Archive for the International Trusts Category

UK – VAT(Value Added Tax) is 40 Today a brief history

Posted in Economics, international tax advice, international tax planning, International Trusts, offshore banking, offshore company formations, offshore trusts, Tax Avoidance on April 1, 2013 by John

Value Added Tax (VAT) is a tax on consumption levied in the United Kingdom by the national government. It was introduced in 1973 and is the third largest source of government revenue after income tax and National Insurance. It is administered and collected by HM Revenue and Customs.

VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the European Union. There are complex regulations for goods and services imported from within the EU. The default VAT rate is the standard rate, 20% since 4 January 2011. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children’s clothing). Others are exempt from VAT or outside the system altogether. Under EU law, the standard rate of VAT in any EU state cannot be lower than 15%. Each state may have up to two reduced rates of at least 5% for restricted list of goods
and services. The European Council must approve any temporary reduction of VAT in the public interest. VAT is an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer). It is also a regressive tax: the poorest people spend a higher proportion of their disposable income on VAT than the richest people.

History Prior to 1973:

The UK had a consumption tax called “Purchase Tax” which was levied at different rates depending on the goods’ luxuriousness. On 1 January 1973 the UK joined the European Economic Community and as a consequence “Purchase Tax” was replaced by “Value Added Tax” on 1 April 1973. The then Conservative Chancellor Lord Barber set a single VAT rate (10%) on most goods and services. In July 1974, Labour Chancellor Denis Healey
reduced the standard rate of VAT from 10% to 8% but introduced a new higher rate of 12.5% for petrol and some luxury goods. In November 1974 Healey doubled the higher rate of VAT to 25%. Healey reduced the higher rate back to 12.5% in April 1976. Conservative Chancellor Geoffrey Howe increased the standard rate of VAT from 8% to 15% and abolished the higher rate in June 1979. The rate remained unchanged until 1991, when Conservative Chancellor Norman Lamont increased it from 15% to 17.5%. The additional revenue was used to pay for a reduction in the hugely unpopular community charge. During the 1992 general election the Conservatives promised not to extend the scope of VAT, but, in March 1993, Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994 and the full 17.5% from April 1995. The planned introduction of VAT on domestic fuel
and power went ahead in April 1994, but the
increase from 8% to 17.5% in April 1995 was
scuppered in December 1994, after the
government lost the vote in parliament.
In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on
domestic fuel and power to 5%. After gaining power, the new Labour Chancellor
Gordon Brown announced in June 1997 that the lower rate of VAT on domestic fuel and
power would be reduced from 8% to 5% with effect from 1 September 1997. In November 1997, Brown announced that the VAT on installation of energy saving materials would be reduced from 17.5% to 8% from 1 July 1998. Brown subsequently reduced VAT
from 17.5% to 8% on sanitary protection products (from 1 January 2001); children’s
car seats (from 1 April 2001); conversion and renovation of certain residential properties (from 12 May 2001);
contraceptives (from 1 July 2006); and smoking cessation products (from 1 July

In response to the late-2000s recession, Labour Chancellor Alistair Darling announced in November 2008 that the standard rate of VAT would be reduced from 17.5% to 15% with effect from 1 December 2008. In December 2009, Darling announced that the standard rate of VAT would return to 17.5% with effect from 1 January 2010. In the run up to the 2010 general election there were reports that the Conservatives would raise VAT if they gained power. The party denied the reports. Following the election in May 2010, the Conservatives formed a coalition government with the Liberal Democrats and in June 2010 Conservative Chancellor George Osborne announced that the standard rate of VAT would increase from 17.5% to 20% with effect from 4 January 2011.

All businesses that provide “taxable” goods and services and whose taxable turnover exceeds the threshold must register for VAT. The threshold has been £77,000 since April 2012. It is by far the highest VAT registration threshold in the world. Businesses may choose to register even if their turnover is less than that amount. All registered businesses must charge VAT on the full sale price of the goods or services that they provide unless exempted or outside the VAT system. The default VAT rate is the standard rate, currently 20%. Some goods and services are charged lower rates
(reduced or zero). Registered businesses must pay over to HMRC the VAT they have charged on their goods or service (known as output tax) but they may offset this with the VAT they have incurred on goods or services they have purchased (known as input tax).

A separate scheme, called The Flat Rate Scheme is also run by HMRC. This scheme allows a VAT registered business with a turnover of less than £150,000 per annum to pay a fixed percentage of its turnover to HMRC every 3 months. The scheme is designed to reduce red tape for small business and allow new companies to keep some of the VAT they charge to their customers.

Businesses that sell exempt goods or supplies, such as banks, may not register for VAT or reclaim VAT that they have incurred on purchases. Businesses that sell some exempt goods or supplies may not be able to reclaim the VAT on all of their purchases. However, businesses that sell zero-rated goods or supplies, such as food producers or bookseller, may reclaim all the VAT they have incurred on purchases.

There are currently three rates of VAT:
standard (20%), reduced (5%) and zero
(0%).In addition some goods and
services are exempt from VAT or outside the
VAT system.[1]
The following are the rates applicable to
some common goods and services:
Standard Rated
covered only)
Bottled water
(inc. mineral
Calendars &
(fizzy) drinks
CDs, DVDs &
Cereal bars
Clothes &
footwear (not
for children
under 14)
(postage &
gas, heating
oil & solid fuel
Food & drinks
supplied for
on the
premises (at
cafes etc)
Hot take-away
food & drinks
(inc. burgers,
hot dogs,
Ice cream
Fruit juice &
other cold
drinks (not
Nuts (shelled,
Potato crisps
Prams &
Road fuel
Salt (non-
Taxi fares
Tolls for
tunnels &

Reduced Rated:

Children’s car
gas, heating
oil & solid
charity non-
installed in
Mobility aids
for the

Zero Rated:

Aircraft (sale
Bicycle &
Biscuits (not
Books, maps
& charts (no
Bread, rolls,
baps & pita
leaflets &
services for
Jaffa Cakes)
Canned &
frozen food
(not ice
ready meals,
Clothes &
footwear (for
under 14
& sale of new
Cooking oil
goods sold a
charity shop
for disabled
people (inc.
Fish (inc. liv
Fruit &
Live animals
for human
Meat &
Milk, butter,
magazines &
Nuts & pulse
(raw for
boots &
fares (bus,
train & tube)
(domestic &
(15 tonnes o
Tea, coffee &
Transport in
vehicle, boat
or aircraft
(not fewer
than ten


VAT revenue since 1978/79 as a percentage
of total government revenue:[27]
Year VAT
% Year VAT
1978/79 4.9 7.02% 1988/89 27.2 13.
1979/80 8.0 9.41% 1989/90 29.6 14.
1980/81 11.1 11.00% 1990/91 30.9 13.
1981/82 11.9 9.95% 1991/92 35.3 15.
1982/83 13.8 10.63% 1992/93 37.2 16.
1983/84 15.3 11.09% 1993/94 39.2 16.
1984/85 18.6 12.59% 1994/95 41.7 16.
1985/86 19.4 12.29% 1995/96 43.1 15.
1986/87 21.3 12.94% 1996/97 46.6 16.
1987/88 24.2 13.53% 1997/98 50.6 16.
Estimated Avoidance:

Evasion and fraud

The UK government loses billions in revenue each year due to VAT avoidance, evasion and fraud. In 2006 the loss was estimated to be between £13bn and £18bn, equivalent to £1 for every £6 of VAT due. The bulk of the lost revenue, about £1 in every £8 of VAT due, is due to evasion.[29] Evasion, which is illegal, occurs when registered businesses pay over to HMRC less than they should. This can be done by understating sales or overstating purchases. Evasion also occurs when businesses do not charge VAT on goods and services they provide even though they are legally obliged to. Cash-in-hand jobs by tradesmen may indicate VAT evasion.

In recent years carousel fraud (also known as missing trader fraud) has increased. Criminal gangs trade goods, such as mobile phones, across EU countries. They do not have to pay VAT, as imports from the EU are exempt. The fraud occurs when the criminals sell the goods with VAT in the UK but fail to pass the VAT to HMRC. The goods are often repeatedly shipped round EU countries by criminal gang networks, hence the “carousel” name. According to the HMRC, between £1.1bn and £1.9bn tax revenue was lost in 2004/05 due to carousel fraud.

The European Union Emission Trading Scheme has been plagued by carousel fraud. A loophole in VAT law – the Low Value Consignment Relief (LVCR) – means that goods imported from outside the EU and costing less than a set amount are not subject to VAT. When the LVCR was introduced in 1983 it was set at about £5 but gradually rose to £18. In March 2011 the government announced that the LVCR would reduce from £18 to £15 from 1November 2011.The LVCR has allowed online retailers of DVDs and CDs to avoid VAT by importing the goods from the Channel Islands, which are not part of the EU.
Major retailers involved in this tax avoidance include Amazon, Asda, HMV,, Tesco, W H Smith and Woolworths. The tax avoided each year due to LVCR was estimated to be £85m in 2005, £110m in 2008, £130m in 2010 and£140m in 2011.
The government has announced plans to close the loophole


Opponents of VAT claim VAT is regressive and is paid by all consumers whether they be rich or poor, young or old The poorest also spend a higher proportion of their disposable income on VAT than richest.

An Office for National Statistics report showed that in 2009/10 the poorest 20% spent 8.7% of their gross income on VAT whereas the richest 20% spent only 4.0% of their gross income on VAT. Similarly, the poorest 20% spent 9.7% of their disposable income on VAT whereas the richest 20% spent only 5.2% of their disposable income on VAT. Supporters of VAT claim VAT is progressive as consumers who spend more pay more VAT. The zero rating of food and allowing businesses to reclaim input VAT means that the government in effect subsidises the food industry. Critics also argue that VAT is double taxation as consumers pay for goods and services using income that has already
been taxed. It is also argued that VAT is an inefficient tax due to the numerous
exemptions and concessions.
It could also be argued that, compared to its predecessor Purchase Tax, VAT has encouraged the “throwaway society”.Purchase Tax imposed high rates on
new goods (especially luxury goods) but did not apply to repair services.VAT has
increased the cost of repairs and encouraged consumers to replace goods rather than
have them repaired.VAT also covers second- hand goods (which Purchase Tax did not)
and has discouraged the re-use of goods through the second-hand market


Russian Mini Economic Boom in 2012

Posted in Asset Protection & Tax Planning., Economics, Financial Freedom, international tax advice, international tax planning, International Trusts, Private wealth management. with tags on December 28, 2011 by John

It’s not easy being contrary. But it is where profits are often found.

Take Russia, for instance. It’s a market that has been on a downward slope for much of the year as global investors fret about what’s to come with new elections – now that former-President Vladimir Putin is looking for another tour of duty.

That kindles bad memories of iron-fisted Russian premieres of the old Soviet Union.

And just this month, protestors began taking to the streets of Moscow and St. Petersburg and clashing with police in the aftermath of questionable parliamentary elections.

It’s in moments like these, when non-economic turmoil upsets markets, that you often find the best opportunities.

Russia is the cheapest of all the so-called BRIC nations today. It’s benefiting from what I call “micro booms” – this one in the consumer and in resources and this micro boom means that 2012 will be a good year for Russian stocks.

I was sitting in a small conference room in Zurich, talking with Alex, the former head of private banking in Moscow for a major Swiss bank. Having spent years living and travelling in Russia, he has a knowledge base of the country as deep as Russia’s winter freeze.

Today, Alex still invests in Russia for ultra-high net worth private clients from his office in Switzerland. I searched him out because I wanted a non-American view of Russia.

It’s very easy for American equity analysts to allow cultural prejudices to color their thinking about Russia, especially because of all we’ve gone through with the Great Bear during the Cold War and beyond.

Indeed, Americans like to cut-and-paste their own Western economic and political values and apply them to the rest of the world. That leads them to miss opportunities, because they’re looking at the country through a distorted lens.

Europeans see Russia from a different perspective. And Alex’s take is that “Russia is cheap.”

Back in my hotel overlooking Lake Zurich, I pulled up a list of major Russian stocks to gauge their valuations and see just how cheap they might actually be. And they are cheap – by any measure … and ridiculously so.

I found gads of stocks with P/E ratios in the low- and mid-single digits. The MSCI Russia index, which tracks the market as whole, is now trading nearly 50% below the 10-year average. That’s the kind of cheap that presumes everything in Russia is headed in the wrong direction … but that’s not the case.

Russia is in a pretty good position, economically. Its economy is deeply reliant on oil, and oil-price movements exert big influence on its stock market. At the moment, there are worries about recession in Europe and whether that flows through America and, ultimately, through oil prices.
but that’s the short-sighted view.
America and Europe are busy increasing their money supply, and oil prices will move higher, relative to the dollar – since the two tend to move in opposite directions. And that, ultimately, is good news for the Russian economy and its stock market. 

By Jeff D. Opdyke, Investment Director,

The Sovereign Individual