The Thieving State (Or Why You Shouldn’t Complain About UK Booze Prices)

The UK Government charges ridiculously high levels of tax and duty on us. If you don’t believe me here’s an example.

So you want to buy a cheap bottle of spirits – maybe whisky or vodka (two of my favourites). Your budget is £12.

Firstly you need to subtract VAT at 20%, which the retailer has to account for to HM Revenue and Customs. On £12.00 this is £2.00, leaving £10.00 for the net cost of the product. But before the retailer, wholesaler and manufacturer can enjoy this revenue they have to subtract alcohol duty from the product. For spirits this is £28.22 for a litre of pure alcohol.

Assuming a 70cl bottle contains 40% alcohol by volume (a.b.v.) the alcohol duty due for your bottle is £7.90. This leaves only £2.10 for the manufacturer, wholesaler and retailer to share between them and earn profits on. That’s £2.10 of a product that you’ve paid £12.00 for, only 17.5% going to the people adding value and delivering a little bottle of joy to within your reach. Whereas the government, at the stroke of the Chancellor’s pen, reaps £9.90 for doing nothing. Oh, hang on, they do something: they add bureaucracy at every step of the supply chain in accounting for VAT, and at the manufacturer (or importer) for alcohol duty, thereby reducing those businesses’ profits even further.

This is a parasitic relationship.

However, it gets worse…

Consider how much you have to earn to pay for that £12 bottle of spirits?

Let’s have a look at someone on National Minimum Wage of £6.31 per hour, as an example, assuming they work 37.5 hours per week. This would result in gross wages of £236.63 per week (£12,338.30 per annum). On this they and their employer would pay 13.6% PAYE tax and NICs (employers and employees National Insurance Contributions). An employer has to pay them £13.89 for them to buy a £12 bottle of spirits, which only £2.10 goes to the businesses supplying it; therefore from all that economic activity to earn wages, make the spirits, package, ship and display near to this worker’s house, £11.69 goes to the government – 84.9% overall tax rate.

Now let’s consider someone who’s on the average UK working wage, currently £447 per week (September 2013, ONS). Their effective tax rate, from what it costs to employ them, is 26.7%. This means their employer has to pay them £16.36 for them to buy a £12 bottle of spirits, of which only £2.10 doesn’t go to the government. So from overall cost to the employer of £16.36 only £2.10 isn’t tax, an effective tax rate of 87.2%.

Finally let’s look at a salary of £40,000 per annum, which is about the salary of a tube driver. Their employer has to pay out a whopping £19.93 for their employee to be able to buy a £12 bottle of spirits, of which only £2.10 isn’t tax. So the government collects 89.5% of this money.

Note that the above calculations all include the tax-free allowance within their assumptions. If you just consider an additional cost to your employer for them to pay enough to earn a £12 bottle of spirits (a pay rise, as it were) the impact is far worse (this is the marginal rate).

  • National Minimum Wage: employer needs to pay £16.70 for employee to buy £12 bottle of spirits – effective tax rate 87.4%.
  • Average earnings: employer needs to pay £18.21 for employee to buy £12 bottle of spirits – effective tax rate 88.5%.
  • £40,000 per annum: employer needs to pay £22.73 for employee to buy £12 bottle of spirits – effective tax rate 90.8%.

Incidentally, this is why £10 bottles of spirits (70cl @ 40% a.b.v.) are impossible to find now. Only 43p would be available for the manufacturer, wholesaler and retailer, the other £9.57 going to HMRC – a tax rate of 95.7%. The employer of a tube driver on £40,000 per annum would effectively be paying a tax rate of 98.7% for his employee to buy a £10 bottle of whisky.

In summary, don’t blame the shopkeeper who has sold you the booze, or the wholesaler (or distributor) they bought it from, or the manufacturer (or importer): these people all created and added value in getting that bottle of joy into your hands. However the Chancellor of the Exchequer does nothing but remove value from the supply chain and the economy. At the stroke of a pen.

Blame the government.

Always blame the government.

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On The Stupidity Of Bureaucracy

I recently tried to pay my company’s quarterly VAT bill to Her Majesty’s Revenue and Customs (HMRC). As I used the compulsory method and logged onto the ‘Government Gateway’ website I discovered that I couldn’t submit a VAT return. In a panic I called the HMRC office that deals with our returns (only 16 minutes negotiating their phone system and on hold before I spoke to a human). There I discovered yet another travesty of bureaucracy.

Some background:

We moved our company offices in March last year. I asked our accountant, who is registered with HMRC as our ‘tax agent’, to change our VAT registration address, but they weren’t allowed to. Although this was stupid I have now discovered that the actual process verges on ridiculous.

As time progressed I continued paying the quarterly VAT via the Government Gateway website without any issues. However, earlier this year I tried to change the VAT registered address online. To do this you have to register separately for the ‘Change Business Address’ service on Government Gateway, even though I’m already registered to pay VAT and PAYE.

When you register for any new Government Gateway service they send you an authorisation key in the post. So guess where that went? Yes … to the old address!

This would have probably been ok but for another bureaucratic organisation: Royal Mail. They cannot setup a redirect on a shared office, as ours was previously, and so this post was never delivered but instead returned to Government Gateway; subsequent VAT post must have been sent back to HMRC too.

So despite the fact that I’ve been paying the VAT as expected on each quarterly date they registered us as a ‘lost business’. This is despite:

  • our address being online on our website
  • our address being correct at Companies House
  • our address being correct at HMRC to pay PAYE
  • them having my mobile telephone contact details

Finally in their completely inadequate ‘tracing’ process they sent me an ‘update contact details’ form to my home address. This lay unopened, like all my HMRC post, for a couple of months.

When I did discover it I completed the form and sent it off, receiving a new VAT registration certificate at our new address last month. However, because we were registered as a lost address we were switched to six-monthly returns, so a VAT payment is not due this quarter (after all the panic). When I explained that I have £90,000 to pay the nice chap on the phone said “well you’ll have to wait” – so that’s about £250 interest we’ll make! Also there are also no penalties as we’ve been paying VAT to date and it’s HMRC who changed our status.

Just how stupid is this system?

  1. You need to change your business address?
  2. No, you can’t do this online even though everything else is without registering for the ‘change address’ service
  3. When you register we’ll send you the key you need to your old address

The chap at HMRC was surprised that I hadn’t registered for this important service already: how often does he think businesses move? This was our first address move in nine years! And who would honestly expect that changing address for VAT would be so difficult? Weirdly HMRC allows you to change the business address for paying PAYE and other taxes online without this convoluted mechanism: the same government department!!!

Now the astute among you will know that HMRC was formed in 2005 by the merger of HM Customs and Excise (who dealt with VAT, customs and excise taxes) and Inland Revenue (who dealt with company and personal taxes). This merger was sold to parliament as a method of making 12,500 job savings by then Chancellor of the Exchequer, Gordon Brown. Obviously little actual integration has occurred in the intervening eight years, even though all payments and returns are made through the Government Gateway.

This is yet another demonstration of the stupidity of bureaucracy, especially in government.

By the way, I’m not suggesting that this process is ‘accidentally’ used as a tax avoidance mechanism!