David Cameron pledges Income Tax cuts
Here at Tamebay Dan and I often have interesting political discussions, amazingly we often agree on policy but just disagree on which party is best placed to bring it to fruition.
The latest such topic is taxation, David Cameron just announced at the Tory party conference that if the electorate deliver a Conservative government and if the budget deficit is eliminated (currently estimated to occur in 2018) and if the government can then find further cuts in public spending (a lot of ifs), then personal income taxes will be slashed.
Cameron is promising a double tax cut by raising the 40p threshold from £41,900 to £50,000 and raising the personal income tax allowance from £10,500 to £12,500. He says that the 40p tax was intended only to apply to the most well off earners and too many ordinary workers such as the police and teachers are now paying the higher rate tax. Plus of course raising the personal income tax allowance benefits lower paid workers.
Is this the right thing to do though? What about other taxation, for instance VAT. Would we be better off by slashing VAT than slashing income tax? Dan and I are both in favour of VAT reductions.
VAT is a tax on consumer spending. Every time a business that’s VAT registered makes a sale the government takes an immediate 20% slice of the action. Unlike income tax (which for a self employed person is paid on profits) VAT is paid on turnover with no regard to the profit (or loss!) made on the deal.
There are two things the government could do to encourage small businesses to grow. One is lowering the headline rate of VAT, the second is either a significant raising the threshold at which businesses have to register to pay VAT, or a stepped introduction to VAT similar to personal tax allowances.
We hear of so many small businesses who purposefully trade just below the VAT threshold holding back growth. Currently if you operate on a 30% margin and turn over £80,000 you pay no VAT and your profit is £24k. If you turn over £81,000 operating on the same 30% margin you lose 20% VAT and your profits plummet to £10.8k.
Of course, the government would argue that you should simply add VAT to your prices, but the reality is that would make you uncompetitive. Equally you won’t lose a full 20% as you can claim back your input VAT. What’s certain however is that you’ll make a lot less profit than before you went VAT registered.
What tax cuts would you welcome? Does a cut in income tax (either raising the 40% threshold and/or raising the tax free allowance do it for you), would you prefer to see a cut in VAT, or is there another tax cut that would benefit your business even more?
Personally I would rather have better public services than a tax cut. When massive spending cuts are going to happen in the next parliament, the NHS is struggling, road congestion costs businesses time and money, more cuts in benefits for the poorest in society and national debt continues to grow – a £7 billion unfunded tax cut in 2018 seems irresponsible and nothing more than a pre-election bribe.
However if tax cuts can be afforded I agree VAT should be the priority. VAT is an unfair tax, a tax through which the poorest have to pay the same tax for goods and services as the richest. VAT also acts as a major impediment to the growth and success of businesses and it acts as a major disincentive to consumer spending.
We stay under VAT threshold. Been very close to it once or twice.
Raising income tax allowance is great for us. 2 of use and a max of 21k in total with no tax great.(we work smart and have next to no overheads)
Is it good for economy …..NOPE lol
I am a bit stumped on the solution to tax/vat… Many people play the system to there advantage. Keeping turn over/ growth down to stay under the vat threshold is bad for the economy ….or is it good??? ..leaves room for more players lol
I would like to see the big boys get hit harder…there are too many monopolies / big companies that have too much of the market place.
My solution would be to remove the VAT threshold altogether.
The VAT rate cut could then be paid for by the VAT collected by those currently under the threshold.
If you want to be a retailer, ie – selling goods for a profit whether offline or on-line, then you should take into account all the costs of running a business.
I watched the PM’s Speech at the Tory Conference(it was live on BBC 2). There is a point that should be made about almost all of his promises. They only come to pass if all the if’s mentioned above come to pass. The biggest of these is that the Tories are returned to Office in the May 2015 General Election. And that is the biggest if of the lot. In other words this long before the General Election already Cameron is already making Election Promises.
A great deal was heard through the Tory Conference about the deficit. But the Tories are still spending and indeed wasting money in enormous amounts. Do you remember when they were returned to office at the last General Election.
One of the first things that they did was to scrap the New Nimrod Maritime Aircraft. The project was a £3.4 Billion Defence Project. Some of the aircraft were finished and about to go into service others were almost completed. In other words the vast percentage of the £3.4 Billion had been spent. There was a clip shown on every News Broadcast of these Brand New Aircraft(that had cost £3.4 Billion to build and had yet to go into service) being cut up to a few thousand pounds of scrap metal. The Tory Government represented this as so many hundred million pounds of saving. In fact it was like a motorist going into the Dealer and buying a New Car and Delivering it straight to the Scrap yard and standing and watching it be crushed and then announcing that this was a massive saving on petrol, insurance and maintenance. Well the Tory Government is negotiating with Boeing to buy Billions of pounds worth of Maritime Aircraft to fill the enormous gap in our defences left by the scrapping of these Nimrod Aircraft.
But what about HS2. I am sure that there are many Tamebay readers who live near the proposed route of HS2 who are going to be very seriously affected by this. It has an estimate of £50 Billion but few believe that it will be built for this. There are estimates up to twice that(£100 Billion) to build it. Surely if the Tories were serious about the deficit an enormous Financial Black Hole like HS2 should be first in the list to be scraped. Yet the Tories seem to be defending it to the death. They concentrate the cuts on small items.
There is an answer and that is to hit every Politician of whatever party with questions about expenditure in general and HS2 in particular in the run up to the May 2015 General; Election. of HS2
there are lots of special schemes and deals to be had with the vat man, its not a hard 20% of turnover
Cassetteboy – Cameron’s Conference Rap
Absolutely priceless and so true in so many sad and scary ways.
Surely the best thing would be to balance the books and have a firm plan to get rid of all borrowing over say 20 years.
By doing that taxation in general could be reduced which in turn would increase the overall tax take as people felt the system was fair and they weren’t simply paying into a bottomless pit of waste and squander?
All promises made thus far can not be fulfilled as the debt burden is crippling. It will not change until a substantial amount of the debt is paid down or restructured.
Generally, I prefer sales tax over income tax, because people receive money to start with and then pay tax on what they spend. Essentials could be zero rated. All businesses would need to be registered regardless.
There is another point about a Sales Tax. Everybody who spends money pays the Tax. Clever Accountants or Large Corporations switching income from country to country and then because there are multiple Countries none of the various Tax Regimes compare notes can mean that the Large Corporations do not pay the tax on the bulk of their income will not happen. So a Multi-National company cannot dodge what they should be paying. Also Foreign Residents(Non-Coms) may not have to pay their income tax but go and do their shopping in Harrods or buy petrol to put in the Ferrari and they pay Sales Tax.
Come out of Europe, and leave Brussels. This would save us £50 million pounds a day. That’s 18 Billion 250 million a year we’d save…. £18,250,000,000
We could still trade with Europe etc.
And all our goods exported to Europe will be subject to Import Duties thus rendering us uncompetitive. It is not that simple you need to look at both side of the argument.
And everything that we import from Europe will carry the same duties. As Europe sells us about 50% more than we sell them it will affect them more than it affects us. So when Volkswagen, Peugeot, Fiat even Ferrari find that their market in the UK has dropped like a stone they will get onto their Governments who will get onto the EU and negotiations will follow(if they have not been carried out before we regain our Independence) and the duties will reduce to zero or near enough. After all Norway, Switzerland etc have negotiated deals with the EU.
It is only the quislings who argue that we will be hammered if we leave the EU. In actual fact it is more in the interests of thye EU than the UK that there is a deal.
We welcome the proposed rise to £12,500 personal allowance. We also believe there should be a raised VAT threshold & then it should be graduated. My wife & I are forced to work from home due to our chronic illnesses & disabilities. When we started our businesses 3 years ago things looked positive & we each managed to earn around 10K each. After all expenses our margin was about 20% of turnover & we thought we could earn around 15K ea without going over the VAT limit. We grew they businesses as best we could. Thinking the VAT was done on a Tax Year basis we then found we had gone over the VAT threshold by a few thousands. By the time we realised VAT was on a 12 month rolling system it was too late. Going over cost us around 50% of our years profit as many goods were 2nd hand & no imputs could be claimed. It nearly finished us.
Now we are trying to move on but due to several reasons margins are plummeting to between 10 to 15%. Increased competition, the large increases in postal costs since 2012, introduction of Small Parcel sizes and more recently International items under 100g must be only 5mm thick. Increase in eBay fees & chargings fees on postage. We are now having to sell more items abroad & we don’t make any margin on postage so it’s dead money but still counts towards the VAT threshold.
At 80K VAT threshold it is extremely difficult to live on an income of around 8K ea even with Tax Credits. We are just not well enough to work any harder & take our businesses to the needed 300K & beyond turnover to negate the VAT impact so we are stuck.
The only alternative is to give up & be on benefits but we want to work to the best of our ability not be on benefits.
National Insurance is the killer for the self-employed.
All governments love to hike it, as it isn’t classed as a tax and lets them claim taxes are not rising.
Get rid of Class 4 contributions for self-employed people.
We carve a job out by our own initiative instead of sponging on the dole. My Class 4 NI is nearly as much as my income tax. Not to mention VAT, the threshold for which should be pushed up to something more like £1 million turnover.
Why should small businesses be press ganged as unpaid tax collectors?
But as someone once said :- whoever wins the election, the Government always gets in.
what am I missing here ? if your buying and selling goods
if you register for vat your selling price goes up by 20% but your buying price comes down by 20% plus you save on your other costs ? you margin will be about the same or am I missing the point
Doesn’t work like that. Say you’re selling a product for a tenner before you go VAT registered. Your competitors also sell for around a tenner. If you put your price up to £12 your sales will plummet, so you can’t hike them 20% when you go VAT registered.
Plus the higher your margins you more you lose. Buy a product for a £8 and sell for £10 and you’ll reclaim VAT on £8 and pay vat on £10 – effectively 20% on £2. However buy a product for a quid and sell it for a tenner and you’ll effectively pay 20% on £9.
If that doesn’t make sense, just ask anyone who is VAT registered if they’d be more profitable without paying their VAT bill 😀
You loose 20% of your profit margin! 🙁
Sounds like loads of empty promises as usual. How can you promise to balancing the book which was promised by the same guy in 2010 BTW and on top promise a £7bn tax cut which he refuses to explain how it will be funded. same old same old…… I am afraid and by the way this goes for all the other parties and then the politicians wonder why the public is soooo disillusioned lol
Plocitician STOP lying every time your lips are moving!!!
if your a small business just bumping along either side of the vat threshold and you register its a potential loss of 20%profit ,plus an increase in asking price
there are ways to stay out of the vat loop. Businesses can be split as long as they can trade and are seen to be totally separate/unconnected.
International sales/export have an effect on vat threshold.
As someone has said you need a very high profit/turnover for it to be viable to get involved in V.A.T.
we compete against vat regd companies, I just do not know how they can survive on the mark-ups they are getting on some products.
For me I applied for VAT as soon as I was near threshold. You don’t need high profit/turnover. VAT improves your margin. because of the ability to reclaim VAT on other business expenses, which outweighs the net 20% you pay on margin.
I think the suggestion that businesses can be split is dubious. If there is the same ownership VAT regs say total income must be accumulated, and the split doesn’t work. It is very hard to establish such business are totally unconnected, and HMRC are not renowned for their generosity of interpretation.
Just about everything(except for such as Newspapers and Books) carry VAT. So it is worthwhile do a detailed calculation about how much you can benefit from reclaimed VAT on all the various expences.
I can remember a bloke I knew years ago. His services were mainly his time. Little expences, so little VAT. In his case it was not worth his while. But for most businesses there are a lot of expences that carry VAT and this can then be reclaimed.
There are many types of business that can be unconnected.
give an easy example retail (ebay) and residential Property rental.
Ebay + Hairdresser+ mechanic+odd job man there are hundreds….
Ebay + retail shop ….oops too connected…lol….splitting retail is iffy
“If HMRC decides that you have artificially separated one business into smaller parts to avoid registering for VAT, it can decide that the entire business is a single taxable person and therefore must be registered for VAT”
I would imagine that splitting business in such a way that would be acceptable to HMRC would cost more than the you might save on.
If in doubt give HMRC a ring and see what they say. Ringing HMRC is always better than having them ring you.
Sorry, Northumbrian, I don’t agree.
1. Instead of buying stock inclusive of VAT that you can not reclaim you buy with VAT reclaimable.
2. Yes you pay VAT on what you sell
3. You can reclaim the VAT on all your business costs, not just stock.
I haven’t yet met a business owner whose profitability didn’t increase when they registered.
Personally, I’d completely change the tax system.
No income tax or NI or road tax etc, just VAT at a higher rate. Much simpler to administer needing far less staff, those who can afford to spend the most on luxuries or more expensive products and choose to do so pay the most tax. Those who can not afford it pay the least tax. The government splits the income according to the budget requirements. You don’t need multiple government departments dealing with the population. It also removes all those loopholes that are exploited by the tax savvy.
I’ve never supported higher rate taxation as an idea. I should say I have rarely ever earned that level of income so don’t have a vested interest in this. It seems to me that every body should pay their fair share, and higher rate isn’t doing that. It says because you have more you should pay a higher percentage. I have never understood the logic of that. In the end it is a penalty. Forget the headline grabbing bankers or inherited wealth people. I bet you they are a very small minority. The vast majority of higher rate tax payers are just ordinary people who have managed to build a successful business or career, and who aren’t fleecing anyone. Generally this will be a positive contribution to society. So why should they be penalised?
Businesses may become more profitable after VAT registration through growth, but not through paying VAT unless they can increase their prices 20% which isn’t always possible in a competitive market.
The thing is you have to ask yourself how much VAT did you pay the day before you went VAT registered – answer zero (not strictly zero, but take input and output VAT and you give nothing to the tax man at the end of the quarter). As soon as you go VAT registered (most) businesses then send the VAT man money at the end of each quarter. That’s a tax on turnover (not profit) and as it’s more than before you registered it must be impacting your profits.
There are only a few ways not to pay VAT e.g. selling non-vatable products and reclaiming on expenses or selling a vast proportion of your goods overseas, paying VAT on UK purchases and reclaiming it and not paying VAT on outside the EU sales.
It’s not as clear cut as this.
Let’s say you’re not registered for VAT and bought an item for £5 and sold for £10. This is £5 cash margin, and 50% profit.
Now let’s say you’re VAT registered, you would have paid £4.17 (£5) for the item instead, and sold for £8.33+VAT (£10). This is £4.17 cash margin, but still 50% profit.
You have indeed suffered a drop in cash margin of £0.83 for the sale, or 16.6%.
What we must also consider is that most of your expenses will be VAT reclaimable.
For instance, eBay fees will be VAT exclusive thus saving you 13% on these.
If you currently pay eBay £5,000 in fees in a year, you would pay just £4347, saving you £653.
You would also get the VAT back on your packaging, shipping, software, computers, tablets, and nearly every expense that is standard rated . This is actually in your favour if you’re VAT registered.
All of a sudden your drop in margin becomes less significant.
Throw in the fact that if you’re VAT registered, there is no more limit to selling – push through the threshold as hard as you can so that your lower cash margins are overtaken by volume.
BUT in your example …
“Let’s say you’re not registered for VAT and bought an item for £5 and sold for £10. This is £5 cash margin, and 50% profit.
Now let’s say you’re VAT registered, you would have paid £4.17 (£5) for the item instead, and sold for £8.33+VAT (£10). This is £4.17 cash margin, but still 50% profit. ”
the non regd seller can always undercut the vat regd seller.
and evan price matching non vat regd seller is always going to be making more.
If profit margin is high, it makes VAT even less desirable.
Buy at £1 sell at £5-£10 you are talking a big loss if vat regd
You make a very good point – VAT has a much higher impact for high profit margin businesses. Those that operate on high volume low margin are affected proportionately much less.
there is no guarantee the your supplier is vat registered or may be international or may be on a special scheme with no reclaimable vat charged
A simplistic view of the difference between VAT & non VAT registered businesses to show that its not a straight 20% difference::
Both Business pay the same for the respective items/services
Non VAT Registered Vat Registered
Item Cost Price 2.00 2.00
VAT to Pay on Supplier Invoice 0.40 0.40
Selling Price (x 2.4 of cost Price) 4.80 4.80
Shipping Price Charged 2.45 2.45
Total Price paid by Customer 7.25 7.25
Ebay Fees @ 10% 0.73 0.73
VAT added on Ebay Invoice 0.11 0.11
Royal Mail Shipping 2nd class PPI 1.98 1.98
Royal mail Surcharge 0.06 0.06
VAT added to Royal Mail Invoice 0.41 0.41
Packaging Cost 0.50 0.50
VAT on packaging cost 0.10 0.10
VAT on sale for VAT Registered Business 1.45
VAT Recovered on VAT Return 1.02
VAT to paid to HMRC Vat Registered Bus. 0.43
Total received from Sale 7.25 7.25
Total Costs (Item, Shipping & Fees) 5.68 5.68
Total Paid to HMRC by Seller 0.43
Profit 1.57 1.14
% Profit against Total Price received 22% 16%
Paypal fees not included due to no tax included
Other considerations are that a VAT registered business will claim back VAT not directly linked to the sale:
Cost of office equipment (Computers & Printers) and consumables (Toner & paper)
Phone lines & broadband
or put even more simplistic
the only advantage of being vat registered is that you are not constrained by avoiding being vat registered,
and of course there is the added advantage of not doing bird for fiddiling
VAT sux …..nothing but headaches and trouble.
Our turnover/profit would have to double for us to even consider.
Much prefer to diversify than intensify ,rather than get involved in VAT.
With a good profit margin its not hard to stay under the VAT threshold and still walk away with a living. Much harder if you margin is getting squeezed or is tight. Trouble is if your margin goes down/tight you have to go for volume.
I don’t see why the government and hmrc just say we only have to pay vat on turnover over 80k. This would encourage small businesses to expand and grow rather than trading and just below the threshold. So if your turn over was 81k, you would only pay £200, not £16000 as it is now.