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Terry Baucher finds a complicated mess in how the British handle differential VAT rates and exemptions, the UK tax agency's entanglements, the OECD's drive to tax energy, and the European penchant to tax everything

Terry Baucher finds a complicated mess in how the British handle differential VAT rates and exemptions, the UK tax agency's entanglements, the OECD's drive to tax energy, and the European penchant to tax everything

In this edition observations from a business trip to Europe, the OECD on taxing energy use, and we don't know how lucky we are.

If you're wondering where I've been for the past couple of weeks I was in England and Germany on a business trip and while I was there a few tax related matters caught my eye.

The first was when I went into a cafe to have a coffee and something to eat just before a meeting with members of the Institute of Taxation. And I noticed there that there was a differential charge if I had hot take-away food.

In the UK, value added tax, the equivalent of GST, is applied at either zero or 20%, generally speaking. And included in zero rated is food, but also cold food taken away. Hot take-away food, consumed in stores is subject to the full rate of VAT. As you can tell by the way how I stumbled my way through that explanation, that does open the door to quite a lot of confusion.

Obviously, these days everyone assumes that with electronics and clever point of sales tills they should be able to manage all of that and this particular shop clearly had all those procedures in place. However, it's just a salutary lesson to those who would suggest, yeah, it's an easy matter to exempt or zero rate food from GST, that actually its practical application is not as easy as you might think.

While I was there, HM Revenue and Customs, the UK tax authority, was in the news for a couple of items, both of which are quite interesting. The first one was that it is being sued by an American-born British citizen who argues that her rights under the European Union data protection rules known as GDPR, (the general data protection regulatation) would be breached if HMRC, passes her information on to the U.S. Internal Revenue Service as part of the automatic exchange of information and common reporting standards.

This case also covers the infamous U.S. act FATCA, the Foreign Account Tax Compliance Act. All of which, FATCA and the CRS, all involve tax authorities sharing information between each other as a global crackdown on tax evasion. So that's a laudable aim in itself but however, it does raise the issues around data protection and information sharing. And you may recall, I talked in a previous podcast about a leak from the Bulgarian national tax authority. So, this is a case to watch with great interest because much of this data exchange going on has gone through on the nod without any real discussion about the data privacy issues around it. So, watch that space.

In another extraordinary story HMRC "has told tenants of properties owned by foreigners that they may have to help settle their landlords' tax bills by withholding rent."

Apparently HMRC has sent out thousands of letters to gather information about properties owned by overseas landlords. It's trying to find out who is and who is not paying tax on this [income].

This is another example, just related to the one I was just talking about in terms of data exchange, of the extraordinary reach tax authorities have right now and the lengths they prepared to go to ensure that people comply with their duties. The example of asking tenants about overseas landlords could equally apply here as Inland Revenue would have the powers under the Tax Administration Act 1994 to ask for such information from tenants. Now, I'm not saying that Inland Revenue is going to follow in the footsteps of HMRC very quickly, but don't be surprised if something like that does happen.

Moving on, climate change has been in the news while I've been away, with the day of action and both the prime minister and the extraordinary Greta Thunberg addressing the UN on the topic. During that time the OECD released a brochure on taxing energy use called "Taxing Energy Use for 2019."  The full report is due mid-month. And what it gave was a snapshot of where countries stand in deploying energy and carbon taxes, what progress is being made in this, and recommendations on how governments could do better. And in short, it's not good.

The OECD release says "governments are not deploying energy and carbon taxes to their full potential". And it looks at every country to see what they're doing and New Zealand doesn't fare very well, particularly in relation to non-road emissions. We are in the bottom four alongside Russia, Brazil and Indonesia. We're a little better on road emissions, but according to this initial report status, there has been no change in the average effect of carbon tax since 2015.

Now, this is an area where clearly there's a lot of political pressure starting to build on both sides. There’s people led by the inspiring teenagers such as Greta Thunberg, and those who organised the climate day of action are saying "Hey, you know, things are happening and we need to change things."

By the way there are reports regarding a category five hurricane has formed in the North Atlantic, further North and further East than has been ever seen previously. So something may be happening, and people are saying, "well, if something's happening, what are we going to do about it?" And at the moment the debate seems bogged down, is whether or not something's happening. Whereas insurers, for example, seemed to have moved on to well, what are we going to do about it and started pricing in that risk.  What the OECD is saying that carbon taxes and energy taxes are something that we should be looking at. And that certainly was something, as I mentioned before, the Tax Working Group examined.

So I'll have more on the full report when it comes out mid-month.  Basically watch this space, because this stuff isn't going to go away and it's going to have a significant impact for our economy, whether in the road transport sector, which is an area where we probably could make some improvements relatively quickly in terms of moving to greater electrification and improving. And I'm not talking about cars, I'm talking about bicycles there. I think electric bikes are probably a complete circuit breaker in making life easier moving around cities. And while I was in Paris, by the way, I saw electric buses, so it was quite interesting just to see how much public transport was being used and how it's being electrified. You know, great use of the underground Metro in Paris, and the Tube in London.

Finally, the trip also reinforced something that one philosopher once said, "we don't know how lucky we are".

What I was doing up in Europe was I was part of a group presenting to people who are interested in migrating to New Zealand and talking about the tax system here. And I was making comparisons to their system. So the pitch was to English and German potential migrants.

Now, where we stand out, and which piqued their interest, quite apart from the four year transitional residence exemption, which is part of the package of attracting high quality migrants to New Zealand as investors, is what we don't have, which other jurisdictions do have. And that is, for example, both Germany and the UK have estate taxes, death taxes. The British have inheritance tax which I've talked about beforehand and I will talk again in the future on how significant that tax is for New Zealanders. The Germans have something I won't even try and pronounce, the ErBst, but the key point is they both have significant wealth taxes.

They both have a general capital gains tax, although as I pointed out our regimes such as the financial arrangements and foreign investment fund regimes do tax capital gains. And then they also have substantial social security taxes, which again we don't.

I mean Britain payroll tax or national insurance contributions are payable by an employee at 13.45% up to, I think it's about just off £20,000. [Actually, it’s 12% on earnings up to £962 per week or just over £50,000 annually]. But they're unlimited for an employer. So, an employer who's paying someone several hundred thousand pounds a year, has a huge national insurance bill.  It has resulted in a whole raft of attempted tax avoidance such as paying people in gold bullion for example, is something that I saw in my time 30 years ago. And incredibly 30 years on, even though those problems were well identified going on, there's still substantial attempted tax planning to get around these hefty national insurance contributions.

Germany has payroll taxes, social security taxes, and they also have state taxes and both countries, by the way, Britain and Germany have a 45% top tax rate. So, against that backdrop, it's worth thinking about how New Zealand tax system compares. There is, as the Tax Working Group pointed out, a danger of a narrow base, we probably don't tax capital enough and we have a whole question of maybe improving our taxation, definitely improving our taxation, of the environmental issues. And that's something that's going to just simply, as I said a few minutes ago, not going to go away. But overall, the circumstances are indeed propitious as one Frederick Dagg Esquire once opined.

That's it for this special edition of The Week In Tax. I'm Terry Baucher and you can find this podcast on my website. or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, have a great week. Ka kite āno!

This article is a transcript of the September 30, 2019 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission. You can also listen below.

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Differential GST is a Pandora's box to administrators and tax authorities, but a veritable gold-mine to consultants and system modest thoughts here....and here...

We could probably look at having a no tax threshold and lower tax for say under $70,000, and increase the top rate for over $100,000. But I always thought that we have a low proportion of high income earners, so it is more difficult to get much tax off them. Also Working for Families complicate things, and produces disincentives for parents to earn more. Our comprehensive GST at 15% makes up for any lack of wealth taxes, and is a good little earner for our government. Far exceeding what was projected for CGT.

I think CoL have done about 7 or 8 taxes already, if you include the cancelling of the tax cuts that National had booked in. We have created a very complicated world & it wouldn't surprise me if they don't tax people for getting old shortly. That should teach 'em to live longer.

Yes a Boomer tax for being such a conservative selfish generation...bring that in pronto.

Adjusting the income tax brackets is not a tax "break". Both National and Labour continue to be absolutely dishonest as how they describe this matter.

I think CoL have done about 7 or 8 taxes already

Remembering of course that National's own standard was that a change in rate of an existing tax did not constitute a new to list the 7 or 8 new taxes you think exist? Or even, break them down by new vs. National's standard.

That 7 or 8 sounds made up.

UK also does not impose VAT on new housing.
If we had that policy here it would make a significant difference to the cost of new build housing

I'm all for any new tax that will A) Make housing more affordable. B) Lessen the burden of paying for the ageing population. C) Facilitate innovation to improve the environment.

Exactly - no new taxes .

I found the tax system there not particularly burdensome (worked at diversified conglomerate) Costs were far lower relative to income for most things. Food was cheap, as was travel. Power etc. no need to own a car in London. Nz by comparison tax aside is horrendous.

If the USA can differentiate GST (simply called sales tax in the US), with a population of 329,000,000 I am sure there is someone intelligent enough to figure it out in little NZ. Taxing broccoli at the same rate as Fanta promotes a myriad of health problems that come back to bite the tax base in hugely increased health costs associated with obesity.
I get sick of hearing ignorant people say that we need more taxes. Per the latest Core Crown Tax Revenue figures, the tax take in NZ as a percentage of GDP (which is generally always going up) has gone up about 68% in the last 8 or so years !!!!!!!!!!
NZ even taxes taxes. For eg. rates are just a tax put under a different label and taxed again at 15%, ( they are actually called 'property taxes in the US, not disguised) . Its disgusting. No wonder the tax take has gone up so astronomically and there should be a surplus when even taxes are taxed. Give it back!

Days to the General Election: 27
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