June 2007 Archives

UK mobile phone companies have failed in their bid before the European Court of Justice (ECJ) to recover VAT on payments for 3G licences.

The affected companies are Hutchison 3G UK Ltd, mmO2 plc, Orange 3G Ltd, T-Mobile (UK) Ltd and Vodafone Group Services Ltd. They were allocated licences to provide so-called third generation (3G) mobile phone services, such as video and internet services. The companies paid sums totalling around £22.5bn to the UK government for the 3G licences.

They then sought to claim VAT (of around £3bn) on the payments, on the ground that the allocation of the licences was subject to VAT.

As a principle, a transaction is subject to VAT if it constitutes an 'economic activity'. So the question was, did the allocation of licences by the Government qualify as economic activity?

The ECJ thought not. It held that the allocation of rights by the Agency constituted 'a necessary precondition for the access of economic operators to the mobile telecommunications market.' Such an activity by a national authority could not constitute participation in the market. The Court therefore held that the allocation did not constitute economic activity, and was therefore not subject to VAT. The mobile phone companies were therefore not entitled to claim VAT on the amounts they had paid.

To read the ECJ press release click here.

For the full judgment, click here.

Note. A similar case concerning Austrian mobile phone network providers was also being heard by the ECJ at the same time as the above case. To read that judgment, click here.

Photo credit: © Photographer: Dawn Hudson | Agency: Dreamstime.com.

To mark this momentous day, what should land on my doormat but a mailshot from the Conservative Party?

An ominous red envelope emblazoned with the following words:

'In comes Brown .... income taxes'.

Which I thought was a splendid touch.

In an interview with the BBC, the Chancellor (and soon to be Prime Minister) Gordon Brown admitted that tax in the UK has risen under the current Labour Government. However he claimed that the rise was down to the increase in the national insurance contributions rate. The increase was implemented in 2002, ostensibly to pay for the National Health Service. (Don't get me started on how, despite all that money being thrown at the health service, some hospitals still ended up in deficit, others were closed, conditions worsened, and doctors' pay soared.)

Are you sure, Gordon? Are you sure that this is the only increase in tax in the past 10 years? But what about the 80-odd (as at 2006) stealth tax rises you have orchestrated within that period? Amazing that the interviewer was not more forceful in jogging your memory. Never mind, the Fisherman is happy to help. Just in case you have forgotten how many taxes you have raised, click here for a refresher. That list only goes as far as 2006, but it is a safe bet that in the last few months, you may well have added a few more stealth taxes to that number.

For taxpayers with undeclared offshore income and gains, today is the last day to take advantage of the taxman's generous offer to come clean.

To recap, following a court case, the taxman obtained from certain banks information relating to offshore account holders. He then announced that offshore account holders with undeclared taxable income and gains had until 22 June (ie today) to come forward and notify him of their intention to disclose. Disclosures then had to be made by 26 November 2007, and all the back tax, plus interest, paid by that date. The taxman kindly reduced from 100 per cent (of the unpaid tax) to 10 per cent, the penalty that would normally apply in such cases.

So today, 22 June, is the deadline for notifying intention to disclose. Anybody with undeclared taxable income in an offshore account who does not, by the end of today, notify intention to disclose, is in danger of criminal prosecution. Thanks to the court, the taxman has information on these offshore account holders, and will waste no time going through that information in order to identify anyone who has not paid his tax and who has also failed to take advantage of this 'amnesty'.

UPDATE. 23 June 2007. The Telegraph is reporting that of the 400,000 people identified by the taxman (based on the information obtained through the court), as having not paid the correct tax, only 56,000 had, by the end of yesterday, notified their intention to disclose. Somehow I don't think the taxman will be very amused.

An interesting and thought-provoking post from US blogger, Taxgirl, about how 'being middle class in America sucks'.

I understand her point. She highlights the injustice in the tax system when one is not 'poor' enough to take advantage of particular tax breaks, or 'rich' enough to arrange one's tax affairs in a way to reduce one's tax liability. Being stuck in the middle, one is clobbered by all manner of taxes, but has no recourse to certain reliefs, because one is deemed 'too rich', as it were, to qualify.

That happens here in the UK as well. Take the case of an employed earner, earning, say £48,000 per annum. Such a person is taxed at the higher rate of income tax, and given the strict rules for tax on earnings, he has very little scope to order his tax affairs, as say, a similarly earning self-employed businessman. His income is too high to claim working  tax credits. He must take the full tax hit.

On the other hand, someone earning far more than him, while subject to the same tax rate, would, in theory, have at his disposal, access to good tax planning advice, and more scope to order his affairs so as to reduce his tax liability.

So that is the situation: too 'poor' to take advantage of the tax breaks enjoyed by the very rich, and 'too rich' to benefit from targeted Government help for the lower earners. Taxed in full with no hope of respite from anywhere. Yes, being middle class sucks.

The Treasury Committee invited leading private equity players for a grilling today.

In March this year, the Treasury announced an inquiry into private equity tax, and today's was the second evidence session organised by the Treasury Committee. The first took place on 12 June, and reportedly led to the resignation of the chief executive of the British Private Equity and Venture Capital Association, amidst claims that he had not been robust enough in defending the industry's corner.

So today's meeting was interesting for all sorts of reasons, not least the expectation that the much-maligned private equity industry would finally come out fighting for its honour. And that it did.

The industry was represented by executives from four of the biggest private equity groups, who rejected claims that they were involved in asset-stripping companies in order to line their already bulging pockets. Not only that, they warned that there was a danger that aggressive tax rules targeted at them could lead to the UK being not so favourable a place to invest. I wonder if the Government is listening. The issue of the UK being conducive to business and investment has been raised so many times in the past year. I have reported on a few occasions on this blog about companies talking about moving abroad to escape the oppressive tax and regulatory burden. So far, none have done so, but that does not mean it is any the less likely.

For more details on how the proceedings went, check out Helen Thomas's splendid blog over at the Financial Times. She attended and liveblogged the session.

With effect from tomorrow, 15 June, a new EU law on the declaration of cash by travellers, comes into force.

The aim of the European Parliament and Council Regulation (EC) No 1889/2005 is to target money laundering. If you are travelling to the UK from outside the EU, or travelling from the UK to anywhere outside the EU, then you could be affected by the law.

If you are making either of the above journeys, and are carrying cash of 10,000 or more euros, or the equivalent, you will be required to declare the cash to the taxman. Failure to do so will lead to a fine of up to £5,000.

'Cash' doesn't cover just banknotes and coins, but extends to bank drafts and cheques.

The declaration must contain the following information:

• the declarant, including full name, date and place of birth and nationality;
• the owner of the cash;
• the intended recipient of the cash;
• the amount and nature of the cash;
• the provenance and intended use of the cash;
• the transport route;
• the means of transport.

Any information obtained under the declaration may be shared with the authorities responsible for dealing with  money laundering, as provided under art 6 of the EEC Council Directive 91/308 (on prevention of the use of the financial system for the purpose of money laundering).  On close reading of the new regulation, it appears that even where a declaration has been made, and accepted as legit, this information can still be shared.

Cash that has been properly declared may be seized by the taxman, under the Proceeds of Crime Act 2002, if he has reasonable suspicion that it has come from dodgy dealings. So is it then up to the traveller to prove that the money is legit?

Also, if a traveller is carrying cash below the 10,000 euros mark, and there are indications to suspect that the money is linked to illegality, those indications, together with the traveller's name, date and place of birth, nationality, and means of transport, may be recorded and processed, and shared with the authorities responsible for dealing with  money laundering.

The declaration form should be up on the HMRC website from tomorrow. I will add a link to this post when I find the form.

Time to be wary. Gordon Brown is promising 'justice and equity' in the tax affairs of the private equity industry.

There has been much outcry of late about how the private equity sector is taxed favourably. And from even within the industry. Nicholas Ferguson, the chairman of a SVG Capital, a private equity investor, recently made the point that there was something wrong about the fact that a private equity executive was paying less tax than a cleaner.

I agree with Mr Ferguson that there is something wrong about that. But this is like comparing two different taxes: the cleaner's income tax, and the executive's capital gains tax. The cleaner pays income tax at the basic rate of 22 per cent. The executive makes a lot his money from selling off capital assets, and after claiming the available reliefs, he benefits from a much-reduced capital gains tax rate, in some cases, as low as an effective tax rate of 10 per cent.

This reduced capital gains tax rate is not available only to the private equity sector. It is available  to any taxpayer who has held a 'business' asset for at least two years. Such a taxpayer is entitled to 'taper relief' of 75 per cent, which means that only 25 per cent of the gain is chargeable to tax. In the case of a higher rate tax payer (paying tax at 40 per cent), the availability of taper relief reduces his tax rate to an effective rate of ten per cent.

So this is the so-called favourable ten per cent tax that we are being informed is enjoyed by private equity. However, what the critics do not add is that this relief is available to any one who holds for at least two years, and then disposes of, a 'business asset' as defined by the tax legislation.

So yes, while there is something wrong with a ten per cent rate for an executive versus a 22 per cent rate for a cleaner, one should not ignore the point that there are two different taxes at play here. In any case, I think the argument should not be about denying the executive his legitimate ten per cent tax rate, or the opportunity to arrange his tax affairs in the most favourable way for him. Rather, the argument should be about whether the cleaner is paying too much tax.

The Chancellor should not be penalising the executive because he has arranged his affairs so as to pay as little tax as he can legally pay. Tax avoidance is, after all, not (yet) a crime, and in any case, what the executive is doing, is just simple, straightforward tax planning. What the Chancellor should instead do, if he wants to introduce 'justice and equity' into the tax system, is to enable to lower earners to keep more of their money. That shouldn't be too hard to do. What about a more generous personal allowance, say £10,000, to take out of taxation the lowest earners, and to encourage more people into work?

The Fisherman recently referred to an article in the Times that claimed the taxman was planning a crackdown on landlords in the buy-to-let sector.

Not so, says the taxman. Not a 'crackdown' at all. Rather, the aim is to give landlords 'improved access to guidance and support so that they can understand how to calculate their own tax liabilities'.

That's reassuring. And not only that, the taxman promises that even where it turns out that there is tax due, he will use 'the lightest touch possible' to recover it from the landlord.

The Fisherman is a bit wary of this new cuddly taxman. First, an 'amnesty', and now this. We're much more used to the demanding-money-with-menaces style approach. Wonder how long this softly-softly manner will last.

The Fisherman wishes you all a Happy Tax Freedom Day.

Tax Freedom Day marks the point in the tax year when the average taxpayer should have earned enough to pay for his taxes etc. From today onwards, he can now start earning for himself.

To give an indication of the growing tax burden, Tax Freedom Day comes later and later each year. The Fisherman supports calls for the day to be made a public holiday, so as to focus all our minds on how much tax we are actually paying. Maybe then, politicians would think twice before reaching for the tax levers.

Courtesy of the Adam Smith Institute, here are the dates for Tax Freedom Day for the last five years:

2002 - 27 May

2003 - 24 May

2004 - 26 May

2005 - 30 May

2006 - 1 June

Happy Tax Freedom Day, enjoy your freedom.