A Taxing Problem

David Cameron has called on the Government to allow small and medium-sized businesses to defer their VAT bills for up to six months due to the pressure they are coming under in the current banking credit crisis.

Despite the fact that our Westminster Labour Administration would not be particularly favourable to such a plan – at face value it sounds like a good idea, doesn’t it? Well sadly it’s not – and here’s why, as Dr Richard North kindly explains:

There are, however, just one or two tiny little problems with this idea. VAT is, of course, an EU tax, implemented via the VAT 6th Directive. A payment holiday on VAT would amount to a de facto reduction in the rate of tax, which is not permissible without the unanimous approval of all 27 EU member states, following a proposal to that effect from the Commission – which it not required to deliver.

That, though, might be the least of Mr Cameron’s tiny little problems. Member states are required under EU law to collect VAT, a proportion of which goes to the EU coffers – known as the ‘own resource’. Collection procedures are also defined by EU law, requiring the imposition of penalties on late payment – typically one percent per month. Changing these procedures unilaterally, guess what, is not permissible without the unanimous approval of all 27 EU member states, following a proposal to that effect from the Commission – which it not required to deliver.

Under certain circumstances, member states are entitled to adopt a simplified procedure for charging VAT, under Directive 2006/69/EC, but that does not include any provision for delaying tax payments. To the contrary, the Directive allows special provisions to enable member states to “prevent distortion of competition,” which rather shows where EU priorities lie.

If these hurdles were somehow to be overcome, however, unilateral action by the UK in offering a tax holiday would certainly be considered a ‘distortion of competition’ under Single Market rules. At the very least, Commission permission would have to be given, which will not necessarily be forthcoming.

And, since Mr Cameron’s proposals affect only small and medium-sized businesses, larger firms might be moved to complain. A company like McDonalds, for instance, would have a just complaint. It regards itself as a ‘group of small businesses’ under one banner. Fighting as it does for market share in competition with other high street outlets, it could argue that different rules on payment would most certainly distort competition.

There is also the matter of state aid. Broad-brush aid – which includes tax-breaks of any form, directed at one sector rather than applied uniformly – would most likely be considered illegal. At the very least, Commission approval would be required, which might not be forthcoming.

Then there is one other tiny little detail. Numerous studies – not least this one - have drawn attention to the danger of deferred VAT payments, making the system even more vulnerable to fraud. This is already a massive problem. Would Mr Cameron want to add to that problem?

David Cameron is calling for something which is practically unachievable. I’m just passing on this important message in case anyone is reading…

Failing Labour Economics

On Friday there was a very interesting and rather revealing interview with the Chancellor Alistair Darling on the BBC.

The discussion related to the Conservatives’ economic competitiveness policy review headed by John Redwood, and the fact that, unsurprisingly, the Chancellor didn’t agree with the proposals.

In the interview, Alistair Darling suggested to listeners that if George Osborne was going to be a ‘responsible’ Shadow Chancellor, then ‘What you can’t do is sign up to a program which John Redwood has come up with today, which talks about over £21bn worth of cuts without actually saying how you’re going to pay for that’.

As the Chancellor well knows, neither George Osborne nor David Cameron have endorsed the proposals found in the Redwood report (I wish the party had, but the fact remains that they have not).

The Chancellor then went on to add, ‘Because, the only way you can pay for that sort of money coming out the system is by quite savage reductions on things like transport’. Again, as Alistair Darling knows, this is not the case – but to admit so would not suit his and the Labour party’s argument.

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Redwood Economic Proposals

John Redwood’s policy review on economic competitiveness has now been officially released today. The report recommends that the Conservative party pledge to cut £14bn worth of red tape.

Naturally Labour, with ample help from their colleagues at the BBC have heavily criticised these proposals as ‘a lurch to the right’ – but then they would, wouldn’t they.

The proposals in Mr Redwood’s report suggest that corporation tax should be cut to 25p, that taxes including capital gains should be reformed, and that many EU laws should be unilaterally dis-applied in the UK. The BBC license fee, which Mr Redwood described as an unnecessary ‘poll tax’, also came in for criticism.

The policy review report was broadly welcomed this morning by George Osborne, the Shadow Chancellor – but crucially not endorsed yet.

Much like the previous Iain Duncan Smith policy review on Social Justice, David Cameron does not have to endorse any of its findings or introduce them as party policy. Therefore, as seems to be the case, if the Conservative leadership are just going to ignore the vast majority of the proposals made by their own policy review groups, exactly what purpose do they serve?

Government Legalised Theft

Yesterday, the Government announced that unclaimed money from ‘abandoned’ British bank accounts will be used to fund the building of ‘a youth centre in every town’.

The Government’s reasoning is that if they create a large number of very expensive youth centres, teenage thugs and ruffians will just suddenly stop causing trouble and enjoy using the new facilities instead.

Apparently many youths go out and cause ‘trouble’ (government speak for getting drunk, beating up other people, causing criminal damage to property, etc) because they have nothing to do. It’s not their fault you see. The fact that there are many other children who have ‘nothing’ to do and yet do not go around breaching the law does not seem to register as applicable to a government and a Labour party that just loves to waste your money on pointless and ineffective schemes.

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