The Office for Tax Responsibility

To move the following Clause:‚Äî

1. There shall be established The Office for Tax Responsibility.

2. The Office for Tax Responsibility shall report to but be independent of the Chancellor of the Exchequer and shall also be independent of HM Treasury and HM Revenue & Customs.

3. The Office for Tax Responsibility shall be managed by the Director for Tax Responsibility who shall be supported in their work by not less than two and not more than four Commissioners for Tax Responsibility who shall with the Director of Tax Responsibility constitute the Board of the Office for Tax Responsibility.

4. The Office for Tax Responsibility shall:

a. Be afforded such budget as shall be required for it to undertake its duties as laid down in this law;

b. Shall be given the right to access all such information held by such other government departments, agencies, local authorities and authorities established under statute as it in its sole discretion shall determine is required to fulfil its duties laid down in this law subject to the sole requirement that all obligations to respect the confidentiality of those with whom those such other agents of government engage shall be also be assumed by the Office for Tax Responsibility when using data those agents of government shall supply to the Office for Tax Responsibility for the purpose of undertaking its duties;

c. Engage such staff (including the Director and Commissioners) as it needs to fulfil its duties, such staff to not be seconded from other government departments, agencies, local authorities or authorities established under such statute and such staff not to be seconded to it by any entity registered at the time such secondment shall take place as a tax agent by H M Revenue & Customs.

5. The Office for Tax Responsibility shall report annually on:

a. Its best estimate of the UK tax gap. In so doing it shall:

i. Calculate the tax gap separately for each of income tax, national insurance in all its forms, corporation tax, value added tax, excise and customs duties in all their forms, stamp duty in all its forms, capital gains tax, inheritance tax, petroleum revenue tax, landfill tax, air passenger duty, insurance premium tax, climate change levy, aggregates levy, domestic rates and business rates but with specific requirement being made that the interaction of the tax gap calculated for any one tax be specifically considered when estimating the tax gap for any other tax before preparing and publishing an estimate of the total annual UK tax gap;

ii. Use a methodology for calculating the tax gap that estimates the net theoretical tax liability for the particular tax subject to calculation within the UK economy as a whole from which is then subtracted the actual receipts for the tax in question to produce an estimate of the annual tax gap for the tax subject to calculation;

iii. Analyse the tax gap with regard to each tax between that attributable to tax evasion, tax avoidance and unpaid or late paid tax;

iv. Publish its methodology and workings with regard to the calculation of each component of the tax gap subject only to withholding such information as is required to prevent any breach of taxpayer confidentiality;

b. Progress made by H M Revenue & Customs in closing the tax gap;

c. The methods it would propose H M Revenue & Customs and other agencies, if appropriate, shall adopt to better tackle the tax gap;

d. Those legislative changes required, in its opinion, to close the tax gap;

e. The budget resources that in its opinion H M Revenue & Customs and those other agencies addressing this issue will require to address the tax gap it identifies;

f. Its forecast of the taxation and other benefits that might arise from allocating such resources for the purpose identified in paragraph (e) above: other benefits for this purpose to include all those social benefits resulting from tackling the tax gap;

6. The Office for Tax Responsibility shall engage with those persons who wish to make representations on matters relating to the tax gap so that those persons concerns and expectations for the closing of that tax gap are reflected in the work of the Office for Tax Responsibility.

Is it perfect drafting? I’m sure not – I dedicated less than an hour to this.

Would it make one heck of a change to our well being, the way we manage tax in the UK and the way we view state finances?

You bet it would.

Maybe that’s why the Clerks to the House were, I gather, resisting it being tabled.

The sheer nastiness of the Tory Policy Exchange revealed

Conservatives, Ethics 16 Responses »

Jul 082010

The Guardian allowed David Cameron’s favourite think tank – Policy Exchange to launch comment on their latest report on the Comment is Free website.

In a piece headed “The Spirit Level is not on the level” and subtitled “A new report fatally undermines the [Spirit Level’s] authors’ claims about the link between income equality and social problems” the Policy Exchange editor of the report in question says:

Beware False Prophets is a hard-hitting critique that shines a powerful spotlight on the flaws in the analysis, assumptions and conclusions of The Spirit Level. We all want to improve people’s quality of life and tackle deep-rooted social ills, but as Saunders clearly identifies, the case for radical income distribution to achieve this is no more compelling now than it was before The Spirit Level was published.

Two instant reactions overwhelm any reasonable reader of this really nasty comment. The first is that when Conservative thinking is all about more material well being as the solution to all personal ills such a comment, so blatantly intended within the subtext to say sufficient income is to be enjoyed by a minority and not to be shared with a majority , is so obviously hypocritical that all else the author says is to be doubted.

Second, you’re left feeling, having read the book and having seen so much research suggesting similar conclusions, that it would be stunning that if a work of real quality proving Richard Wilkinson and Kate Pickett were wrong was to be published then Policy Exchange would be the likely publisher.

And of course the Policy Exchange paper is wrong – as even the briefest review shows. But perhaps that destruction is best left to the Spirit Level authors who have issued a statement saying:

Beware False Rebuttals

A response by the authors of The Spirit Level to a report by Peter Saunders (Beware False Prophets), published by Policy Exchange

Responding to the new report by Peter Saunders, published today by Policy Exchange, Professor Richard Wilkinson & Professor Kate Pickett said:

“We welcome open debate of our findings that more equal societies do better, but Peter Saunders’ analysis contains serious methodological errors. There are many peer reviewed analyses of relationships with inequality carried out by other researchers which support The Spirit Level‘s conclusions. In particular there is substantial evidence elsewhere that infant mortality, life expectancy, violence, trust, social capital and school bullying are all worse in more unequal societies. The evidence for the benefits of greater income equality remains compelling.”

The Spirit Level is based on many decades of research by its authors and other respected academics – it represents a synthesis of research and critical thought that has been subjected to stringent and robust quality control before being widely disseminated.

All analyses of income inequality and health and social problems in The Spirit Levelhave been either: (a) replicated by other researchers, in some cases hundreds of times, or (b) published in peer-reviewed academic journals This is fully referenced in The Spirit Level, but Peter Saunders is either unaware of this very large body of evidence or has chosen to ignore it. (1)

The selective removal of countries suggested by Peter Saunders does not have the effect of removing the relationship between inequality and health & social problems. The Index of Social Problems (http://www.equalitytrust.org.uk/images/index-graph-inequality.jpg) remains statistically significant even if those countries suggested for removal – Japan, Norway, Sweden, Finland, USA and Portugal – are disregarded.

Peter Saunders analysis includes much poorer countries. The Spirit Level explicitly restricts analysis to rich, developed market democracies, where average levels of income are no longer related to average life expectancy, happiness or quality of life.Confining the analysis to the richest countries very clearly demonstrates the effects of relative income (Fig 1.4 in The Spirit Level) which contrast so clearly with the lack of effect of absolute income (Figure 1.3 in The Spirit Level). By including poorer countries the sharp distinction between relative and absolute income is lost. (2)

Saunders is wrong to claim, in analyses of the US states, that many of the associations are explained by the proportion of African Americans in each state. There is a detailed, empirical argument against Saunders’ claim and other researchers also show his analysis is incorrect. (3)

Saunders misunderstands the evidence that shows that almost everyone does better in more equal societies. The Spirit Level does not say that everybody in a more equal society does better than the highest social class and income groups in a less equal country. It shows that for any given social class or income level, people do better than their class or income counterparts who live in a less equal society. (4)

The Spirit Level is sometimes called a ‘theory of everything’ but the book makes it clear that it is a theory of problems which have a social gradient – that is, problems which become more common further down the social and income ladder. Saunders ignores this and chooses counter examples such as suicide rates which do not have this social gradient.

And so what does one really conclude of the Policy Exchange paper? Simply this: that it is further example of the sheer nastiness of the Tory party – the left of the Tory party on this occasion. These people hate those not on above average income. It is clear they not only want them to suffer inequality and all that goes with it – but to increase that inequality – as the plan they put forward in the budget to create mass unemployment proves.

You were right Theresa May when long ago you termed your own party the Nasty Party.

But you may have understated the case for just how nasty it is.

Climategate, what Climategate?

Ethics 28 Responses »

Jul 082010

As the Guardian has noted of the conclusion to all investigations into the Climategate “scandal”:

There was no scientific scandal, only scientific stupidity. There was no attempt to hoax the world into believing that climate change exists, just excessive secrecy. There was no panicky cover-up to hide rigged data, for no data was rigged. There was no cabal of scientists cooking up fake evidence of catastrophe. There is, however, a real crisis of the most extreme nature: evidence suggests that climate change is real, urgent and increasing. Nothing about the so-called Climategate affair challenges that fact.

So, all that happened was that climate scientists – in the face of the overwhelming nastiness of the bullying of the libertarian far right – were over-protective of their work, and I have little doubt, their sanity and their families.

I don’t blame them.

I do think it is now time for the Guardian to make appropriate response.

One quite appropriate response would be to ban those identified to be users of such thuggish approaches to debate from Comment is Free, because free comment is the last thing these people want. As Climategate showed, intimidation is their goal. And that is something that should not be tolerated in democratic society – of which these people are not a part.

Is that censorship? Of course not.

It is the exercise of editorial freedom in the pursuit of freedom – and that is very important indeed. After all – freedom only exists when thuggery is outlawed – and its impact is seen all over the Guardian web site every day.

Delivering the counter argument

Economics 8 Responses »

Jul 082010

I loved the honesty of this comment on this bog:

I’m not an economist but I’m trying to learn what I can. All of you who want to make a better world have to get out there, start treading around the Skeptics in The pub meetings, community groups interested in the environment, charities, anywhere and everywhere, bringing on the young graduates in economics and politics with you as you go. I want to see a loud counter argument to what has been going on, to what has been damaging my future, I want to be educated as a voter, as a citizen. But I’m not getting it on the internet, I’m not getting it on the TV or the radio and I’m not in London. You guys need to get out, across the country and start talking.

The scientists are getting out there, communicating with the public and you all need to do the same.

Please!

I promise – that’s what I intend to do.

Who else is mad enough to pay first and ask questions later?

HMRC 1 Response »

Jul 082010

As the FT Adviser notes:

Christos Charalambous completed more than 6000 self-assessment tax returns for clients, which included fictitious expenses claims in order to increase the tax repayments due.

As he knew, the repayments would be automatically paid without question being asked. That is HMRC policy. The accountant in question is now in jail, but that’s not the key point. I am, and I know many HMRC staff are, utterly baffled by the instruction that they must on all occasions make payments to those who ask for refunds of tax and only ask questions later.

There are two reason for the bafflement. First, as this case proves, this is an open invitation to defraud HMRC.

Second, as those staff well know, their capacity to ask questions later has always been limited, meaning many get away with the fraud. And because of the massive cuts HMRC is imposing on its staffing that capacity is now being reduced still further.

And you then wonder why I think the tax gap is £120 billion or thereabouts, £70 billion being made up of tax evasion (of which false reclaims are a part) and £28 billion is unpaid tax debt – of which the requests for repayment of false over claims are a part.

Have no doubt – as the recession develops HMRC will be increasingly seen as a soft touch for easy money if this policy continues.

Let’s face it – either the ConDems are stupid or they think we are

Conservatives 8 Responses »

Jul 082010

Sorry that title has to be written. News today that the Tory health minister is telling the food industry that they can pay their way out of being regulated on obesity issues so long as they contribute to public health campaigns is straightforwardly ludicrous.

I think Tim Laing of City University got this right on the Today programme this morning when he said that, in his opinion and having undertaken a study of corporate responsibility in this area for the World Health Organisation, the contribution of the corporate sector to tackling obesity was pathetic.

And as he also said, all major advances in public health – be they with regard to food, air, water, transport safety, tobacco and more besides, have always been in the face of staunch opposition from business, and never with their cooperation.

This will remain the case, I am sure. In which case, if the Tories want us to believe they are serious on obesity (and they say they do) then either they’re stupid or they think we are when promoting this new policy. No other conclusion is possible.