Further to my earlier post...
Of course, while corporation tax is the most reviled tax among authoritarian right-wingers, authoritarians on left, right or middle go along with the myths that VAT is a 'tax on consumption' or that Employer's NIC is a 'contribution towards employees' welfare'.
If you sit down with a pencil and paper you will realise that VAT or Employer's NIC are far, far, worse than corporation tax in terms of discouraging re-investment, employment or economic growth:
Company A has found a nice niche market and coasts along with turnover of £1.2 million and a wage bill of £600,000. It has to hand over £200,000 in VAT (being the sum total of its own VAT bill which it pays to HMRC and the additional input VAT it pays to suppliers, which they in turn hand over to HMRC) and £82,800 Employer's NIC (13.8% x £600,000, ignoring the amounts which fall below primary threshold). That leaves it will profits chargeable to corporation tax of £317,200, liable at 21% plus a bit, call it £67,000 corporation tax, total tax bill £350,000, post-tax profits £250,000.
Company B is very similar, but management decide to re-invest £280,000 of its profits in the business by taking on a load of new employees to do market research, product development, marketing etc.
Its VAT bill of £200,000 remains unchanged.
its Employer's NIC payments go up to £121,440.
Its corporation tax bill goes down to +/- nothing (taxable profits are £317,200 minus £280,000 extra wages, minus £39,000 extra Employer's NIC = +/- nothing, 21% x +/- nothing = +/- nothing).
And the company/its shareholder have spent £250,000 but their employees are only £190,000 better off (because while corporation tax is only 21% for most companies, the marginal rate of basic rate income tax + Employees' NIC is 32%). So that's another £60,000 down the tax toilet as a result of the decision to take on more employees and try to expand the business.
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So tell me, of the three taxes, VAT, Employer's NIC and corporation tax, which discourage re-investment the most?
in absolute terms, it's VAT, in relative terms its Employer's NIC and in behavioural terms, corporation tax actually encourages re-investment. And the fact that corporation tax is at a lower rate than basic rate income tax + Employees' NIC doesn't exactly help matters - far better to have a flat rate on tax on everything.
Jammy
1 hour ago
13 comments:
I think you need to go and read a tax textbook before writing this rubbish.
Firstly VAT is not an expense deductible from turnover to get taxable profits. VAT isn't calculated that way.
If a trading company is VAT registered they don't pay VAT. VAT paid to suppliers is netted of VAT collected on sales. The only cost is the administrative burden of reporting this to HMRC and small amounts of VAT on entertaining expenses that cannot be recovered.
It therefore should have zero absolute impact on investment decisions.
Furthermore, it is a strange company that "invests" in a new operation (at the cost of £280k) without any upside in turnover/profit. Your corporation tax calculation exists only in companies that decide to blow up their overheads by 50% without any return. Thankfully companies generally don't adopt this management style as their shareholders tend to get pissed off.
Your arguments on NI have some merit, but your comments on corporation tax and VAT are completely wrong.
"If a trading company is VAT registered they don't pay VAT."
Oh how I wish to God this was true.
I am VAT-registered and in the business of selling labour. True, I also buy some materials and sell them on, but in the main, the vast bulk of my invoices are for labour. I do not pay any VAT to my suppliers of labour (my employees), but I sure as hell have to pay the VAT I have to charge my customers over to the government.
Please go and have a word with someone involved in business before making stupid ad hominem attacks.
I think it's even simpler.
If you go out for a meal say, you may pay £100 for you and the missus/mistress/girlfriend/boyfriend/whatever. That's £100 including VAT. If you are happy to pay that £100 you'd be happy to pay it anyway - VAT'd or not.
Now if you scrapped VAT prices would initially stay at £100 until, as is the way of things, competition between eateries brought the price back to £83.33. At which point I would be able to go out for one more meal in six. That means 20% extra revenue for the eatery.
Whatever way you look at it tax, especially sales taxes, reduce economic activity. As far as I can see there is only one, least damaging tax...
JW, a few points for you to think aboout...
1. I take it you blithely accept the EU nonsense about VAT being a tax on consumption and not a tax on production?
2. People claim that 'the consumer pays the VAT' and that the business is merely a collecting agent who can merrily add it to his prices and that consumers have very deep pockets and do not respond to higher prices by consuming less?
3. Clearly, that's not true, but even if it were, what's to stop UK businesses adding the corporation tax they pay (about £40 billion a year) to their selling prices, in the same way as they can add VAT (about £90 billion a year) to their selling prices?
4. Let's imagine you are in the business of selling fruit juice, which had been considered to be VAT-exempt, but then the government decides actually fruit juice is VAT-able. Would you take it lying down? Coca Cola certainly didn't, because they knew that the VAT cut into their margins and would make them worse off,
B, thanks for real life example.
L, that's another good example, which is similar to my point 2 above.
This reminds me of a tale wot I was told at an job related training session" shall we say "a long time ago" - the lecturer, who was asm I recall giving us all a quick skip through the various taxes with which the great unwashed were assailed, threw in as an aside, that in his possibly not so humble opinion, the government of the day had missed a major trick when VAT replaced Purchase Tax - if only they had been prepared to be bold, he said, and had introduced VAT at 25% - they could have completely abolished income tax and NI at the same time - making massive savings in tax administration and all the hassles that go with it and everyone who be, if not happy, much clearer about what was extracted from their earnings in taxes. He then said in a sort of "I despair" way - of course they completely missed the boat, and to achieve the same now (bear in mind -quite some time ago) they would have to have VAT at 35% or 40% and further added that because of the deep mistrust this this simplified, so much better than purchase tax was being seen to work, the public would riot if any governmment ever tried to make the standard VAT rate something as high as 20%
Anon: "the public would riot if any governmment ever tried to make the standard VAT rate something as high as 20%"
But it is 20%, or is this what your lecturer said all those years ago?
In the example you have given the VAT would not discourage investment as it should provide the business with extra (possibly short term) cashflow.
I think the only way the VAT can be problematic in the example that you have shown is when it is being charged to the public or a non vat registered business. The reason for this is that they cannot reclaim it, and so would see the vat as an extra 20% on the price. This also assumes that there are competitiors who are not charging VAT, thus the extra.
VAT is a disincentive however to other types of businesses, like exporters of godds and busnesses that provide services to the public. The administration of VAT is also problematic and was mentioned by the CIOT recently.
You are dead right however about the NIC as there are businesspeople who may employ people, somewhat speculatively in the hope (say I'm 90% sure it's going to work) of turning a profit on the job that the extra employees are paid to do. If it doesn't work out as expected then it's cost some wages (which you might not feel too badly about because you gave some one some work) but an extra kick whilst you are down is the NIC. Effectively you can't get employees to work on a tight margin as you would have to earn at least 13.8% on their wage bill in order to turn a breakeven on employing them. (In your example B, if the employer had only earned £39k for employing those people then he would have been working for the tax man)
I hope that all makes sense.
PPS:
"This also assumes that there are competitiors who are not charging VAT, thus the extra."
Partly, but not really. High tobacco duties must depress smoking rates, however slightly, even though nearly all cigarettes are UK duty paid. I say 'only slightly' because demand for tobacco is price-inelastic. The demand for 'everything else' is much more price elastic.
"Effectively you can't get employees to work on a tight margin as you would have to earn at least 13.8% on their wage bill in order to turn a breakeven on employing them."
Make that a margin of at least 37%, i.e. if wages are £100 gross, then the employer has to sell on that labour for at least £137 (£100 x 1.138 x 1.2). That is one heck of a margin, no wonder that we've got millions of unemployed (the effect is like the Nat Min Wage, but working from the other side).
MW
Anon: "the public would riot if any governmment ever tried to make the standard VAT rate something as high as 20%"
But it is 20%, or is this what your lecturer said all those years ago?
Apologies for lack of clarity - just to be absolutely clear (hopefully) all those years ago the lecturer was rueing the missed opportunity, and opined that with having kept Income Tax and NI and brought in VAT at a "low" rate alongside them, instead of bringing it in at a high rate and scrapping Income Tax and NI, he believed (and to be fair no one present disputed the thesis) that "if, at any point in the future" a government tried to bring in 20% VAT alongside high Income Tax and NI there would be disorder on the streets. How wrong he and we were, eh ! Just goes to show, you should never underestimate the "being slowly ground down" effect- especially when you can bring into play "tax credits" to help disguise what is going on - "OK Mr Jones, that is £150 you owe us this week in tax and employee NI, ok, thank, yes £150 exactly, and now here is your £75 in tax credits, have a nice weekend, and remember spend spend spend is the only way to get us out of this present little difficulty ..."
Anon, ta for popping back, yes, the past is another country, isn't it? Stuff that seemed inconceivable then seem perfectly normal now.
Bayard - I think you have intentionally misconstrued my comment. But to your comment - you collect VAT from your customers and pay it to the government. Great - so technically you do pay VAT - but I think we can both agree that in absolute terms this nets off with the amount you charge your customers by law and therefore isn't funded from your own pocket (however much synthetic rage you want to generate on this issue).
Mark - I see you took ideological issue with my comment on VAT. I agree to a point that excessive VAT can prevent companies from pricing their products optimally and therefore impact their margins.
However, you haven't addressed my critique of your incorrect tax calculation nor the strange investment decisions needs to validate your argument.
J: " this nets off with the amount you charge your customers by law"
Neither tax statutes nor accounting treatment can change reality or the laws of economics.
Like I say, you have to immerse yourself in the difference between economic and legal incidence of a tax and not just go by what the politicians and MSM say. I know perfectly well what they want us to think and this is how I was taught it when I trained but the economic reality is rather different.
For example - what if they changed the law that corporation tax was no longer to be borne by companies; that they have to add their corp tax liability to their selling prices; and that the corp tax element was not to be shown in the P&L as an expense but to be netted off with turnover?
To the outside world, would prices or net profits change? Nope. So the economic incidence of the tax stays exactly the same.
"However, you haven't addressed my critique of your incorrect tax calculation..."
Well of course not, because all my calculations are correct and you didn't point out any logical or mathematical errors.
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