LVT: the most simple and elegant of all taxes.
- Tax: a dog's breakfast of a mess
- But it's legal so it must be OK!
- Council Tax
- LVT is simple
- The beauty of the lien
- Land is a great thing to tax
- The systems side of things
- The moral dimension
- No exceptions
Tax: a dog's breakfast of a mess
The current tax system is unnecessarily complex - it's a mess.
Over the last 200 years it has become a monster, evolving piecemeal as governments of all colours have responded with knee-jerk reactions to the latest panic whipped up by the mass media - particularly the press - itself owned by people who go out of their way to avoid tax by being "non-doms" or "resident overseas for tax purposes".
In some cases it has evolved to put money directly into the hands of the government's supporters - like the taxpayer-funded "Help to buy" scheme which lines the pockets of large developers and builders.
There's money in tax!
Tens of thousands of tax advisors, tax accountants and tax lawyers ("the tax industry") make a very good living from interpreting tax law, advising on tax avoidance and sometimes developing or recommending schemes with the sole intention of avoiding tax. Everyone from Bono in music, to Victoria Beckham in fashion to Jimmy Carr in comedy has engaged in tax fiddling schemes - only to come a cropper when HMRC, quite rightly, comes down hard.
At least two tax dodging schemes: generating losses by " funding British films" and generating cash through charity Gift Aid claims, have involved hundreds of people (usually the wealthy and celebrities) in Limited Liabilty Partnership.
One becomes immediately suspicious when, on the Companies House web site, one see names such as (fictitious to protect the guilty): "Golden Frog No 1" (272 "partners"), "Golden Frog No 2" (272 different "partners"), "Golden Frog No 3" etc.
"We've got this great scheme, "SLP 278 No 1", it generates a massive tax loss and gets Gift Aid for this charity we've set up in South Georgia. Giving it a French name adds mega-cred and it has an official HMRC approval number! (*)"
* schemes established that result in significant tax avoidance must be disclosed to HMRC. HMRC will provide a "reference number".
The number merely indicates that HMRC has been informed - it does not imply approval - in fact, it may mark the start of an HMRC investigation which could end with fines or imprisonment!
Advice to potential clients of such schemes
- If it looks like a duck, walks like a duck and quacks like a duck - it probably is a duck. If it looks dodgy it is dodgy.
- If it looks too good to be true - "Guaranteed 7% interest" - it isn't true!
- It takes one second to sign a document and one second more to lose your life savings.
- There's no such thing as a free lunch - those offering such schemes are lining their own pockets, not yours!
... and don't expect the rest of us to bail you out if you are stupid! Don't come bleating to us!
But it's legal so it must be OK!
The Tax Industry could bleat for Britain in the Olympics!
"We don't make the law, we just interpret it."
"It must be OK if it's legal."
"Everyone has a right, nay, a moral duty, to avoid tax."
"No one should pay more tax than is necessary."
We agree with the last one.
The problem is the tax system is so complex that it is relatively easy to drive a coach and horses through it so taxes are avoided that were never meant to be avoided - politicians, and the laws they create, are somewhat lacking in clarity.
The Tax Industry
The majority of the Tax Industry is honest and would never dream of introducing clients to dodgy schemes.
Tax avoidance schemes have many players: the person who had the idea, those promoting it to the tax industry, those "recommending" it to their clients, those "introducing" it to their clients and the clients themselves - who usually plead ignorance:
"I leave all that to my advisors, I don't understand it, I didn't ask any questions, it has nothing to do with me."
"Introducing" is pretty low level - "you might like to have a look at something I read about this morning".
"Recommending" is more like "this is a great scheme and will save you at least £135,000 on your tax bill" - which is very naughty.
Penalties range from imprisonment to fines depending on the level of culpability.
Please see LVT: council tax and infrastructure about the glaring unfairness of the current system.
A billionaire in Westminster, in a £95 million Band H house, pays £1,421 Council Tax.
A Band H Council Tax payer in South Derbyshire pays £3,445.
It may surprise you but a Band H house in South Deryshire isn't worth £95 million!
LVT is simple
It is so simple it can be fully defined in a single sentence:
"LVT is an annual, nationally determined, nationally collected, percentage tax, paid by the freeholder, on the open market value of all land with no exceptions"
- "Nationally determined": the percentage rate is set to bring in the same revenue as the taxes replaced by LVT.
- "Nationally collected": at the moment 152 Local Authorities (LAs) in England are responsible for valuing, administering, collecting and enforcing Council Tax and Business Rates.
This is a very expensive duplication of effort.
In reality the national Valuation Office Agency (VOA) does the valuation and much of the rest is sub-contracted to a few private companies who are in business to make a profit and who can go broke leaving taxpayers to pick up the mess.
It makes sense for HMRC to collect LVT - they know how to do it, they have the people and they can't go broke.
- "Paid by the freeholder": we know (or will know) the name and address of the freeholder of all land in the country - even if the freeholder is a company or trust registered in a tax haven!
This is infinitely better than the system used for Council Tax (CT) and Business Rates (BR) which starts with an LA letter addressed to "The Occupier".
What if there is no "occupier"? What if the owner refuses to respond? What if there is no tenant?
There is a far greater churn of tenants than there is of freeholders - and each time the LA has to start with a letter to "The Occupier".
CT and BR can be a difficult to enforce - partly because tenants can disappear.
- "Open market value": what someone would pay for the land given its location and its permitted use.
- "No exceptions": LVT is paid on the value of all land, no matter where it is or who owns it.
Exceptions are the kiss of death for a good tax and the lifeblood of tax advisors etc. "Simplicity" and "no exceptions" are the essential bedfellows of any good tax.
The beauty of the lien
Liens are brilliant, so brilliant that banks and building societies have been using them forever.
Liens are a charge or debt against the value of an asset. In the case of a mortgage the bank places a lien against the property and it is recorded by the Land Registry. When the property is sold, or when the owner tries to take out another loan using the property as security, the lien will be spotted instanty and, until it is paid off, nothing more can be done.
Liens solve problems in a simple and elegant way.
"I'm a non-dom - you can't catch me!"
Imagine the freeholder of some land is a company or individual "resident for tax purposes" outside the jurisdiction of HMRC - Necker Island in the British Virgin Islands (BVI) for example.
How can we enforce the payment of LVT?
- We ask nicely by sending the bill.
- Time passes (a few days) and the bill isn't paid.
- We send another, slightly less nice, letter as a reminder.
- Time passes (a few days) and the bill isn't paid.
- We send a stern "last chance" letter as a reminder.
- Time passes (a few days) and the bill isn't paid.
- Do we "send the lads round" - on a plane to the BVI - to "sort things out" after a "chat" with the freeholder?
- No - we slap a lien, with punitive cumulative interest (5 x bank rate), on the land.
- The next time the land is sold or transferred the value of the lien is recovered.
- If the value of the lien exceeds the value of the land we sell the property to recover the lien.
- The balance (if any) is held for the freeholder to collect the next time he/she is in the UK and under UK tax jurisdiction.
Job done. No messing about. Couldn't be simpler. I love liens!
For the non-lien lover
Some people don't love liens - hard to understand but fair enough - à chacun son goût. (Pretentious? Moi?)
An alternative method has been suggested for collecting LVT from those outside UK tax jurisdiction.
We go through the same process of bills and reminders but, instead of taking out a lien:
- We notify the occupier/tenant of the property that the rent (or a portion to the rent) should be paid to HMRC not to the freeholder.
- We notify the freeholder that this has been done.
- We revert to a "normal" arrangement when the LVT has been paid.
I don't like this because:
- We are back to the problem of having to identfy the owner/tenant.
- There may be no owner or tenant.
- There may be no rent being paid.
- The rent may not match the LVT due - or may be less than the LVT due.
- We would need to know the rent before we could decide what to do.
- Imagine the panic of the tenant when our letter arrives on the doorstep?
- Imagine the tenant's response to "part of your rent should now go to HMRC, the remainder to the freeholder".
- We are placing an unfair duty to pay on the tenant.
- A tenancy is a contract. The freeholder will sue the tenant for breach of contract.
- HMRC is inciting the tenant to breach a contract. The Freeholder will sue HMRC.
- The freeholder will attempt to evict the tenant.
- We now have to support the tenant with legal advice and possibly with a lawyer.
- It rapidly becomes a legal nightmare - though it will keep the lawyers happy.
- In all of this the poor, innocent tenant is being dumped with stress simply to help us collect LVT that should have been paid by someone else.
- We have turned the tenant into the agent of the freeholder!
- This isn't fair.
Land is a great thing to tax
Clarification: LVT doesn't tax land, it taxes land value - a very different thing.
The Common Agricultural Policy (CAP) is a grant paid by land area - no matter where the land is, what quality it is or who owns it. Billionaires get it (James Dyson gets over £1.6 million each year) and hard-pressed small farmers get it. Sometimes it is grabbed by the landowner, sometimes it gets down to the tenant.
LVT is not based on land area - it is based on open market value - see above.
Land has great advantages for a tax:
- You can see it.
- You can touch it.
- It doesn't move about.
- It is finite - they aren't making it any more.
- You can't hide it in a safety deposit box or a tax haven.
- You know who owns it - or you will do when the Land Register is completed during the first stage of LVT implementation.
The Land Registry already has details of every land transaction since 1862 so it won't take long (six months?) to complete. Unregistered land will return to state ownership.
The Driver and Vehicle Licensing Agency (DVLA in Swansea) records details of every driver and vehicle in the country - and it is pretty efficient.
Recording details of all land and all freholders in the country is a simple job - it ain't rocket science!
One difference is that the Land Registry is public while the DVLA is private - but available to "authorised agencies". The online Land Registry means we can see who owns what and what LVT is being paid - though the current search functions need considerable improvement and should be free to all.
Some people have objected that this is an invasion of privacy. It isn't - the information is in the public domain.
From the Land Registry you can find the details of all property transactions - including details of those involved and the price paid.
From other online sources you can find the Council Tax band any property is in and from any Local Authority web site you can find the tax being charged for each Band
The systems side of things
Sorry, this is my speciality, this is what I have spent a lifetime doing.
Government has a long history of failed IT systems and large corporations, mainly American, have screwed the UK taxpayer out of millions, possibly billions.
Why IT systems fail
The primary reason is the one IT contracting companies love: the customer moves the goal posts.
This is not something that happens sometimes - it happens every time, guaranteed, 100%.
So, the process goes like this:
- IT companies know the goal posts will be moved so they go in with a perfectly reasonable, and fairly low, quote to get the job.
- Having got the job, based on the 2,927 page written specification produced by the customer, the IT company starts work.
- The customer wakes up, realises they have forgotten something, or sees an opportunity to add a new feature with "a minor tweak".
- The contract has been signed and the IT company is working to the original spec.
- The IT company now has to cost the new work and adjust the quote - upwards - always upwards!
- Adding something, or tweaking something, always has knock-on effects ("unforeseen consequences") that can bring systems to their knees.
- The IT company legitimately claims that it has to look at the ramifications of any change - and that is expensive.
- More and more changes appear as the customer watches the system taking shape.
- Every change is costly.
- No system will come in at less than double the original cost - that's why the IT companies can quote low in the first place!
- If the system looks as if it will come in at less than double the original price the IT company just goes broke and lets the customer worry about it.
Aircraft engines are sold at almost cost price to get the business. The profits come in service, maintenance and spares.
Government IT systems start low but the real money comes as the goal posts are moved.
Having said that, the civil service is getting much better at controlling this sort of thing. Think how the details of many millions of vehicles, drivers, MOT certificates, licence endorsements etc. are processed by DVLA in Swansea.
From a systems point of view the NHS is the most complex system in the world - but my recent personal experiences are that the IT side of it is pretty darn good (well, it is in Derbyshire!)
When I started in system design we were scratching around for memory to store our programs and disk space to store our data. We went to very complex lengths to keep things as tight as possible.
These days 4 terrabytes of data (4 x 1024 x 1024 x 1024 x 1024 characters) can be stored on a single chip! There is no longer a problem with volume.
A system designed today should be able to handle the sort of data volumes that would last 100 years. (Caveat: "should" doesn't always mean "will".)
The LVT system
Unlike the NHS, the LVT system is very straightforward because:
- We know the freeholder for every piece of land in the country - or we will do when the Land Registry completes its work at the start of LVT implementation.
- We know the value of every piece of land in the country - or we will do when the Valuation Office Agency completes its work at the start of LVT implementation.
- The number of freeholders will be fairly static because, unlike tenants, they don't tend to move around a lot. Every change of freeholder is recorded by the Land Registry.
- Land will change value as it changes use within the planning system - from agricultural to housing for example. That will be picked up by the VOA (as it is already) and reflected as a new value for LVT calculations.
- We have a simple way to deal with people who can't pay or won't pay - a lien on the property.
There is a lot of data here (less than at DVLA and infinitely less than in the NHS) but the processing is very straightforward.
Methods of payment could be done by linking to other systems. For example, LVT could be paid via the PAYE system as payroll deductions. However, this is not essential to begin with and LVT could stand on its own with the data from the Land Registry and the VOA.
My preference would be to start simple, keep it self-contained within the HMRC systems, but design it so that links can be added later without suffering the moving goal posts problem!
The moral dimension
We know, talking about "the moral dimension" is a big turn-off - it makes us look like do-gooders - and there is nothing more boring than a do-gooder!
There are some people who are totally selfish, who think only of their own self-interest or the interest of "people like me" - the people they went to school with or the people in the same social circle. However, most of us are decent human beings, we aren't psychopaths, we are empathetic and we want to feel good about ourselves, to be happy in our own skin and to make a positive contribution to society.
All we ask is that each morning, every banker, financial trader, PR person, tax advisor, tax accountant and tax lawyer looks in the mirror and asks:
We hope that, instead of focusing on ways around the current system, they apply some of their brain power to making it simple and unavoidable. We would love to hear their ideas.
Of course, that may mean we need fewer of them - but they are clever people, their talents will be welcomed elsewhere in more socially useful and rewarding jobs - and they will feel better when they look in the mirror. That's what life is about: feeling comfortable in your own skin and knowing you have done some good.
Teachers can do it, nurses can do it, doctors can do it - in fact most of us can do it - we can look in the mirror and feel good about ourselves - we do a worthwhile job.
End of lecture!
Bad law is unfair, opaque, complex, difficult to understand and easy to avoid. The more clauses it has, the worse it is.
Good law is fair, clear, simple, easy to understand and impossible to avoid. The fewer clauses it has, the better it is.
LVT is good law.
It has been suggested that we allow exceptions to LVT, for example:
- The LVT from agricultural land amounts to very little in the grand scheme of things. It also raises the possibility of annoying the rich and powerful - let's not bother.
- The National Trust is sacrosanct - we can't possibly tax it.
- Places like Chatsworth and other stately homes are "national treasures" - we can't tax them.
- We can't tax military firing ranges - they are armed!
- It's not fair to tax listed buildings - they cost so much to look after.
- We shouldn't tax social housing - that's not fair.
- It's not fair to tax property used by charities.
- Councils shouldn't pay tax on the land they own.
- We can't tax small farmers - they won't be able to make a living!
- We can't tax grouse moors - think of the poor grouse.
- We can't tax Balmoral, the Queen lives there and she never carries money.
- My gran couldn't afford it - we can't tax her.
Land has value because it can be used for economic gain and freeholders can sell it if they wish.
There may be a small amount of land that has no economic value and which can never be sold - it has zero open market value.
There are other ways to deal with things if you want taxpayers to subsidise land that has economic value.
Every exception allows one of these:
to drive one of these:
through the law.
- Exceptions make bad laws.
- Exceptions create loopholes.
- Exceptions got us into the mess we are in now.
- Exceptions lead to trusts.
- Exceptions lead to tax havens.
- Exceptions lead to happy tax advisors, tax accountants and tax lawyers.
We want people to be happy, but not at our expense and not at the cost of bad law.
Please, please, please - Keep It Simple!