I published this thread on Twitter this morning:
When I started publishing the Taxing Wealth Report 2024 I put out a note suggesting that the increase in wealth is undertaxed by £170 billion a year in the UK. In response tax lawyer Dan Neidle has said this is nonsense. It's a pity he did not read what I said before commenting. A thread…
This is the tweet Dan Neidle published:
Increased/more effective taxation of wealth is on the agenda. And @RichardJMurphy claims that wealth is undertaxed by £170bn/year.
One small problem: the figure is nonsense. pic.twitter.com/iSPtMpZvja
— Dan Neidle (@DanNeidle) September 9, 2023
The link to my report is here.
Now, let's first of all talk about Dan Neidle before then discussing why he's wrong.
Dan is a lawyer. I hate to say it, but they're not known to be good at numbers.
Nor do many of them have much grasp of economics.
And they're also rather famously scathing of anyone but lawyers.
I am afraid that Dan seems to be in those modes in his thread. Which is a shame, because of late he has done some good work on legal tax justice related issues – which is a fact I am happy to acknowledge.
That said though, Dan was for many years a senior tax lawyer at one of the largest law firms in the UK. The sort of firm that only the largest companies and the very wealthy can use. That indicates a bias on his part: he chose to serve their interests. It's fair to note his biases.
And now he says that a simple bit of numerical evidence that I have produced that shows that the increase in wealth in the UK between 2011 and 2020 was taxed at massively lower rates than was income in the same period is nonsense.
Except, of course, it is not. I simply pointed out that income as represented by GDP was taxed at 32.9 per cent and the increase in wealth (which was almost exactly one-third of GDP) was taxed at 4.1% over this period.
And then, in a statistical move that was hardly surprising, I suggested that the vast majority of this largely untaxed increase in wealth was owned by a relatively few wealthy people in the UK. I attached a number to this advantage to simply indicate the scale of their gain.
Was there anything wrong in doing so? I suggest not.
Were my numbers wrong? Unless the ONS and HMRC publish false data, I suggest not.
And was the indicative extrapolation of £170 billion I made to indicate the scale of the difference in the taxation of income and wealth fair? Again, I suggest it was.
With the greatest possible respect to Dan he has to do better than say something is nonsense to make his case.
I presume that he thinks that he made that case by suggesting that in the recent history of tax governments have not made more than 4% of their revenues from wealth and property.
He then very obviously thinks that this proves that I am talking nonsense because I said there was under-taxation wealth of £170 billion. Dan really should have read what I wrote a little more carefully.
If he had, he would have noted three things.
The first was that I did not propose a wealth tax. He seems to think that I did when I actually specifically excluded it from consideration.
Second, I suggested that taxing the value of pension funds and domestic property would be hard, as he does.
And third, I said that instead we should look at how income from wealth could be better taxed and that we should look at how the allowances and reliefs that have allowed the enormous tax-driven disparity in wealth in the UK to arise might be changed.
Dan ignored all this. Instead, he just said what I had written was nonsense. But it wasn't. What it suggested - and this was the sole reason for producing the figure that I did - was that the changes in the tax system that I will propose will be fair.
Since Dan actually seems to think that such changes might be appropriate it seems mighty strange that he says that a number I say should never be taxed but which makes the case for the changes I will actually propose is nonsense.
I suggest that Dan reads rather more of the Taxing Wealth Report before he comments again. He might find he agrees with quite a lot of it. And if he does not, then he really has to do better than this when disagreeing with it.
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Well saying something is nonsense without putting forward any convincing counter-arguments is typical right-wing gas-lighting. Much like Thatcher pompously announcing the government has no money of its own without taking the trouble to explain where the money as a means of transaction does come from and how. Even the Bank of England it would seem is now recognising there’s a “greedflation”issue in the country and the obvious means of countering this is taxation:-
https://www.theguardian.com/business/2023/sep/09/now-even-the-bank-of-england-admits-greedflation-is-a-thing
Agreed
The trouble is Neidle has always been in the Labour Party as far as I know – whilst persistently opposing tax justice over many years.
He is the sort of person Reeves would listen to.
That said, he needs to improve his tax knowledge. He favourably retweeted another layer criticising me who suggested that removing the VAT exemption in financial services would mean VAT would be charged on mortgage interest. Apparently he does not know that interest is outside the scope of VAT.
What you say doesn’t surprise me. The Labour Party has been well and truly nobbled. It’s no longer a political party but a special interests vehicle. Trojan Horse Unlimited!
Interest is within the scope of VAT but normally exempt.
Bank interest is not to be included in the turnover used to calculate the VAT due by a business . Interest is outside the scope of VAT. This change follows the decision in Fanfield Limited & Thexton Training Limited v HMRC [2011] TC00919 (11 January 2011).
You’ve confused a few things here. The Fanfield case was about specific circumstances (the Flat Rate scheme), and the comment made by the judge about interest was only relevant to those circumstances, where the interest was incidental.
Interest charged in return for providing credit, such as the mortgage interest example referred to by Dan Neidle, is within the scope of VAT but exempt.
I would suggest that the decided case is definitive. It cannot have two statuses for VAT.
Mr Burrows,
You are now describing, and trying to reinforce a legal and tax system that is notably over-complex showing the signs of a State paralysed by resistance by its inability to face (never mind address) the underlying problems, and is well known to have become unworkable (like so much in the decayed Union). Judges and Courts will never clean up the mess; they are not designed to lead change.
Hmmm – sounds as though he’s only just got back from holiday and he was is still half asleep when he twatted (sic).
Neidle is a tax lawyer, who is no doubt so discomfited to read about the actual consequences of undertaking his kind of activities., he is in denial of the underlying facts.
Your £170Bn was a reasonable estimate, illuminating the scale of the distortion in the real distribution of the tax burden between tax payers; rather than a prescriptive statement of policy intent regarding wealth taxes.
May I suggest that you make that very simple point in a simple one paragraph Tweet in reply to him, challenging his assumption?
Rory Stewart (ex-minister, Conservative MP, FO insider …) has suddenly discovered (actually – just admitted, but only now everything is falling apart so obviously, and even the gullible, politically inert, absurdly hard to convince British public can see it). He was whistling a very different (or very cynical?) tune, right up to the point he stood for the Conservative leadership.
Britain, according to Stewart is run like a bust fish and chip shop (Sky News, Trevor Phillips interview today). He should know, look at his CV. The system, he acknowledges is “mad”. Did he really need ten years in Parliament to find that out? Yes, he did; and there is your problem. Indeed he defended the bust-chip-shop, mad Union in 2014 with zealous, eccentric excess of passion; and admitted nothing. He said this in a moment of extravagant excess: “Our common parliament is the glue: it is a formal process to compel consideration …… We have a hundred shared institutions, underpinned by a common state and parliament” (Rory Stewart website – ‘On Scotland and the Union’).
Well the glue’s formal process turns out to be a mad, bust chip shop.
You hoghlight the issue. He couild not see this until he had helped it all go wrong.
Is it the case that the rates at which you can tax income will always be much higher than the rates at which you can tax increases in wealth?
For example if I receive £1 in income and you take £0.40 in tax then I still end up with £0.60 that I didn’t have before.
On the other hand if I own a house worth £200k and it increases in value to £300k I still only own exactly the same house. I haven’t really gained anything, unless I sell it, and paying £40k in tax prior to that would be a definite issue. Any tax is deferred until sale, if it is paid at all due to PPR relief.
Whilst wealth is currently taxed more lightly is it the case that the deferral of taxation on many assets that makes the difference in rates so stark? Would removing that deferral create all sorts of other issues?
i am not proposign taxing wealth so the questiion is not one that concerns me.
Not my intention to single out Michael but it is interesting that all the criticism of your report is of things NOT in it. Has anyone criticised what IS in it?
No…..
You certainly can gain from an increase in the value of a house you own, without selling it.
If you have a mortgage on it, the LTV (loan-to-value ratio) is now lower, which will generally allow you to get a lower rate of interest on the mortgage. You may also be able to borrow more now, against the higher collateral value of the house.
Why has the house price gone up? If it because of something like a new railway station being opened nearby, or any other public infrastructure, then you gain from the amenity value of that infrastructure (if you live in the house), or from the higher rental you can now charge because of that amenity value (if you let the house).
That’s just off the top of my head.
“I haven’t really gained anything, unless I sell it”.
Think about that. Does that mean you have no wealth at all, unless you turn it into cash? Is cash being proposed as the only form of wealth? That would change the world – radically; overnight. That will also prove tricky; since digital banking is effectively a form of de-monetisation.
Incidentally, Michael defends untaxed wealth with notable vigour; by arguing with Richard, who is not actually proposing taxing wealth. No wonder Britain can do so little competently if we are so neurotic about discussing tax.
No, you’re wrong on this. I’m not going to try to persuade you about this any more, but I suggest you look into it when you have five minutes. It’s not the main point of this discussion (about which I have no opinion), but you were simply wrong to use the VAT treatment of interest as an example of where Dan Neidle should improve his knowledge of tax.
Let’s agree to disagree, unless you can explain why interest can be exempt and outside the scope when a court says the latter.
Yes, I know it says it was for a particualr scheme – but HMRC had to change their guidance as a result. They were found to be wrong.
I would also note that the EU is proposing to remove the exemption of financial servcies for the purpsoes of VAT and that quite specifially will not result in VAT being charged on interest.
So why do you think it will here?
I am afraid Nick is right here, Richard. Interest is within the scope of VAT, at least when it is the consideration for a supply of goods or services made in the course of business, but as things stand it is normally exempt.
The Fanfield case was a decision by the UK’s First-tier Tax Tribunal in 2011, and while as interesting as any other tribunal decision, it has no precedent value. It is not binding on anyone else or any other court, although it might have some persuasive value. Here is it: https://www.bailii.org/uk/cases/UKFTT/TC/2011/TC00919.html
Specifically, it was about whether interest receipts should be taken into account in determining the amount of Fanfield’s business’s turnover for the application of the UK’s flat rate scheme.
The decision refers to an ECJ case which is much more important, Regie Dauphinoise, which concluded that interest receipts on bank deposits were part of the economic activity of the property agency in that case – as a “direct, permanent and necessary extension of the taxable activity” of the taxpayer – which had an impact on its ability to recover input VAT, because the VAT directive specifically provided that “incidental” financial transactions should be left out of account. And here that judgment is: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:61994CJ0306
Certainly, interest paid to individuals on their bank deposits is likely to be outside the scope of VAT, because the individual depositors are not in business. But interest charged *by* banks and credit card providers and other financial institutions on loans and mortgages will be within the scope of VAT – the very business purpose of the lender is to charge interest as the consideration for its lending. That interest is currently exempt from VAT, but your proposal to abolish the financial exemption (Group 5 of Schedule 8 of the VAT Act) would mean VAT would be chargeable by the lender.
Odd then that the EU clearly do not agree on this. They clearly think interest is outside the scope of the VAT exemption – and we are still reliant on EU law here.
I also note your own uncertainty as to the status of the supply in various situations.
I note Dan also is unsure as to the basis of the HMRC estimate I used.
The only fair conclusion is I have raised a very good question. And the worst implication of the issue is that the estimate of revenue raised might (I stress, might) be lower than I have suggested. C’est la vie. The principle of the issue is sound, as even Dan Neidle notes.
First, to correct my typo, I should have referred to Group 5 of Schedule 9 (not 8) to the VAT Act, here: https://www.legislation.gov.uk/ukpga/1994/23/schedule/9 – which includes at item 2 “The making of any advance or the granting of any credit.” and at item 8 “The operation of any current, deposit or savings account.”
That just reflects Article 135(1)(b) of the principal VAT directive – https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32006L0112 – “1. Member States shall exempt the following transactions: … (b) the granting and the negotiation of credit and the management of credit by the person granting it; … (d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;”
Have you considered the EU jurisdictions that currently permit an option to tax financial transactions? For example, as I understand it, in France, a financial business has the option to tax certain financial transactions, but some sorts of transactions (including granting of credit) are excluded so they remain exempt. And then the proportion of taxable to total (taxable and exempt) financial supplies made by a business governs its ability to recover input VAT. The interest on the lending is not left out of account as outside the scope of VAT.
Sorry, Richard – please can you provide some evidence for the EU thinking interest (such as that charged by banks) is outside the scope of the exemption, or indeed outside the scope of VAT, based on existing law. They may be thinking of changing the VAT directive to secure that (post-Brexit, we could unilaterally change the law in the UK to do something similar) but it is not the current treatment.
But this is a detail. I’d be more interested in seeing all of your proposals, and the total amount of tax you estimate could be raised.
Andrew
Thanks for this comment. It came in last evening, but I was otherwise committed and have now done the reading to support a useful comment.
First, I have re-read the EU directive. And I have searched it. The term interest, in the context of a charge for what we commonly describe as interest, is not mentioned, at all. The word appears 11 times, but never refers to an interest charge, which is quite strange if interest was of concern to VAT rather than outside its scope.
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32006L0112
The relevant part of Article 135 says:
Member States shall exempt the following transactions:
(a)
insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;
(b)
the granting and the negotiation of credit and the management of credit by the person granting it;
(c)
the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;
(d)
transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
(e)
transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest;
The management process of granting and negotiation of credit is exempt. So too is is credit management. But can interest be described in this way? Clearly it cannot. Credit is the process of money creation in this context and interest payment is the activity that flows from that. No one thinks the process of money creation and loan repayment is exempt. It is outside the scope. Nor, because nothing is said otherwise, is the payment of interest exempt then. It is outside the scope. It is the making of arrangements around this that are exempt, not the credit and interest in itself, I suggest.
Nothing in (d) and (e) changes that.
You may have another reason to think interest is exempt, but this is not it, and this is the primary area of guidance on this issue in EU law, and it is what is reflected in UK law.
The decision in the case I mentioned reflects that fact, correctly in my opinion. That said interest is outside the scope of VAT. HMRC had to change their guidance on this issue as a consequence and said that in the area it referred to interest was outside the scope of VAT – correctly, in my opinion.
HMRC persist otherwise in their guidance on this issue elsewhere, incorrectly, in my opinion, as they were previously on the flat rate scheme, as noted above.
And nor is there any guidance along the lines you suggest might exist on which businesses might be exempt when making article 135 supplies: the division between banks and others that you imply exists with regard to interest is not in the legislation as far as I can see. So, interest is either an exempt supply, or it is not; the only noted exceptions being of no concern here and relating to statutory authorities.
It is assumed that interest is exempt but I will need better evidence that it is.
But, let me also refer to the EU consultation, which is unfortunately no longer on the web, but the answers are. https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12671-Review-of-the-VAT-rules-for-financial-and-insurance-services/public-consultation_en There is no discussion of interest in there. I think we can be sure there would be if the plan was to bring interest within the scope of the charge – but I accept I cannot prove this by the absence of a reference, it just seems very unlikely. A range of google searches also suggest that this is not in the plan – and nor is it in the French option to tax you note. I cannot find any hint of that. Could that be because interest is not exempt? It seems a powerful argument.
And then there is the HMRC estimate of the cost of the exemption. I have suggested this might be a bit over £8 billion having allowed for insurance premium tax – appropriately, I think.
In 2021 – which I think we might assume an appropriate base year for this estimate – the five leafing UK based banks (I stress Uk based, not the groups of which they were a member) charged £35.25 billion of gross interest, net £30.5 billion after interest costs. You suggest most of those input interest costs would be exempt still – and I certainly suspect much would not have input tax on it if interest was vatable. So gross output tax would exceed £7 billion, and net at least £6 billion. And these banks are not by any means the whole market. Assuming there are no more inputs to claim – because the HMRC estimate of the cost of exemptions would have covered them all for other services – it would be wholly fair to assume as a result that there is no way VAT on interest is in HMRC’s estimate of the VAT to be raised from removing the VAT exemption on financial services. Is that because VAT is not exempt? I think so.
So, first of all, the last suggests that my estimate of tax yield is fair. Right now I think it very unlikely I will have to change it.
Then, second, you have still to show me what law says VAT is exempt. I have a case saying it is outside the scope. HMRC chose not to appeal that – because I am very sure that they did not want to do so and find the right answer (I can think of no other explanation) – but that does not mean their position is right. And I note, they were wrong on the flat rate scheme. They could be again.
So, can you tell me why interest is exempt and not outside the scope when the exemption provisions do not refer to it? I am genuinely interested.
Richard
PS I slightly edited the para beginning ‘the management process’ 20 minutes after first posting this to add clarity
I’m sorry I got involved in this. Lesson learned.
Richard, you said of Dan Neidle:
“He favourably retweeted another layer criticising me who suggested that removing the VAT exemption in financial services would mean VAT would be charged on mortgage interest. Apparently he does not know that interest is outside the scope of VAT”
Interest is not outside the scope of VAT, unless in very specific circumstances, such as the case you mentioned, and not in the case of mortgage interest. You were wrong to claim Dan Neilde “… needs to improve his tax knowledge ..” using this as evidence. He was correct, you were wrong.
I’ve no broader point, and no agenda, so your question about the EU’s plans is irrelevant and of no interest to me.
I was just trying to point out you made a mistake criticising Dan Neidle on this point. That’s all.
(I’ve no idea what John S Warren is on about in his reply to me on this.)
And as I pointed out, the decided law is on my side and the EU clearly does not agree with you.
I am very comfortable with my position. I won’t be engaging on it again. Even Dan has accepted I have raised a valid point.
I do not possess professional insight into the intricacies of VAT; but if the professionals are in dispute about something as fundamental as VAT and interest, then this is prima facie unsatisfactory. I was expressing what I may perceive as the bewilderment that could be felt by an SMB owner, confronted by such uncertainty about a matter that should;d, frankly be as plain as a pikestaff.
I will not extend my comment further by bewailing the unreasonable complexity of the tax system and the law; which appears to benefit only accountants and lawyers. This is not a philosophical issue disputed solely by sholastics, but a matter with real practical consequences: that is what I am “on about”. I have nothing more to say.
What does the change in wealth look like once you account for inflation?
Does it matter?
Incomes are not adjusted forinflation before tax is applied.
Why are you implying wealth might be?
So your proposal is to tax reductions in real wealth? That doesn’t sound very sensible or fair, which is why historically there was an inflation adjustment for capital gains tax.
You do know I am not proposing to tax wealth, don’t you?
I am proposing to tax income and gains from wealth.
It seems no critic wants to take notice of this. It is very bizarre. You are all fighting a straw man.
“You do know I am not proposing to tax wealth, don’t you? I am proposing to tax income and gains from wealth.”
God trying to do nuanced argument in this country is like trying to wade through treacle!