My appearance on the BBC Newsnight Show – see it @ http://bbc.co.uk/i/nxbmw/

A quick note about the Sales (or Purchase) Tax idea on the BBC Newsnight programme ( BBC iPlayer: http://bbc.co.uk/i/nxbmw/ ).

Here is the initial write-up before airing of the show: http://news.bbc.co.uk/1/hi/programmes/newsnight/8340721.stm

Not wishing to sound too smug (!), you’ll notice that although Patience Wheatcroft thought my idea was “too fiddly” & “unfair” on the programme that aired, she actually suggests an even more fiddly approach by targeting the tax at the luxury end of the market.

The simplicity of the blanket tax is it’s strength – no exceptions, no “fiddly” rules, just a simple tax of 0.5% on all items for a period of time.

As for the “raft of administrative burden” – HMRC already provide FREE payroll software for small companies, and lots of toolkits to check tax liabilities too.  All business’s should know the figures in their operation, and it would not be a major issue for HMRC to provide some software to allow simple monthly accounts, that would help with VAT if necessary, provide simple P&L and more importantly, a simple, discrete method of collecting the tax and liability information.

To alleviate the issue of “unpaid tax collectors”, the Government could easily offset this argument by allowing a small rebate to be given for the amount of both VAT and Sales/Purchase Tax collected – say 5%, much like in Germany.  This rebate would remain after the Sales/Purchase Tax has been suspended, to stop any further complaints by business’ – mainly from large companies with sophisticated accounting systems!

Remember also that the £1.406 trillion pounds spending is split (approximately) as: 48% – households, 17% Government, 13% for financial services and the remaining 22% spend by Industry.  Therefore the burden of cost is mostly met by household consumers and the Government.

Here are the contents of my original document sent to the BBC:

Initial proposal

Rather than return the VAT rate back to 17.5%, keep it at the current 15% and introduce a blanket 2.5% "Sales Tax".  This will immediately return £12.5 billion to the treasury based on the government figures for the introduction.  In addition to this, it paves the way for increases in the Sales Tax to be made, which could be offset by reducing Income Tax, thereby reducing the effect of the "Black Market".  You may be able to be paid "cash in hand" but you will still be within the tax system when you spend it!  In effect, this will make sure that tax avoiders will still have to pay tax. If you like this idea, I will research figures and build a solid case for it.

Figures Involved

Based on UK Family Expenditure of £459.20 (Family Spending and Family Expenditure Survey 2007) the extra cost to a standard family would be less than £5 per week

2007 figures from ONS Blue Book as these are available across multiple papers.

The Gross Value Added Basic Price (“ABML”) takes production taxes and subsidies away to reveal a standard price per unit.

In 2007, this was worth £1.406 trillion of which, the Sales Tax would be applied.

At a tax rate of 0.5%, this would equate to £7 billion which would be negligible in prices on the “shop shelves” – even allowing for a 5 step supply chain, the consumer price would only increase by about 4%.

Potential Benefits

Black Market / “Cash in Hand” employees: Even when the employer avoids the on-costs of Employer NI contributions, the payroll paperwork involved etc, and the employee avoids paying possible Income Tax & NI as a “2^nd job”, the employee will still pay towards tax when they use the money received to buy something

Simple Administration: A single, UK wide Sales Tax can be collected be collected via regular returns, similar to VAT, allowing non VAT registered business’s to provide sales data online.

Small Incentive to Avoid: Being a small universal tax, the temptation to avoid the tax would be small compared to the relative return on the effort to find loop-holes. In effect, unless all your suppliers are avoiding the tax, and subsequently falsifying their own records for reduced sales, then it is unavoidable to pay and the incentive is to charge to recoup the cost of tax spent on purchases.

Encourages Internal Product Development: Companies are encouraged to develop and maintain products and services in-house if they want to reduce their tax burden, as out-sourcing will attract tax.

Ring Fenced Revenue: The tax raised can be ring-fenced to pay for National Debt as per the extra Tobacco Duty targeted to the NHS in the 2002 Budget.

Potential Problems

EU Legality: Article 33 of the Sixth VAT Directive may prevent EU Member States from introducing a Turnover Tax. This would need to be looked at in detail to identify work-around if necessary.

Business Competitiveness: Where very small margins are within an industry, the cumulative effect of multiple items purchased in a long supply chain will attract tax. However the relative cost of the purchase side tax is offset by the sales tax.

Low Income Families: To alleviate the first year impact on families, the first year will incur an increase to Benefits paid and the National Minimum Wage to offset the “initial cost to the consumer”.