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the UK cannot claim to be the bastion of micro-entrepreneurialism just yet

Kitty Miv, Editor
07 November, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

I've watched India's GST debacle from the bitter beginning, and had formed the belief that, after year upon year of broken promises, the tax would never see the light of day. However, now, I've been pleasantly surprised by the uncharacteristic speed with which some of the final, essential steps needed to implement this long-awaited tax reform have been taken.

The Rajya Sabha's landmark vote in favor of the tax took place in August, and by early September more than half of India's states had ratified the constitutional amendment bill, removing a major roadblock to the introduction of GST. By the end of the month, the GST Council had been formed and already resolved the tricky question of the GST registration threshold. The digital framework underpinning the new tax is already well advanced, and there is the very real prospect that GST could be in place by April 2017 after countless false starts.

That is, if lawmakers can agree on the four-tier GST rate structure, which will surely add much needless complexity to a law intended to simplify India's indirect tax system. I suppose a four-rate GST still represents a vast improvement on the existing hodge-podge of inefficient and cascading indirect taxes, and with so many stakeholders to please, the GST Council was always going to struggle to find a single rate that would please everybody. But I'd hate to see all the good work of recent months unravel at the final hurdle.

Now we move more decisively into the digital realm, and while some countries are busy trying to tax, restrict, or shut down innovative new businesses in the so-called sharing economy, such as Airbnb and Uber, others are attempting to remove obstacles to their growth.

On the one hand, we heard recently that French lawmakers voted for a bill that would subject to professional tax those making a significant amount from "sharing." One could argue that this is only fair, for there is a difference between a taxpayer renting out their home for a couple of weeks in a year and, say, for half the year.

On the other hand, some countries are taking a more hands-off approach to the issue. Rather than being so prescriptive in this area, some tax authorities have issued new guidance to inform people where the line between "pocket money" and declarable income exists, including the US Internal Revenue Service, the UK tax authority, and the Australian Tax Office. Still, guidance or no guidance, ultimately it will be the tax authorities that will decide where the line exists, so the trapdoors haven't been entirely removed for taxpayers.

At least one country is actively trying to ease the tax compliance burden on users of sharing platforms. The United Kingdom is introducing tax allowances – albeit modest ones – to encourage the new breed of "micro-entrepreneurs." Except that the UK cannot claim to be the bastion of micro-entrepreneurialism just yet, after the London Employment Tribunal recently ruled that Uber drivers should be classified as employed and not self-employed.

Not only has the ruling cast much uncertainty over UK employment laws, it has opened a tax can of worms. Will it mean that Uber is responsible for the payment of employment taxes, principally National Insurance (social security) contributions? Furthermore, the ruling could have value-added tax implications for Uber in terms of how drivers' supplies to consumers are treated.

Perhaps the radical UK tax reform plan proposed by the Institute of Economic Affairs last week would help. Its proposal to scrap most taxes in favor of a few would likely strike a chord with numerous members of the ruling Conservative Party at any rate, coming as it did from a free-market think tank.

If we were living in a more uneventful political era, the Government might have given some of these ideas serious consideration. Times are, however, far from dull, and the UK Government has rather more pressing matters on its plate.

I refer of course to Brexit. And if the prospect of negotiating with an increasingly impatient – and possibly vengeful – EU wasn't daunting enough for a rookie Prime Minister like Theresa May, the waters have been muddied further by the High Court's ruling that Parliament must be consulted before the Government can trigger Article 50 and formally launch these negotiations.

Potentially, this is a big problem for the Government. In the House of Commons, remainers outnumber leavers, so if a Brexit bill is put to the vote, MPs could reject it. And given that the UK's nebulous constitution never envisaged such events, no-one can be sure what would happen next.

This state of paralysis may not come to pass. A further ruling by the UK's highest court, the Supreme Court, is anticipated in the coming weeks, and many remainers in the Commons have indicated that they would respect the will of the people and not stand in the way of the Brexit process. Nevertheless, despite the assurances that the parliamentary vote to trigger Article 50 would probably be a formality, at least in the Commons (let's not mention the House of Lords yet!), the reaction from the Brexit camp has been nothing short of vitriolic, as if the ruling were the result of a conspiracy by the pro-EU liberal elite to derail the Brexit process.

This will be the most important decision the UK takes economically for generations, and surely it is only healthy that all the legal implications are examined. However, the legal proceedings do raise a tantalizing prospect: what if the Supreme court agrees with the lower court? What then? Will it be appealed to the European Court of Justice? How ironic that would be!

Still, as entertaining as this situation is for an outsider, there's no denying that these developments have added ambiguity to an already highly uncertain outlook for the UK. For taxpayers, this might not have entirely negative consequences. Certainly, on the one hand, it is impossible to predict the nature of the post-Brexit relationship between the EU and the UK, so we are none the wiser about how EU tax legislation and case law would be applied in the UK. But on the other, we may see a period of relative calm and stability in the UK tax system in anticipation of potentially major changes ahead. Indeed, radical change in the area taxation of the magnitude advocated by the IEA is likely to be the last thing businesses want to think about right now.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

India expeditious

Kitty's Execrations

France prescriptive

United Kingdom hullabaloo



About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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