Viewing 40 posts - 1 through 40 (of 78 total)
  • Is VAT still a regressive tax?
  • igm
    Full Member

    I know that conventionally it is regarded as such, but I wondering have times changed.

    In particular I’m considering it not against income tax, but against corporation tax.

    We’ve all seen how difficult it is to build a system where multinationals pay tax, but VAT taxes them on their activity (ie Starbucks selling coffee) which is more difficult to pretend was oversees than profits which can easily be financially engineered to low tax regimes.

    Now it might lead to multinationals just putting their prices up, but domiciled companies wouldn’t have to do that as their corporation tax would go down.

    The marginal advantage would then move to British based companies, who on average and on balance against the multinationals tend to employ people in Britain, which is probably a good thing for both the British economy and British workers.

    Thoughts?

    maccruiskeen
    Full Member

    In particular I’m considering it not against income tax, but against corporation tax.

    Well not really – the point of VAT is only the end user customer pays it – corporations or other vat registered traders collect the vat from the end user – they don’t pay it as such.

    I’m vat registered – the VAT I pay to HMRC is the difference between the vat I pay to my suppliers and the vat I charge my customers – I effectively reclaim the vat I pay on supplier from the vat I charge. I don’t ‘pay’ any VAT at all – I collect it from the customer and hand it to HMRC

    anagallis_arvensis
    Full Member

    Thoughts?

    You are John Redwood and I claim my £5 VAT refund finders fee

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    wwaswas
    Full Member

    VAT tends to be a free loan to companies too as they pay it a quarter in arrears so collect from their customers and then it’s in their cash flow for up to 3 months before they have to hand it over to the government.

    maccruiskeen
    Full Member

    Well it would be a free loan except that you’re doing the governments work for them – your time collecting, calculating declaring and paying returns doesn’t get paid for by anyone. At least 20% makes the sums nice and easy. 17.5% was a pain in the hoop.

    By that measure self assessment / corporation tax is a 22 month free loan 🙂

    wwaswas
    Full Member

    your time collecting, calculating declaring and paying returns doesn’t get paid for by anyone.

    surely it’s built into your overheads as a business, like doing the payroll etc?

    binners
    Full Member

    Its a good way of putting up the base level of tax, while pretending thats not what it is you’ve actually done. Hits the poorest in society disproportionately hardest
    Its George Osbournes wet dream

    maccruiskeen
    Full Member

    surely it’s built into your overheads as a business, like doing the payroll etc?

    So its an overhead then – not free

    richmtb
    Full Member

    Yes its regressive. The poor payer a higher proportion of their income as VAT than the rich. That the definition of a regressive tax.

    Its not as bad a Council Tax but its still regressive

    wwaswas
    Full Member

    I’ll rephrase it;

    VAT is a 20% increase in your cash flow for filling in some forms every few months and keeping track of invoices into and out of the business (which you’d do anyway).

    Junkyard
    Free Member

    What binners says and tax rates stay the same as % they just change form direct to indirect. I would more towards Direct personally

    Whilst most agree with targeting tax avoiding businesses VAT is paid by their customers not them

    If you want to hurt them its easy dont buy from them as the only thing they GAS about money., if they stop getting it they will change to get it or die out.

    We get what we put up with

    gonefishin
    Free Member

    The poor payer a higher proportion of their income as VAT than the rich. That the definition of a regressive tax

    Is that actually true though? Given that “the poor” (for want of a better description) will spend a larger proportion of their income on things like accommodation (which doesn’t attract and VAT), domestic fuel (which is charged at 5%) and food (most of which is exempt) than “the rich” (again for the lack of a better description) I wouldn’t necessarily expect that to be the case. That being said the main reason for confusion over the matter is the bewildering comlexity of what is and isn’t subject to VAT!

    Junkyard
    Free Member

    The argument is better worded as the poor ending up paying a higher % of their income in tax as a result of VAT than as a result of say income tax. For example gas and electricity is a greater % of their income and they dont save or invest so they do less VAT free stuff.

    The poorest 10% of households pay eight percentage points more of their income in all taxes than the richest – 43% compared to 35%, according to a report from the Equality Trust.

    No on VAT per se to be clear
    http://www.theguardian.com/money/2014/jun/16/british-public-wrong-rich-poor-tax-research

    maccruiskeen
    Full Member

    (which you’d do anyway).

    Passing the VAT threshold gives me 5 accounting dates in the year rather than just one. I’m not complaining at all* as my work is ‘mid stream’ in VAT terms – I don’t sell time/things to the public and if wasn’t VAT registered me breaking the chain would arse everything up for people down stream from me.

    The work you need to do varies greatly depending on what kinds of transactions you make as a business – I probably only issue a couple of dozen invoices a year at most but can have £50k – £100k worth of receipts to pick through (cursing at no two suppliers managing to put the date or the amount in the same place) Its five to six full days work a year. No big deal but thats more unpaid time than I took as holidays (and I’m including weekends in that) last year – its significant enough. But if my work model was different I could be incurring much heavier admin time/costs – if I was making lots of small sales rather than undertaking a small number of contracts. The thing with the VAT threshold for businesses its turnover rather than profit dependant and businesses like mine with a high turnover figure but also a high overhead figure and therefore quite modest incomes and in those situations the time/cost of the admin is quite significant

    * well I complain quite vocally on new years eve as I seem to be the only person in the world who has to do a return then

    igm
    Full Member

    Totally accept the income tax versus VAT argument.

    However corporation tax at the moment looks broken. Small (poor?) companies pay handsomely will multinationals pay very little in relative terms. And it’s not the multinationals fault it’s the tax regime’s.

    So the question arises, what do you want to do instead of corporation tax? “Nothing” is a legitimate answer – possibly boy my preferred one.

    PS as to who pays VAT, as an end customer I don’t care if the price is 100 and I pay 20 to the government or the price is 120 and the shop pays 20 to the government. I accept that from the point of view of a company buying on one hand and selling on the other their may be a difference but that could be sorted perhaps.

    chewkw
    Free Member

    If you want to cut VAT, Tax etc … then you need to see what they are feeding first …

    Very simple just cut the white collar ZM bureaucrats number by 60% especially those administrative pen pushers (I am talking about this lot and not those cleaning the street etc) then keep a cap on their salaries. These are the ZM bureaucrats that create problems for the masses in order to justify their own existence.

    If you can reduce those ZM then you don’t have to pay towards their feeding hence VAT can be reduced.

    Who take up the slacks as I hear? The market or technology will …

    🙂

    maccruiskeen
    Full Member

    Is that actually true though? Given that “the poor” (for want of a better description) will spend a larger proportion of their income on things like accommodation (which doesn’t attract and VAT), domestic fuel (which is charged at 5%) and food (most of which is exempt) than “the rich”

    The rich don’t live in cheap houses though – people will tend to live in the best house in the best neighbourhood they can so housing will still be a significant cost to the well-off. (which is why you’ll often get people on here stating that earning £50k doesn’t make them well off.

    The regressive element is the poor, by necessity spend all the money they have and get taxed on that expenditure. The rich at least have the option not to spend everything they earn – they can save it, invest, put it into a pension and so on. So the poor effectively get taxed twice on every penny but the rich have on option to only get taxed once on at least some of what they earn.

    igm
    Full Member

    Chewkw – I think everyone is trying to spread tax more fairly. And quite possibly increase it slightly overall.

    The question was not about reducing tax it was about whether VAT is regressive. The unwritten question in my mind is could a non-regressive VAT be dreamt up that would sort the corporation tax issue – and that’s a little harder.

    maccruiskeen
    Full Member

    I accept that from the point of view of a company buying on one hand and selling on the other their may be a difference but that could be sorted perhaps.

    If it was any other way it would be VAT.

    If you take your bike as an example from the bauxite mines and oil rigs to the bike shop – how many times have the atoms its made of changed hands and had value added in that transition- from the mine to the refinery to the tube manufacturer to the frame manufacturer to the bike assembler to the distributer to the shop – with every component following similar and sometimes longer lines. If VAT didn’t work they way it did the customer would be paying vat on top of vat on top of vat for each of those value-adding transitions from dirt and greasy slop to a bike covered in dirt and greasy slop

    Junkyard
    Free Member

    it’s not the multinationals fault it’s the tax regime’s.

    they make decisions to avoid and minimise tax at all costs using massively complicated shell companies

    I am not sure how you can blame the system for them doing this…they dont have to do this they choose to.

    How do we change this stop buying from them nothing else matters to them.

    One could tax them on any sale to a UK address I assume.

    as to who pays VAT,

    In both cases its you we are only discussing how it is collected.

    igm
    Full Member

    Junkyard – they have a legal obligation to look after their shareholders’ interests. Arguably that means making as much money as they can while not doing anything illegal or too immoral.

    tax them on any sale to a UK address

    That was the kind of thing a (revised?) VAT might do?

    wwaswas
    Full Member

    one could argue that paying fair taxes in countries they operate in *is* in their shareholders interest?

    fr0sty125
    Free Member

    I would certainly say it is fairly regressive.

    1. It is as flat rate and not income related. (not saying we should have a income related sales tax that would be crazy.)

    2. People with businesses of a large enough turnover may be able to dodge VAT by passing certain items off as business expenses.

    maccruiskeen
    Full Member

    they have a legal obligation to look after their shareholders’ interests

    Actualy the obligation is not too much to do with the shareholders – a company has an obligation to try and succeed. You can succeed as a business without managing to distribute any profit quite legally but a company’s directors would face prosecution if they made a business deliberately fail.

    igm
    Full Member

    So we’re agreed.

    1. The current VAT is still regressive
    2. Corporation tax is broken
    3. We don’t have the answers (not sure about this one)

    Ok. Now about inheritance tax… (ducks)

    teamhurtmore
    Free Member

    Hardly GOs wet dream. VAT is a European invention and was introduced in the UK as precondition of entry into the old EEC. Having said that VAT in Europe has proved flawed in practice. Quelle surprise.

    The main advantages of VAT are that it is an effective way to raise revenue not least because it is relatively hard to evade. That’s one reason why all governments like it!

    But re the regressive angle, it should be noted that VAT is a tax on expenditure not on income (well actually it’s a tax on the value added at each stage in the production process but that is starting to complicate issues.)

    Latest stats suggest that poorest pay 20% of their expenditure in indirect taxes whereas the richest pay 17% with the gap between the two narrowing recently (although one gov table has both at 20%). Unsurprisingly, the amount of VAT payed is skewed the other way, with the richest paying 2.5x the poorest due the former’s greater levels of expenditure.

    Even though it is not a tax on income, in terms of a % of income VAT remains clearly regressive. The richest pay 14% of their income while the poorest pay 31% of their income.

    Edit for X post: inheritance tax is immoral. On that line at least george will pander to the grey vote by freeing access to pensions.

    maccruiskeen
    Full Member

    3. We don’t have the answers (not sure about this one)

    A simple answer is make corporation tax work.

    gonefishin
    Free Member

    Those figures about the poorest paying a large proportion of tax than anyone else never make sense to me.

    Take the case of someone earning the minimum wage but full time for 52 weeks per year. That gives a salary of £13936 which will have a Tax and NI liability of £1372. Assuming that all the remaining money is spent rather than saved means that the total VAT paid will be £2513 (assuming all of it is at 20%). This gives a total tax libility of £3885 or 28%.

    The only way of making it up to 43% would be to have a council tax liability of £2100 which is frankly huge and there is no way that anyone on such an income could afford to live somewhere with a bill that high.

    igm
    Full Member

    I am corrected.
    However on checking apparently “success” of the company will usually mean (you are allowed to redefine it you wish) the “long-term increase in value”.
    Minimising tax appears to be in line with that.

    Junkyard
    Free Member

    they have a legal obligation to look after their shareholders’ interests. Arguably that means making as much money as they can while not doing anything illegal or too immoral.

    its is arguable but its not important to this debate
    Not every company is this aggressive and I am not aware of any prosecutions

    Either way its still not the tax regimes fault they try to avoid tax with complicated structures.

    igm
    Full Member

    maccruiskeen – Member

    A simple answer is make corporation tax work.

    Fair enough. Any idea how to do it?

    Just to be clear, I’m not picking a fight, it just seems clearly broken with no clear fix.

    binners
    Full Member

    Hardly GOs wet dream. VAT is a European invention and was introduced in the UK as precondition of entry into the old EEC.

    How come he bunged it up by 2.5% the millisecond he became chancellor then? It was literally the first thing he did? Those bloody tories eh? Always cutting taxes! Oh…. wait…. hang on minute…….

    teamhurtmore
    Free Member

    They don’t pay a larger proposition of tax. The pay broadly the same amount of indirect tax on expenditure but this represents a much higher % of income. They pay less direct tax.

    Who pays the tax? Companies do not pay tax – it comes out of the pocket of one or a combination is customers (higher prices), staff (lower wages) or shareholders (lower dividends). So if easing taxes leads to increased prices and/or lower wages then that might not be such a good result for the poorest!

    Binners – several reasons not least the one I gave originally. Plus consumption was more resilient that incomes at the time and he needed to raise revenues?

    dragon
    Free Member

    The government actively encourage tax avoidance by businesses in certain areas e.g. R&D tax credits brought in by Gordon Brown.

    igm
    Full Member

    Junkyard – some companies are more aggressive, some less. Agreed. But governments don’t get to whinge that companies should pay more tax – that’s an abdication of the government’s role. What the government gets to do is change the tax laws until the companies are obliged to pay some tax.

    igm
    Full Member

    I tend to think of a company as an amoral (not immoral) mechanism for making money.

    People have values – companies don’t.

    And talking of corporate cultures is people hiding from the things they themselves did.

    Eg HSBC didn’t do illegal / immoral things in Switzerland. People did. And those people’s bosses didn’t bother to reign them in (or even check to see if they needed reigned in).

    People are responsible.

    igm
    Full Member

    I’m going ranty and off topic now. Sorry

    binners
    Full Member

    [video]https://www.youtube.com/watch?v=ICG0MuzEYzw[/video]

    😉

    igm
    Full Member

    Thank you Binners. Needed that.

    maccruiskeen
    Full Member

    it just seems clearly broken with no clear fix.

    what makes it possible for corporations to avoid (rather than evade) tax, in a way mere mortals can’t, is layers upon layers of breaks and incentives that have accrued over decades.

    At the mega-corporation level you can entwine yourself in these so much that you end up being the only people who can say exactly what your tax liability should be – its so complex the HMRC couldn’t hope to challenge it as they’ve not the resources to do so – If Vodafone says we owe ‘X’ HMRC basically has to believe them.

    However the bulk of the tax gap from businesses isn’t the big household names is the little people (like me probably) – its lots of little tax avoidances

    like this

    ^thats tax avoidance^ – count how many you see each day. Its designed so specifically to avoid tax you can actually seem the legislation drawn on the bodywork – just behind the rear passenger door – that gap line between the door and the wheel arch avoids tax.

    Its an incentive or concession for one purpose thats been seized upon and exploited for all its worth.

    A solution would maybe simple corporate taxation and incentives realised as grants rather than rebates. If a government wants to encourage businesses into a location, or aid a certain industry or encourage us to drive a particular car then do it buy grants rather than tax-breaks. Then for your business to benefit from an L200 you actually need to be the farmer that the tax legislation was aimed at, not a dog groomer who want to take his kids to school in a vehicle he’s put through his books as a commercial vehicle.

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