Category: Taxation

Closing VAT Tax Havens

Finally we see some action from the coalition on the issue of tax havens, albeit a small step in the right direction.

The hint by Lord Sassoon at proposals to be brought forward in the upcoming budget to change or even better to possibly remove the VAT exemptions currently enjoyed by the Channel Islands is to be welcomed.

Lord Lucas‘s observation that the amount avoided is likely to be higher than the Treasury’s estimated loss of £130 million pounds a year is almost certainly true; as you’d know if you’d ever bought a DVD from Amazon or Play.com.

I can only hope that this is the first 0f many rationalisations of the tax system with the aim being to remove our archaic tax havens special status entirely.

For more information read the register.co.uk here.

The Greatest Tax Heist in History

So the pro-corporation, anti-society coalition government is proposing changing the tax code to give corporations the largest single tax break in British, perhaps global history.

The basics are fairly simple. At present corporations domiciled here pay UK Corporation Tax on profits earned offshore at the difference between the Corporation Tax of the offshore location and the Corporation Tax in the UK.

So for a simple real world example lets say that a UK based corporation earns £100 m in Ireland.

The Respective Corporation Tax Rates:

Ireland: 12.5 %

UK: 23%

Difference: 10.5%

Amount of Tax Paid:

Ireland: £12.5 million

UK: £10.5 million

Total Tax Paid: £23 million

This is an intrinsically fair system both jurisdiction gets the Corporation Tax rate it sets; if the rate was higher in the foreign jurisdiction then no tax would be due here in the UK.

The UK corporation can also offset the costs of the foreign offices, etc, against the tax due to be paid here. So in effect the foreign income is treated exactly like income earned here in the UK. All seems fair right?

So what are the Proposed Changes?

They’re radical so make sure you’re sitting down. Basically our coalition government is proposing that UK corporations no longer have to pay any tax on income earned abroad.

So in this example we’d go from earning £10.5 million to a big fat zero.

In fact it’s worse than that. They’re still allowing the corporation to offset the cost of their foreign earnings against the tax they pay here on their UK earnings. So we will actually lose money.

How I ask is this in our interest? A few corporations might stay in the UK?

Is it done anywhere else in the world? Not even in Republican States in the US.

So what are they telling us?

It’s a small tax change.

The Treasury estimates it will only cost £100 m a year in lost revenues.

But I ask will it end there?

As a business owner myself I deeply doubt it.

For further discussion on this see this excellent segment from Newsnight a couple of weeks ago featuring Richard Brooks, Richard Murphy and Chrystia Freeland.

A bit of Truth on the 50p Tax Receipts

I’m usually quite a fan of Fraser Nelson, but his blog posting for the Spectator today is simply misleading and an example of the kind of sloppy journalism that editors are meant to be employed to prevent happening (see here).

It was written in response to the following tweet by John Rentoul (see here):

Where is @frasernels when you need him? The 50p income tax rate has brought in a ton of money; he said it would probably reduce revenue.

Fraser begins his argument by chiding John Rentoul and stating:

Were John self-employed, he’d know that the tax paid last month was in respect of the 2009-10 tax year – when the top rate of tax was 40p.

The argument that he then makes is basically advanced on this premise. Unfortunately this premise is quite simply not true and if he’d looked at his own return he’d of known that.

The payments made on 31st January by millions of people filing Self Assessment Tax Returns include the first of two payments on account relating to the current tax year 2010-2011, so do include the 50p in the £ tax rate.

Now this can be bit confusing, so maybe instead of intentionally misleading his readers rather than admitting he might of been wrong, maybe Fraser just got a bit confused. So this is how it works:

1. The tax year runs from 06 April to 05 April each year, currently 06 April 2010 to 05 April 2011.

2. You file your return by the 31st January after the year has ended, so your 2010-2011 return would be filed by 31 January 2012 at the latest.

Now you might assume you just pay all of your tax liability for that financial year, which is generally true if you’ve only been filing returns for one year, but if you’ve not, that’s not true. What happens is:

1. When you filed your return on 31 January 2011 for the year 2009-2010 the HM Customs & Revenue estimates, based on that return, your future income for the financial year you are presently in (2010-2011).

2. It breaks this payment down into two equal amounts the first of which you pay immediately on 31 January 2011, the second of which you pay by 31 July 2011.

3. Your payment on 31 January 2012 will include the difference between these Payments on Account and your actual tax liability determined by your return, plus the newly determined first Payment on Account for the current financial year (2011-2012).

If you want to read more (perhaps you’re tired and would like something to send you to sleep or your intentionally masochistic) you can do so here on the HMRC’s website.

Perhaps in the future the Spectator or Fraser himself could do some basic fact checking or research into the topic concerned before mouthing off.

* This post has been updated to make the following corrections:

  1. The term ‘self-employed people’ has been changed to ‘people filing Self Assessment Tax Returns’ after commentator BigC correctly pointed out that not only self-employed people file SA Tax Returns.
  2. References to the ‘Inland Revenue’ have been changed to ‘HM Customs & Revenue’ or ‘HMRC’ as commentator BigC pointed out the Inland Revenue and HM Customs merged in 2005 into a single entity.
  3. I’ve updated the link to the HMRC to point to the most recent document discussing Payments on Account, which I discovered whilst researching my reply to BigC.