How good is Amazon

[akirk]

If I understand your suggestion, then no, your attempt to simplify the system has just made it more complex. You now have to differentiate which costs are 'goods' passed on to the consumer and which are simply costs of doing business. That is simple if you're just buying flat pack cabinets from Wickes, but what if you're a cabinet maker? You buy wood, some of which will end up as a 'good', some of which will be wastage and offcuts which are business costs and you have to apportion the two. How much of your 2L tub of glue constitutes the 'good'?

No - I was suggesting exactly the same as the way in which VAT works

Sorry, I'm afraid you're a little off base here. VAT is a consumer tax; VAT registered businesses do not pay VAT. The VAT component of all goods from sawmill to timber yard to joiner is passed down the chain to the consumer, with the tax increased at each stage in proportion to the value being added by that stage. That's why trade suppliers typically list prices excluding VAT -- it's not to make themselves seem cheaper, it's because VAT registered buyers don't care about the VAT, they never see it.
Your suggestion, in a nutshell, would mean that you would be asking aunt Mavis to pay your tax for you.

Do you not think that Aunt Mavis is already paying the tax? where else is my business income coming from to pay corporation tax if not from the end user?
Businesses can already offset other business costs pre tax, so it is always the consumer who picks up the tax bill - however you calculate it the essence of tax is that the consumer pays it - while most obvious with a clear cut tax such as VAT, the consumer picks up the bill - when taxes rise, do companies reduce the pay to their shareholders / executives? or do they increase their prices? With the recent digital tax designed to catch Amazon - what happened? Amazon added it onto the costs paid by those who trade through the platform - who will therefore get that price increase? The consumer - Bezos profits aren't impacted...

True, but then you're taxing profits, not income, which is in fact the current system!

Moving all tax to VAT has regularly been proposed, but it's known that this puts a far higher tax burden on the least wealthy and a lower burden on the most wealthy.

Complex, huh? Which is why it's worth my student writing her PhD on taxing digital companies.

the question though isn't just about what is fair to different groups of consumers - but also to different businesses - the underlying 'anti-Amazon' feeling over taxes is that they pay disproportionately less tax than the 'average' business - so it would iron out that issue... arguably you might collect more tax and be able to offer more allowances etc. to the poor - though in reality you would simply change the shape of business and lose some, so it would be a more complex result...

intrigued by the concept of VAT being detrimental to the least wealthy - surely VAT is a tax on purchases, it is zero-rated on many products (e.g. books / children's clothing etc.) which is designed to help it not affect the purchase of essentials - but the least wealthy are surely spending less and therefore spending less in tax? There are many options open to how we purchase - many of which don't include VAT... (I am quite a fan of charity shops / jumble sales / car boot sales / ebay / etc.) none of which are likely be charging VAT.

 

[space.dandy]

No - I was suggesting exactly the same as the way in which VAT works

I thought you were attempting to differentiate between costs that are directly passed on to the consumer and costs which are incidental to the running of the business.

Do you not think that Aunt Mavis is already paying the tax? where else is my business income coming from to pay corporation tax if not from the end user?

Sure, you can make that argument philosophically, but it doesn't work like that technically. The difference between the technical and the philosophical is what allows businesses the flexibility to remain competitive by adjusting price points and profit margins. If you hard code business tax into VAT then it removes that flexibility and forces the business to raise the price of the end product.

 

[akirk]

ultimately any business producing the identical or equivalent product will compete in a number of places:
- costs of source materials (e.g. buy in bulk)
- costs of manufacturing (e.g. make it in China)
- costs of staff (i.e. more efficient and use fewer staff / have younger and cheaper staff / etc.)
- costs of overheads (as a VC once said to me he always looks for fountains and porsches - expensive HQ / company cars / directors' perks / etc.)
- brand awareness and cost of marketing
- etc.
none of those need to have much impact on taxation and all would still have the ability to be adjusted to be more or less competitive...

if you have a product with:
£40 costs
£60 profit
£20 VAT - for a total sale price of £120
the company will pay £12 tax (lets assume corp. tax of 20%!) and take home £48
If you put that £12 onto the VAT the government will want £32 VAT
so, your total of £120 will be £88 product and £32 VAT (roughly 36% VAT)
the company still takes home £48
Aunt Mavis is still paying £120
everything is the same - but it is less complex and there is less opportunity to 'play' with tax laws to avoid tax...

I am not really advocating this - I am one of those who doesn't have an issue with Amazon following the laws as written, even if that means they pay less tax - I think that we should simplify the laws, structure them into more bands for businesses as they grow and then let companies get on and make money... if you wanted to stay parochial you could simplify further and penalise money exiting the country - so a business earning £1m in the UK pays e.g. 20% tax - but from abroad, pays 22% etc...

 

[space.dandy]

if you have a product with:
£40 costs
£60 profit
£20 VAT - for a total sale price of £120
the company will pay £12 tax (lets assume corp. tax of 20%!) and take home £48
If you put that £12 onto the VAT the government will want £32 VAT
so, your total of £120 will be £88 product and £32 VAT (roughly 36% VAT)
the company still takes home £48
Aunt Mavis is still paying £120
everything is the same - but it is less complex and there is less opportunity to 'play' with tax laws to avoid tax...

You're assuming a number of things. You have assumed that the company wants to 'take home' the profit and you're assuming that avoiding tax is a bad thing, which isn't always the case. One of the ways that companies can 'avoid' corporation tax is by reinvesting profits back in to the company, growing the business, employing more staff. This 'avoidance' has benefits to the economy and employment and is generally considered a good thing.

I'm going to shut up now, as I'm wandering into areas of taxation about which I know relatively little -- my business doesn't pay corporation tax for one thing.

 

[akirk]

You're assuming a number of things. You have assumed that the company wants to 'take home' the profit and you're assuming that avoiding tax is a bad thing, which isn't always the case. One of the ways that companies can 'avoid' corporation tax is by reinvesting profits back in to the company, growing the business, employing more staff. This 'avoidance' has benefits to the economy and employment and is generally considered a good thing.

I'm going to shut up now, as I'm wandering into areas of taxation about which I know relatively little -- my business doesn't pay corporation tax for one thing.

I am not really...
I am certainly not assuming that avoiding tax is a bad thing - in fact I am one of the few who has been arguing that Amazon should not be blamed by following the system and minimising the tax they pay... I am simply making a point that there are different ways in which you can collect tax and that in the UK we have two major forms of tax a company pays (well PAYE as well, but let's leave that one out for now!) and there is little issue with VAT - or how Amazon deals with VAT as far as I know - yet there is a psychological difference with corporation tax - there are so many rules and exclusions, exemptions and grants that it has become over-complicated to the extent that no one person fully understands it all - and that is what allows companies such as Amazon to find ways to avoid paying un-necessary tax... were it to be simplified, then that would be less likely...

I probably know as much / as little as you about tax - though my company does pay corporation tax, and VAT - so I am aware of some of the loopholes and that every company has decisions to make as to whether you walk a slightly dodgy line pushing legislation, or follow it fairly straight - we are pretty straight down the line, but that doesn't mean that I am anti-Amazon who undoubtedly pay proportionally far less tax than my company...

 

[profchris]

The main reason Amazon pays little corporation tax is because it's not a UK company. It's residence is Luxemburg.

The international tax law rules I mentioned in a previous post say that such a company only pays corporation tax if it makes sales (not delivers, that's a separate function) through a UK establishment - premises and staff used for selling. Amazon doesn't need a selling establishment So Amazon's profits are mainly taxed in Luxembourg. But the VAT on UK sales is paid in the UK.

Like I wrote, this needs international tax law agreements to change. 30+ years into the process, this hasn't yet happened.

Shifting all taxes to VAT would mean Amazon pays proportionally the same as other sellers, true. But it does change the relative prices of products.

Currently:

Product A, costs 80, profit 20, VAT 20. Corporation tax 4, so after tax profit 16. Price to consumer 120

Product B, costs 60, profit 40, VAT 20. Corporation tax 8, after-tax profit 32.

Assuming all tax is VAT at 25% and after tax profits don't change:

Product A, costs 80, profit 16, VAT 24. Price to consumer still 120, tax take the same.

Product B, costs 60, profit 32, VAT 23. Price to consumer now 119.

So the higher the profit margin, the lower the tax take becomes proportionally.

High margin products tend to be bought by richer people, so they benefit more. And to retain the total tax take we need maybe a 27% rate, which makes Product A (bought by poorer people) more expensive than it was.

To make it worse, Amazon still wins because it doesn't have the costs of physical businesses, like rent and rates. So its prices are still cheaper, because the costs make part of the price, all of which attracts VAT. If Amazon's costs are lower it can charge less than the physical business, and the higher the VAT, the cheaper Amazon is comparatively.

It's a highly complex problem to solve. For those problems, attractively simple solutions rarely work.

 

[akirk]

High margin products tend to be bought by richer people, so they benefit more.

Always the case?
plenty of cheap tat with low cost but high profit margins
plenty of expensive kit (eg digital cameras) with very low profit margins... assuming that we are referring to % margins not absolute margins...