Tax and Morality – what’s the solution?

Having miraculously returned from a great week in Ukraine not in a coffin, I swiftly discovered that this week’s media sensation is tax avoidance.  And a tax avoidance scheme aptly named after a mountain with a 25% death rate seems to have quickly killed off the career of Jimmy Carr.  But although the K2 offshore scheme is fairly easy to deride, there are surely areas of tax avoidance that are less easy to pin-point on a moral compass. 

Tax advisors like to use the term “tax planning” to essentially mean taking steps to minimise your tax bill, but in a less aggressive manner than the more ugly term “tax avoidance”.  It is certainly clear to me that trying not to pay too much tax is not morally wrong per se.  Here are a few examples, and maybe different people will draw the line in different places:

·         Putting your savings in an ISA so that the interest you earn is tax free;

·         Keeping track of the charity donations that you make and claiming the reduction in income tax allowed under the gift aid rules;

·         Giving money to your children every year in order to use the £3,000 annual exemption from inheritance tax;

·         Setting up a company to provide your services as a contractor, and deducting your work expenses from your tax bill;

·         Setting up your eBook business in Luxembourg so that you charge your customers only 3% VAT;

·         Flying your private jet out of the country at 23.45 and back in at 00.15 the next day, so that you’re not technically in the UK overnight for residence purposes;

·         Using the K2 tax avoidance scheme to only pay 1% income tax.

All of the above are / were technically legal (although some are challengeable), but obviously not all of them sit as comfortably with us as the others.  To simplify this in my mind I define tax planning as minimising your tax by doing something intended by the law (e.g. using an ISA which was intended to incentivise saving), whereas tax avoidance is minimising your tax by doing something not intended by the law (e.g. clearly income tax law was not written with the intention what some people would only pay 1%).  By defining and understanding this “purpose” we set a much clearer benchmark than a pure moral judgement which can change with the wind, a politician’s latest grab for headlines, or the media’s latest hunt for a sensation.

This is not new.  In Sweden, tax legislation is accompanied by interpreting provisions which define both the purpose of the law and guidance on how it should therefore be interpreted.  These interpretations are considered persuasive in the Swedish courts.

So maybe there is a simple answer to the complex question of defining a tax system which prevents abuse of rules.  New tax law should include a description of purpose, and this should be persuasive in court.  There are obviously a few hurdles in the way, but in an economic environment where every penny counts, knowing what you’re trying to achieve is surely a good starting point.

Lebara Made Simple

You may have noticed a few tweets over the last week about the Lebara case and changes to UK VAT rules on vouchers.  This is one of the most complex areas of VAT; and so in an attempt to maintain my reputation for making the complex simple, here’s a quick and easy take on Lebara and vouchers...

The way things were

The UK has in general taxed vouchers on redemption.  So as an example if you went to HMV and bought a gift voucher for a friend, they wouldn’t account for VAT at the time you paid the cash, but would do so when your friend came back to the store and used the voucher to buy stuff.  This gave retailers one big VAT advantage, if your friend lost the voucher and never used it, HMV would get its £10 VAT free – this concept is called “breakage”.

But difficulties arose when a voucher was sold through a distributor (which is fairly common practice).  UK rules say that the sale of a voucher by a middle-man is subject to VAT (unlike a sale by the retailer itself) in order to ensure that any margin made is appropriately taxed.  As a result in a three party chain the distributor accounts for VAT on its sale, the retailer accounts for VAT when the voucher is used, and the poor customer ends up paying VAT twice on the same thing!

And so HMRC came up with an odd work around to stop this happening.  This allowed the distributor in such a chain to recover VAT on its purchase of a voucher from a retailer, even though VAT would not actually be accounted for by the retailer on the sale (as we know from the HMV example above).  This “pseudo-VAT” was therefore netted against the VAT charged by the distributor, and ultimately the customer only paid VAT once (accounted for by the retailer when the voucher was ultimately used).  Right overall result but all a bit of a mess.

The new way

In its recent ECJ case Lebara challenged the UK rules.  VAT is a harmonised tax across the EU, and so while the UK has its own VAT legislation that legislation must fall within the parameters set by the EU VAT Directive.   I won’t go into the details of the case, but essentially Lebara had ended up in the position outlined above of being taxed twice; this was because its distributor was not based in the UK and therefore could not make use of HMRC’s special work around to recover “pseudo VAT”.

And last week Lebara won, and the UK has had to change its rules.  The result is that the sale of a voucher should now be treated as a sale of the actual goods or services which that voucher can be used to buy.  So back to the HMV example:  HMV should now account for VAT when you pay for its gift voucher, any distributor should do the same, and no VAT should be accounted for when your friend ultimately uses the voucher.

I’ll put in a small caveat here.  Lebara only considered vouchers with a single purpose i.e. ones that can only be used to buy one type of thing and at one VAT rate.  It’s obviously hard to tax a voucher based on what it can be used to buy if you don’t know what those things will be.  So the changes only apply to single purpose vouchers.

What are the implications?

Well the obvious big one is no more “breakage”, vouchers will be taxed even if they’re not used.  Judging by some of the messenging coming from the Treasury they feel that this is an anti-avoidance measure and will be a big winner for the Exchequer.  I think this may be a little premature.  Firstly it’s not obvious to me that breakage was tax avoidance in any event, after all, if a customer doesn’t actually buy anything why should VAT be charged?  Secondly, as the rules for multi-purpose vouchers haven’t changed there’s an obvious solution to keep breakage, make sure your voucher can be used to buy more than one type of thing...

Another interesting impact here is how and where a voucher will be taxed.  As the new rules apply VAT based on the underlying good or service, different vouchers will have different VAT treatments depending on what that good or service is.  And a sure consequence of numerous different treatments is numerous types of VAT planning around them.  Factor in cross border sales, special rules for different types of services, and the EU proposals for further changes to the voucher rules in 2015, and this becomes a complex and challenging area for businesses to get right!

The Realities of the Pasty Tax

Who knows when the British press are likely to get excited by VAT?  But following the Budget they’ve been truly salivating at the prospect of a “Pasty Tax” and all the class issues that this throws-up Link to one of many articles in the Daily Mail

Regular readers will know that VAT on food can be a minefield due to numerous historical attempts to challenge where the line should be drawn on how the 0% rate and 20% rate apply to food.   As a lover of FACTs, here’s my attempt to clarify what’s really going on with the VAT change.  And if indeed this is a change at all...

The basics.  The law as is now (and has been for years) separates food (generally at 0% VAT) from catering (at 20% VAT).  In an attempt to clarify what catering means the legislation states that catering includes hot food “heated for the purposes of enabling it to be consumed at a temperature above the ambient temperature”.

Where do you draw the line?  The historical point of challenge has been around the “purpose of enabling” something to be eaten hot.  For some foods the line is obviously clearer than others e.g. soup which people normally like to eat hot.  For others it is less obvious and a whole load of cases have reached the UK courts with varying success:


WIN:  The Great American Bagel Factory successfully argued that its bagels were not toasted to be hot but to “create a crunchy interior to the bagel and to promote freshness”.


WIN:  The Lewis Group (supermarkets) managed to convince the Tribunal that its roast chickens were not supposed to be eaten hot but were simply kept hot to comply with hygiene requirements.   And...


DEFEAT:  Domino’s Pizza was rumbled by its own advertising “delivery while hot” whilst attempting to claim that its pizzas were only hot due to baking and not to enable them to be eaten hot.


And perhaps most importantly...


WIN:  It was agreed that whilst Lutron Ltd sold Cornish parties which were often hot when purchased, the intention was solely to have them freshly baked, and the pasties were not deliberately kept warm after heating.  Hence we have the zero-rated pasty!


There are many many more cases, and it’s kind of easy to see how the tax man was getting a little fed up with people trying it on.  Therefore the change, with the new law simply stating that “hot food” means food “which is above the ambient air temperature at the time it is provided to the customer”.  And once it’s written down it almost sounds obvious.


So the Pasty Tax isn’t even a new law, it’s a tinkering with an old one, but a tinkering with some significant effect.  One thing the new wording specifically excludes from hot food is “freshly baked bread”, and so I guess the Tribunals can expect a loaf of fresh cases on what constitutes bread.  Watch this space...

April Fools

It’s April Fool’s Day on Sunday!  With years of experience pounding the streets our Customs officers between us we’re seen a fair few fools in our time.  Here are some examples to provide some light VAT filled entertainment over the weekend...

·    In pre-EU days a repayment trader was claiming VAT back on purchases of tractors exported to Ireland.  All the export documentation was in order but strangely some of the tractors had ended up back in the UK being sold without VAT.  It turned that the trader had been driving the tractors back over the land border through a muddy field in the dead of night with the risk of being shot at by the IRA or the security forces or perhaps both.  Proper hands on tax planning!

·    One trader seemed to be expecting a large outbreak of norovirus as they were found with a mountain of toilet paper stacked up floor to ceiling in the basement along with the rest of the stock.   On closer inspection by a beady-eyed inspector the mountain of toilet rolls turned out to be makeshift false wall behind which was found six crates of extremely low-grade but highly illegal vodka.  The shop owner first denied all knowledge and then hurriedly called his accountant who appeared with some handwritten invoices.  However, the ink was still drying on these invoices and thus all the vodka was seized. 

·    A veteran of Chinese restaurant inspections (with the girth to prove it) carried out his usual spot checks on chits and carton orders.  His instinct told him something was wrong – the till receipts were just too low for this kind of business.  Braving the wrath of a cleaver wielding chef he ventured into the kitchen area and spotted a pig carcass with a small length of till receipt hanging from its rear end.  Shuffling in closer he noticed stitches on the belly, which after a few quick tugs split apart to reveal a second till craftily hidden inside the pig!  A sweet and sour experience all round.