THE US IS NOT ABOUT TO GO TO WAR WITH FRANCE OR THE UK!

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THE US IS NOT ABOUT TO GO TO WAR WITH FRANCE OR THE UK!

I subscribe to the Centre for Policy Studies, which is a Conservative leaning think tax.  I am not a Conservative Party member, but the CPS produces some interesting publications.  It also produces CapX, a daily briefing of interesting articles on a range of subjects.

A recent CapX article was, “The International tax system is changing – should the US sign up?”  This was written by two officers of The Tax Foundation, a US think tax, whose website describes as “the nation’s leading independent tax policy non-profit”.

The article starts “The United States has often been asked to pay a price for peace” and ends, “As countries around the world assess their own positions relative to the French digital tax and the OECD proposals, it will be important for the US to lead by recognising the price we are willing to pay for peace and working to ensure that peace is lasting”.  Leaving aside the melodrama – I doubt that the French digital tax (or any other country’s) is a declaration of war against the US – what struck me about the article is that it is almost wholly wrong.

An early paragraph tells readers, in relation to the OECD, BEPS project, that “Rewriting the international tax rules means I …focus on taxing profits where goods or services are designed or produced.  But profits from intellectual property and digital products can be difficult to tax because, at the moment, companies can often shift their profits to lower tax jurisdictions”.  Remarkably for a think tax that claims to be a leader in tax policy, that is almost wholly incorrect.

Firstly, the OECD is not rewriting the international rules.  It said at a fairly early stage in the BEPS project that it thinks that, by and large, they are still fit for purpose.  It is however making some tweaks to them that it hopes will largely eliminate the scope for tax havens.

Secondly, the current rules do not focus on taxing profits where goods are designed or produced.  They focus on taxing them where the profit is made, which in most cases is where the goods or services are sold.  Of course, with international trade, that begs the question of whether goods or services are sold where the seller is or where the buyer is.  The system has opted for the former except where the buyer has set up shop in the purchaser’s company.  For example, I like jazz.  I recently bought some records from a smallish record company in Chicago.  To do so, I found that I could not buy what I wanted through Amazon.  I therefore searched out the record company’s website.  They were happy to sell me the records but only if I paid for them to ship them to the UK.  The profit they made from me is taxable on them in the USA.  That seems to me to be reasonable.  They did not try to sell records in the UK.  I had to go to them to buy.  As far as they are concerned, they do not care where I am.  Why should they pay tax in the UK?  Of course, that is tax on the profit; customs duties and VAT are different.  The Royal Mail had to pay those to import my records and would not deliver the records to me until I reimbursed these taxes to them.

Suppose the record company open a shop in the UK.  In that event, if I bought my records in their UK shop, both seller and buyer would be in the UK and it would be reasonable for the UK to tax the retail profit which arises in the UK and for the US to tax the manufacturing profit which arises in the USA.  That is exactly what happens.  There is no intention to change that, but the OECD has tightened the rules to make it clearer where the profit arises if, for example, the US company were to put its copyrights in a tax haven and seek to attribute a large part of its overall profit to those copyrights.

Which brings me to the third point, which is that a digital services tax is not aimed at tax havens.  It is based on the proposition that the current rules do not work in relation to some types of digital income.

I am a baseball fan.  I support the Chicago Cubs.  I visit Chicago every year and try to take in a couple of Cubs games.  But there are 162 games in the baseball season.  Happily MLB (Major League Baseball, which controls and ultimately owns baseball) does live video broadcasts of all of the baseball games in a season.  It has sold me for a fairly modest figure the right to watch all of the Cubs games on my computer.  Again, it is surely right that the US, not the UK, should tax my subscription to MLB TV.  Both the games and the broadcast takes place in the US.

A baseball game consists of a minimum of 18 innings (9 for each team – it is often more as a baseball game cannot normally end in a draw; they keep playing extra innings until one team wins).  There is a gap between each inning.  MLB describe this as an advertising break.  So that I don’t get bored, they normally fill that 3 minutes or so with highlights from previous baseball games.  But every so often there will be an advert.  This will not be an advert by a US company; it will be an advert by a UK company.  Similarly, if I look up the Chicago Cubs website I will, of course, have to put up with a number of adverts.  These will be UK adverts, not US ones.

This is the issue at which France’s digital tax is aimed.  If an English company pays MLB or the Cubbies a fee to allow it to target an advert at me in England, it is much less clear than when I buy my jazz records that the profit arises in the US.  Someone in the UK is trying to entice a UK resident to buy a product in the UK.  The only connection with the USA is that the owner of the medium on which the advert is placed happens to be in the US.  There is a great deal of logic in the UK (or France, as the case may be) claiming the right to tax the profit made from allowing the UK company to solicit my UK custom.  That is what the digital tax seeks to do.

My understanding is that the US tax authorities are sympathetic to that view.  They are not in principle opposed to the advertising revenue (or at least part of it) being taxed in the UK instead of the USA.  What they object to is overseas countries jumping the gun and creating special taxes that, in practice, are payable only by large US companies.  They do not object to the OECD developing a principle that advertising revenue from websites should be taxed where the advertiser, or possibly the advertisee, is based.  But they want an international agreement that applies to everyone; not special taxes with massive de minimis exemptions so that they apply only to big US IT companies.

Pushing for such an international accord and pushing back against unilateral taxes aimed only at US companies does not seem to me an unreasonable stance for the US government to take.  It is hardly a declaration of war!

ROBERT MAAS

ITS ALL IN THE MIND!

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IT’S ALL IN THE MIND!

I recently attended the Hardman Lecture, one of the ICAEW Tax Faculty’s annual flagship events that I try not to miss.  The speaker was Paul Johnson, an economist who is Director of the Institute for Fiscal Studies.  He spoke on “Tax, its role in our future”.  But I don’t want to comment on his talk.  There was something he said and his answer to one of the questions both of which started me thinking about the gulf that sometimes appears between perception and reality.

The first is student loans.  Paul welcomed the fact that the government has at last recognised that the bad debts on student loans ought to feature as government expenditure.  But in reality there are no bad debts on student loans; that is because they are not really loans at all.

The real deal with the student is that the graduate has to pay the State 9% of his earnings over £25,725 a year.  The Office for National Statistics say that average earnings for August 2019 was £28,184.  However, the average for, say, a 25-year old is likely to be significantly less.  In other words, the deal is that the student should pay the State 9% of the extra earnings that he can generate by virtue of his degree.  If his earnings are less than £25,725 (actually if his earnings in a week are less than £494) he has no obligation to repay anything.  The repayments are capped.  They stop when the total paid becomes equal to the initial financial support plus interest thereon.  If the aggregate payments after 30 years are less than that amount, nothing further is payable.

That is not a loan; it is a graduate tax.  But of course there would be uproar if the government said that they intended to impose a 9% tax on education.  Calling it a loan sounds much more acceptable.  But a problem with putting a false label on a product is people start to believe the label.  This can have unfortunate side effects.  For a start, both students and lenders which should know better treat it as a loan when the student wants to borrow to buy a flat.  That is unfair.  The “student loan” has no real effect on his borrowing capacity; its effect is that 9% of the top slice of his earnings is not available to make mortgage payments, so the lender ought to reduce the earnings by that 9% in deciding what multiple of earnings it is prepared to lend.

Similarly, the government should not bring the “bad debt” into the national accounts.  An amount that is never due to be paid is clearly not a bad debt in any rational interpretation of the word.  It should bring into account the whole expenditure on educating the student while he is at university and should credit to the national accounts the receipts from graduates.  That would really make the national accounts look sick.  But it is better to face up to the reality, than to disguise it. 

The second issue is National Insurance.  Anita Monteith, the Tax Faculty’s senior manager asked Paul whether he thought that tax and National Insurance for the employed and self-employed should be brought into line and he agreed that would be a good idea.  I have a lot of respect for Anita, but not in this instance.  They seem to me to be already in line with one another.

An employer pays 12% NI on the slice of earnings between £166 and £962 a week.  I make that £4,967.04.  He also pays 2% on the excess over £962 (£50,024 pa).  A self-employed individual pays 9% on profits between £8,632 and £50,000, which comes to £3,724.12.  He also pays £3 a week Class 2 contribution, so his total NI is £3,880.12.  He also pays the same 2% on the excess over £50,000 as an employee.  So he pays £1,086.92 (£20.90 a week) less than the employee.  However, the self-employed individual does not qualify for jobseekers allowance of £73.10 a week when he is out of work, so the £1,086 saving could be said to reflect that ineligibility to benefit.  Both pay the same income tax, although the employee pays it only on what he is free to spend, whereas the self-employed individual also has to pay more income tax on money which he cannot spend as it is needed to provide capital in the business.  There is also a different treatment of expenses.  It is very difficult for an employee to obtain a deduction for expenses, but that is because HMRC and the government expect the employer to pay its own business expenses, not require the employee to pay them out of his salary, and the test for expenses of the employer and the self-employed is identical.

What Anita and Paul are really concerned about is the employee’s National Insurance contribution.  But that is not a tax on the employee.  It gives no insurance benefit to the employee.  If the employer is non-UK resident, no employer’s contribution is payable even though his UK resident employee still has to pay the employee’s NI.

The reality is that the employee’s NI contribution is a payroll tax.  Most economists think that payroll taxes are not a good idea.  They discourage employment.  If full employment is a good thing (it probably isn’t actually, but 96% employment is) anything that discourages it is a bad thing.  It also encourages businesses to look for alternatives to employment, which normally means more computerisation, which is a good thing only if it is done in such a way that the displaced workers can readily find other work.

It also distorts the tax burden on employers, particularly corporate employers.  The government are proud of their 17% headline rate of corporation tax, which is amongst the lowest for developed countries.  But that 17% is a lie.  Suppose a company has income of £1million, salary payments of £600,000 and other expenses of £300,000 and that 90% of its salary payments attract 13.8% NI.  It pays 17% tax on its profit of £100,000, a mere £17,000.  But that is misleading.  It also pays payroll taxes of 13.8% of 90% of £600,000, which is £74,520.  So its real tax burden is £91,520, which is over 90% of its £100,000.  But “the UK is open for business; move your business to the UK and pay tax of only 91%” is somewhat less attractive than a 17% rate.

The mis-labelling though creates a perception that there is an unfair differential between tax and NI on employment and self-employment.  That perception (I nearly wrote deception, which may be more accurate) – combined with the fact that the government and HMRC seem happy to allow closely-held companies to reward work done by their directors by way of dividend (which does not attract NI at all) rather than salary – is largely responsible both for the massive growth in personal services companies and the highly complex IR35 legislation which vainly seeks to counter the resultant loss of NI receipts.  That loss is directly attributable to the government allowing “employers” to avoid having to apply PAYE and NI by engaging “staff” via personal services companies while at the same time allowing those companies to escape NI by replacing salary with dividends.

ROBERT MAAS

IS THIS THE SORT OF TAX AUTHORITY YOU WANT? - PART 11

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IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 11

Mr Nowroozi is in his late 60s and has serious health issues.  In 2014 he was diagnosed with stage 4 prostate cancer which had spread to his hip bone and lymph nodes.  He is still undergoing chemotherapy.

In 2017/18 Mr Nowroozi sold a house.  HMRC assessed him to tax of £44,277.  He, or rather his then accountants, appealed against the assessment on the grounds that the property qualified for private residence relief.  The appeal was sent to the First-tier Tribunal, which issued directions for the progression of the appeal.  The accountants, sadly a firm of Chartered Accountants, appear to have ignored the Directions.  The Tribunal warned that the appeal would be struck out if Mr Nowroozi did not confirm by 7 March 2017 that he intended to proceed with the appeal.  In the absence of a response, the Tribunal wrote to the accountants stating that the appeal had been struck out but they had a right to apply for reinstatement within 28 days.  The accountants still did nothing.

In October or November 2017, Mr Nowroozi asked his daughter to contact HMRC to ask what was happening with the appeal and, we are told, was “shocked” to discover that there was to be no hearing as the appeal had been struck out.  He appointed new accountants, but they told him that an application for reinstatement was a legal matter.  Nr Nowroozi with the help of his daughter, therefore himself applied to the Tribunal for the appeal to be reinstated.

It looks as if Mr Nowroozi was badly let down by his accountants.  That is clearly not HMRC’s fault.  We all know that HMRC are sympathetic and understanding with vulnerable customers like Mr Nowroozi.  It is only a few weeks ago that they told the Treasury Select Committee, “HMRC recognises that support needs can be complex and customer needs can change due to increasing or difficult events (such as …illness …).  HMRC is building on the experience and successes of the Extra Support Service in the Customer Service Group to determine how best to support customers who are undergoing compliance checks”.

Well, Mr Nowroozi was not undergoing a compliance check, but I thought I should quote that to illustrate what HMRC want MPs to believe in relation to their understanding of vulnerable people like Mr Nowroozi.  So how did they support him?  After 50 plus years in tax, I suppose I ought to know by now that the platitudes HMRC wheel out for MPs bear little relationship to the real world.  Naturally (for HMRC) they opposed his application.

Whether or not to admit late appeals is at the discretion of the Tribunal.  They exercise this discretion by:

1.      Establishing the length of the delay.

2.      Establishing the reasons for the delay.

3.      Bearing in mind the importance of the need for litigation to be conducted efficiently and at proportionate cost and for statutory time-limits to be respected, considering “all the circumstances of the case”.

The Tribunal decided that “although the starting point is that Mr Nowroozi’s appleal should not be reinstated, having regard to all the circumstances I am satisfied that on balance it should”.  The circumstances the Tribunal thought relevant were:

a)      in the light of Mr Nowroozi’s health, it was reasonable for him to rely on his accountants,

b)      although the Tribunal copied other correspondence to Mr Nowroozi, it did not send him either the “unless Direction” or the strike out decision,

c)      the Tribunal did not see suing the accountants as a practical alternative to reinstating his appeal, and

d)      as Mr Nowroozi will primarily rely on documentary evidence in support of his appeal, any prejudice to HMRC by the reinstatement of the appeal is outweighed by the injustice of denying him the opportunity of putting his case to the Tribunal.

As the appeal is clearly important to Mr Nowroozi, I hope that my readers will agree with me that this is a fair and reasonable (and humane) decision.  I like tax cases where everyone can live happily ever after!

Sorry, that juxtaposition of “everyone” and “happily” is a slip of the pen.  Why do we know about poor Mr Nowroozi?  The Tribunals do not normally issue decisions in relation to such applications.  The answer is that not everyone seems to be happy.  A party who wishes to appeal a decision needs to ask for a formal written decision in order to do so.  And that is what HMRC did.

So it appears that whatever I (and hopefully you) may think, we, as taxpayers, through our representatives HMRC, are very unhappy indeed.  We think that Mr Nowroozi should shut up and pay his tax.  We are going to do all that we can to thwart this sick man’s wish to have his day in Court.  We are prepared to spend whatever it takes.  Money is no object to us, because it comes out of our taxes.  I hope you feel great about that.  I don’t!

ROBERT MAAS