TAXATION - Online business is in line for taxes
Richard Baron argues for a tax that will take into account Internettransactions.
Richard Baron argues for a tax that will take into account Internettransactions.
VAT on phone calls has just changed: the telecoms derogation agreed by European Union member states earlier this year was put in force on 1 July.
The change was brought about by the banks, which transmit vast amounts of data over phone lines. Under the old rules, the supply of data transmission services by a non-EU telecoms company would not have been subject to VAT, even if its customer was a London bank. But, if the bank had bought the services from an EU company, it would have had to pay VAT.
Plugging this VAT leak meant changing the EU directive governing each state’s VAT system.
A taste of the future
If it were just a banking issue, few of us would get excited. But this derogation is the shape of things to come. John Andrews, president of the CIoT, highlighted the problem last month in Accountancy Age, when he spoke of a cyberspace black hole: transactions disappearing onto the Internet where no national authority can track them down and extract tax.
Data transmissions are an extreme example. They exist only as electronic impulses that can follow any route around the world. But what about buying a CD of music? You could buy it in the UK and pay the VAT, or you could get the music sent to your PC from a country where VAT does not exist.
You could obtain all manner of services from outside the EU, including self-assessment tax returns and financial planning advice, all without paying your tax accountant’s VAT.
VAT revenues wouldn’t disappear entirely. You’d stay in the country to have haircuts and meals out, so you’d pay VAT on them. But the government’s income could still drop sharply.
One solution is to copy the telecoms derogation. It works by making the recipient of the services pay VAT on what they buy as if they had sold the services, instead of buying them. So, when you obtain music over the Internet and copy it, you would work out the VAT and pay it to Customs & Excise.
This might sound crazy. Customs has enough problems with the 1.5 million traders it deals with already. It can handle a few banks and other heavy telecoms users, but does not want to collect VAT from millions of private computer users as well.
Yet it could be done. Computerised transactions will be in a special form to ensure the security of credit card numbers. Customs will simply have to decode these transactions as they pass through the Internet. The VAT can be collected from the credit card companies, which will bill card holders.
But to spot transactions on the Internet, Customs would need one thing: unrestricted phone-tapping capability.
Alternative measure
It may not be such a good idea to give Customs greater powers than MI5.
There is an alternative: the bit tax, a flat-rate tax on each bit of data transmitted. It would be easy to apply, but would bear no relation to the value of what the bits represented, and would not equal VAT.
Alas, this crude substitute may be the only option if we are not prepared to open our credit cards to Customs.
Richard Baron is taxation executive with the Institute of Directors.