When I was living in UK, I remember an advertisement from Inland Revenue: taxes do not need to be taxing.
I think that every taxpayer would agree- actually, it is one of the reasons why whenever available, I try to use only electronic services.
But taxes are just part of the picture: the “taxing” Inland Revenue referred to was actually the red tape that comes along taxes.
Or, sometimes, is an hidden tax, as compliance is so expensive and cumbersome, that the monetary value of the associated activities exceeds the tax itself.
So, how do you generate “value added taxes”?
No, not by increasing the VAT.
But finding creative ways to generate unexpected benefits.
Just to stay on the VAT theme, the main cross-EU tax and reporting regulation that could be “harmonized”.
While presenting that nice advertisement, the UK government had a wonderful idea: avoid the “tax cheat” that were employees and using the LTD statute to avoid payroll taxes.
How? By stating that any revenue produced by the owners and shareholders and directors be considered as if it were payroll income, i.e. paying monthly or quarterly the taxes, and then getting reimbursed by the Government at the end of the fiscal year.
It was called IR35. The side-effect? Small consulting enterprises merging or moving abroad because, as you probably know, in small consulting companies the shareholders are actually working.
And, if you added the approx. 30% of the various payroll taxes to the 17.5% of the VAT, you ended up being required to advance to Inland Revenue almost 50% of your turnover… before even seeing a penny.
The crisis in 2007/2008 seemingly produced some creative ideas based on business reality.
Such as: the Italian Government regulating that VAT from SMEs below a certain turnover threshold would be paid by their customers, or the French Government saying that you can register as a free-lance, and pay no welfare taxes if you have no revenue or are below a certain threshold.
Both initiatives had the purpose of having the “black economy” emerge, and solve the small issue represented by the endemic delay in payments (also from Governments) to SMEs.
But this did not solve the issue, as it did not solve the issue the introduction of interests for late payments.
Why? Because no SMEs has the negotiating power to actually receive the interests for late payments- and, anyway, the amounts charged by the financial institutions to manage their cash-flow exceeds any nominal interest.
And if you consider that not too long ago banks in a company town refused to factor the invoices of a famous industrial company (i.e. keep a slice and pay the remainder to the original invoicing company, de facto assuming its credits toward its customers)…
… you have the whole picture: why laws on the book that ignore market reality are irrelevant.
The market reality is that SMEs usually operated with a limited number of customers, and that their negotiating power is actually decreasing by a continuing activity, as they become even more dependent on few customers.
And almost no SME ignores the tempation to “focus on key customers”, i.e. becoming integrated in their supply chain.
So, back to the European VAT. How could it be made more creative in supporting both Governments’ (avoid tax fraud) and SMEs (being able to avoid losing a sizeable chunk of their cash-flow)?
In Europe, if you sell physical products you are supposed to report the VAT registration numbers of your cross-EU customers and suppliers.
As more and more statutory reporting activities are becoming part of the e-government, i.e. paperless and integrated with other government activities and databases, why not move the invoicing online?
If the reporting on the turnover were to be linked to the statutory reporting, the contractual payment terms could be not just written inside the invoice, but added as a reporting and legal requirement.
The EU-wide electronic payment system allow the exchange of structured information associated with the wire-transfer.
While large companies can easily adapt their flows to new electronic (i.e. automatic) reporting systems, for SMEs the governments (or the Commission, as a receiver of a slice of the VAT) could deliver a “free service”, embedded in the VAT registration, to SMEs and sole traders who cannot afford to use the electronic system.
The advantages? I will outline just few positive side-effects:
- transparency in economic transactions
- real-time monitoring of the economic activities
- potential for the enforcement of legal payment terms or penalties
- removal of even the potential for VAT fraud (quite common in some countries)
- creation of a consistent EU-wide database of economic activity information.
I applied the same approach in the past in business activities, while designing or redesigning business processes or organizational structures.
It is quite simple: you identify an additional cost, brainstorm on the motivation of all the parties involved, and find that some small “tweaks” can make more acceptable most changes.