Tax Research UK

The Guardian, working I am sure with the irrepressible Richard Allen, have reported:

The controversial online sale of VAT-free CDs exploded at the end of last year, driving one in three purchases by British music-lovers on to the web. The surge in sales casts doubt over Treasury claims to be tackling the tax dodge, already thought to be costing the exchequer £110m a year and rising.

Websites operated by HMV, Tesco, Amazon, Play.com, Asda, WH Smith and Woolworths structure almost all their online CD and DVD transactions as personal imports from the Channel Islands. As a result they are able to offer unbeatable VAT-free prices, threatening the futures of music stores and sapping tax revenues.

Data from market research firm Kantar shows that 16.5m CDs were bought by British customers over the internet in the last three months of 2009 at an average price of £7.80. Over the same busy pre-Christmas period, 26.6m DVDs were bought online at an average price of £9.36.

In most cases, customers remain unaware of the extraordinary lengths online firms are going to to ensure the buyer avoids the 17.5% VAT charge they would pay on the same product bought from their local store. What appears a simple online purchase exploits a 27-year-old European tax directive that waives VAT charges on low-value personal imports from outside the EU. In the UK, the VAT relief applies to goods bought for £18 or less.

This is not a victimless sham:

Tax-free internet sales from the Channel Islands have been steadily ballooning over the past 10 years while the Entertainment Retailers Association claims 1,600 shops selling music have closed in the last five years. Among the high street names to have failed, or to have disappeared altogether, are Fopp, Our Price, MVC, Music Zone, Virgin Megastores, Tower Records, Zavvi and Woolworths.

It’s  a sham in my opinion none the less. It is impossible to explain the activity undertaken but for the tax saving generated. That makes this activity about as far removed from tax compliance as it is possible to be if tax compliance is defined as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. Despite this, and inexplicably, the Treasury appears to persist in denying the scale of the issue – which now costs the government hundreds of millions in revenue a year – as much as was lost to the Isle of Man on its VAT arrangements.

All this is despite the fact that, as the Guardian notes:

In fact, the Guardian investigation had found that all but one of the companies involved in the VAT dodge were controlled by UK-registered parent businesses. Maidenhead-based HMV Group and Swindon-based WH Smith – both stock exchange-listed – push much of their online sales through subsidiaries HMV Guernsey and WH Smith Jersey.

Amazon has an arrangement with Indigo Starfish, a Jersey company owned by Glasgow-registered parent Indigo Lighthouse, while Tesco, Asda, Argos and WH Smith have struck outsourcing deals with Cheshire-based The Hut, which operates through Jersey and Guernsey subsidiaries. The only genuinely Channel Islands-owned company using the VAT loophole is Play.com, founded by islanders Richard Goulding and Simon Perree. The Guardian has been unable to find any mainstream website that does not offer CD or DVD sales via the Channel Islands VAT loophole.

The Isle of Man VAT abuse has been shut down. Now it’s time to do the same for the Channel Islands. There is no excuse for not acting left. This one is overdue for reform. As I’ve previously noted:

This problem could be solved overnight. If every packet from Jersey and Guernsey was opened to check values were under £18 and a £5 handling charge for doing so was levied on all who received those packets then the market would be closed in days.

That would be legal, and appropriate in the face of blatant tax avoidance. What is holding them back?

Richard Murphy Guernsey, Jersey, VAT

I have been sent a Freedom of Information request made in the Isle of Man concerning the new VAT sharing agreement with the UK. I publish here what is, for my purpose, the most relevant page – the illustrative calculation. The rest of the document has been put on line. This calculation is new.

Let’s talk about what is known in this new document and what is speculation. The 2006/07 income is known. The subsequent uplifts and adjustments are not yet confirmed – and it’s very hard to believe that a) the IoM really did have 8% growth in 2007 and b) has continued to grow through the recession. That is certainly not true of the UK, almost any other economy I know of, and Jersey, so why of the IoM claims to have done so I do not know. I take the claim with a considerable pinch of salt as a result.

The data for expected VAT and duty is based on the UK budget for 2009/10. The figures are for adjustments to that data are, of course purely speculative. I have, therefore, ignored them.

Let’s be clear what this shows: it is that at most the Isle of Man might expect to enjoy VAT income under this agreement of £156 million this year.

Use the more reliable 2006 income data to apportion benefit and the income due to the Isle of Man would be £135 million.

The actual expected VAT income of the Isle of Man under this agreement this year, before revision, was £338 million.

That means, depending on the final proven level of national income in the Isle of Man, the level of subsidy was between £182 million and £203 million. I, of course, predicted a figure of £230 million: but I was using 2008/09 data and I used GDP not GNI for the UK in doing so.

But, the maximum sum that we learn is to be withdrawn from the Isle of Man is £140 million a year. Which means that, quite categorically, the subsidy remains. It has simply been reduced to a sum now running at between £40 million and £60 million a year.

That remains a scandalous use of UK taxpayer’s money. It also gives a complete lie to the claim that the Isle of Man neither was subsidised, and will not be in the future. It still is being subsidised.

But I should make clear: I can live with that. The Isle of Man may need to be subsidised, but I utterly reject the idea that a subsidy should be given without conditions being attached. My conditions would be simple. The Isle of Man should earn this subsidy by:

1. Definitely becoming a full information exchanging member of the European Union Savings Tax Directive as soon as possible;

2. Supporting current proposed extensions to that directive;

3. Requiring that details of the beneficial ownership, real management and full accounts of all IoM companies be put on public record;

4. Requiring that the Isle of Man match any developments in the UK requiring details of trusts to be put on public record;

5. That the Isle of Man proactively seek to sign Tax Information Exchange Agreements until it reaches a target of at least 60 – the average number for a G20 state;

6. the Isle of Man actively seeks to pioneer automatic information exchange agreements with other states.

That’s worth a subsidy. But the current arrangement is not worth a penny.

And as that for that statement that I made that I accepted that the Isle of Man was no longer subsidised – I withdraw it forthwith. It was wrong. The evidence, now available, simply does not support it.

So the debate goes on.

Richard Murphy Isle of Man, VAT

Manx Radio has noted:

The man responsible for the Isle of Man at the United Kingdom’s Ministry of Justice has confirmed the VAT arrangement was changed because the Island gained too much from the previous deal.

Under the re-drawn revenue sharing rules, the Manx government will lose almost £100 million from its budget next year, and £140 million annually after that.

The reasons behind the change have been the subject of intense debate in Tynwald this week.

Lord Bach spoke to journalists before giving the Chief Minister’s International Lecture at the Hilton Hotel last night.

He said the Island had benefitted from an extremely good deal which had to end

Of course it had to end: it was a wholly unjustified subsidy – as I always said.

Richard Murphy Isle of Man, VAT

It was reported only days ago that my comments on the Politics Show about the Isle of Mn and its VAT arrangements were to be the subject of questions in the Tynwald (Manx Parliament).

Now the order paper has been published and it would seem the focus has changed. This question is typical:

2. The Hon Member for Michael (Mr Cannan) to ask the Chief Minister –
(1) Whether he will confirm that in past years the Revenue Sharing Arrangements of the Common Purse Agreement have been weighted in favour of the Isle of Man and that the United Kingdom has now taken action to rectify or correct the situation;
(2) whether he will confirm the Revenue Sharing arrangements are now correctly apportioned and that there will be no further adjustment in calculation; and
(3) whether it had previously occurred to the Treasury Minister and Treasury officials that the present ratio of direct taxation (£160M) to indirect taxation (£399M) was suspect and whether this fact had been reported to the Council of Ministers?

This is also indicative:

8. The Hon Member for Onchan (Mr Karran) to ask the Minister for the Treasury -
(1) Who authorised the signing of the “Arrangements for the Sharing of Common Duties” by a Treasury official on 15th October 2009, recently published on the Government website;
(2) when the “Arrangements for the Sharing of Common Duties” was signed on 15th October 2009 whether the financial consequences of the agreement were fully appreciated;
(3) if the financial consequences of the “Arrangements for the Sharing of Common Duties” were fully appreciated, why Tynwald was not officially informed of the financial consequences before the agreement was signed;
(4) in view of the financial impact on the Island, if he considers that an informal briefing to some Tynwald Members on 14th October (ie one day before the document was signed) gives adequate notice to Tynwald Members of the revised arrangements;
(5) on what date the Common Purse Agreement update of 24th October 2007 was renewed/extended and whether this preceded or came after the “Arrangements for the Sharing of Common Duties” signed on 15th October 2009; and
(6) if he will supply Tynwald Members with full details of the 2009 update of the Common Purse Agreement?

There’s no mention of the BBC, me or the Politics Show.

Could it be the Members have realised that their ire should be aimed at the people whop conned them and the people of the Isle of Man all along – that is their own government who, in typical Manx fashion hid behind secrecy, non-disclosure and obfuscation to deny the glaringly obvious – that they had been subsidised all along? It certainly looks that way to me.

Richard Murphy Isle of Man, VAT

Manx Radio’s web site features an article entitled “Calls for BBC correction in Keys”. It notes:

Comments about the Isle of Man, broadcast in a BBC television programme last weekend, will be raised in the House of Keys this week.

Onchan MHK Peter Karran has described them as ‘damaging and inaccurate’ and will call on the treasury minister to insist that corrections are broadcast.

Mr Karran says Allan Bell should write to the BBC to counteract statements about the Isle of Man on the BBC Politics Show last Sunday.

They were made by one of the Island’s fiercest critics, Richard Murphy of the Tax Justice Network.

This is, of course, in response to my appearance on the Politics Show last week –m no longer available on the BBC web site, I am afraid, so let me instead summarise what I said:

1. That the Isle of Man had rightly lost a subsidy form the UK – that’s my opinion and so indisputable
2. I had foretold this – which is indisputable
3. That I thought the subsidy was bigger, at £230 million than the sum the UK has reclaimed. At the time of broadcast the new formula had not been published. I now accept the new formula is fair. I am surprised it only claims back £140 million – I can’t see how it does only do that – but I am for the moment and until new evidence comes along accepting it is correct. However, I was right at the time of broadcast to say exactly what I did – so this is indisputable
4. This did not mean the Isle of Man had to cut public services and put people’s lives at risk as a result – as was the clear implicit threat of the very biased BBC reporting: simply bringing Manx income tax rates towards UK rates would solve the problem. Therefore what I said cannot be disputed – even if the MHK does not like it
5. That the Isle of Man is a tax haven – which is indisputable – it very obviously is or it would not have fought so hard for the tax system it has
6. That it is opaque – which is indisputable – try getting any meaningful information at all on a Manx company and the case is proven, as does its refusal to date to exchange information under the European Union Savings Tax Directive prove it beyond dispute
7. That the opacity of the Isle of Man has facilitated crime. Tax evasion is crime. The Isle of Man has been proven to be used for tax evasion by the US, Irish and UK governments at the very least. The claim is indisputable
8. That I think tax haven activity and the activities it facilitates are harmful – which is indisputable – I do indeed think that.

Interesting to think what the BBC might need to correct.

More interesting though to note how unused the Isle of Man are to criticism when it seems I can become, single-handedly and according to media there and in the UK its strongest critic simply by writing a blog.

And also interesting to reflect on their anger, which is so utterly irrational. Let’s be candid, that anger is akin to that of the person who has for some time realised that whenever they ask for £50 from a cash point machine they get £150 in return and then is furious when the free flow of cash is stopped, as if they had somehow been wronged as a result.

Methinks the MHK does protested too much. I stand by all I said: it was all accurate, founded in fact and justified in the context of the discussion. I can’t see him getting far.

Richard Murphy Isle of Man, VAT

The UK has now stopped the Isle of Man benefitting from the UK VAT system.

So what’s next for the Crown Dependencies and VAT? It seems very obvious that Low Value Consignment Relief, which is extensively abused in Guernsey and Jersey should be next to go. The saving to the UK will be at least as much, the cost to the islands in question much less.

There seems not reason not to do this now.

Richard Murphy Guernsey, Isle of Man, Jersey, VAT

The new rules for VAT sharing with the Isle of Man have been published.

If I might say so the basis of calculation looks rather oddly like the methodology I have used i.e, tax is split proprtionately in relation to GNI (I used GDP).

Not surprising the new basis reduces the share of the IoM – as I predicted would happen if such logic were used.

Richard Murphy Isle of Man, VAT

I was on the Politics Show for the North West today talking about VAT and the Isle of Man. The programme can be seen here – start at about 37 minutes.

Please also read what I have written here – which explains the issues. It’s a pity Tony Brown – the Isle of Man chief minister had not read this before talking. It’s very obvious his knowledge of VAT is very limited.

I also think the programme quite extraordinarily inappropriate in suggesting people will die as a result of this. The Isle of man can afford – on the basis of its income per head – to supply health services as good as any in the UK. The developing countries of the world – who suffer directly as a result of its existence - cannot.  It’s ludicrous to suggest the Isle of Man should be subsidised when there is real poverty to be addressed elsewhere.

The arguments of those from the Isle of Man on the programme are blinkered, wrong, or plain selfish. As I said – if the Isle of Man wants to be a tax haven the least it can do is pay its own way as one. But to date it hasn’t even done that – perhaps the ultimate in free riding.

And for those who disagree on the issue of transparency – please see this report.

And does the Isle of Man support crime? Of course it does. To date it has not done automatic information exchange under the European Union Savings Tax Directive and as a result has hidden tax evaders from view – deliberately. They cannot argue, and even when they change –m as they say they will – they know the opportunities for abuse are legion and, as Panorama showed recently, these opportunities are widely used. That is their intent because they are, without doubt a secrecy jurisdiction.

Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

That’s a perfect description of the Isle of Man.

Richard Murphy Isle of Man, Secrecy jurisdictions, VAT

The Other TaxPayers’ Alliance | VAT: The Tories’ favourite tax.

Clifford Singer lists a long whole range of alternatives to a VAT rise, which the Tories are bound to deliver, and notes:

Let’s also remember who increased VAT from 15% to 17.5% in the first place: that party of low taxes, the Conservatives, in 1991. And who increased it from 8% to 15% before that? The Tories, in 1979.

That 1979 rise was particularly deceitful as it followed chancellor-to-be Geoffrey Howe’s election promise that “we have absolutely no intention of doubling VAT”. The Daily Mail listed the “double VAT” charge as one of “Labour’s dirty dozen lies” days before the election. The Ministry of Truth website lists Howe’s promise as one of its “top 10 political porkies of our time“.

No doubt to be repeated soon.

Richard Murphy Conservatives, Ethics, VAT

Manx Radio has just announced:

The Chief Minister has warned a revision of the VAT sharing agreement will have a significant impact on the Isle of Man, but stresses we are equipped to deal with it.

Tony Brown says while the subject is still under discussion it’s not possible to establish what the full repercussions for the Island will be.

Tynwald members attended a briefing earlier today (Wednesday) amidst concern the Island could be forced to revise the Customs revenue sharing deal it has with the United Kingdom, which currently provides more than half of the Manx government’s income.

I draw attention to my comments on the reliability of announcements by Chief Ministers and then add three additional comments. First, there seems to be no denial that the UK can do this. Second, there seems to be no denial that there might be some mistake – that the Isle of Man is rightfully owed this sum and therefore challenge will be made. Third, all the evidence that is needed that the Isle of Man have always known they were subsidised – whilst vehemently saying I was wrong on this matter - is clearly now available.

So I go back and draw attention to what Chief Minsters do. How can there have been such persistent denials of there being a subsidy if it is now clearly true that there is one without someone, somewhere not telling the truth?

Richard Murphy Ethics, Isle of Man, VAT