Sales tax is not such an easy money-spinner

THE warnings have been stark – if the cost-cutting drive in the States does not work, taxes will have to rise.

And while Treasury conducts its wholesale review of the tax system, it may do well to look at some of the experiences in other jurisdictions.

It has always had in its back pocket the option of bringing in some form of sales tax – the legislation was approved as part of the zero-10 introduction.

For some it is the easy option, for others it is the nuclear choice.

Take the example of the Turks and Caicos Islands, where the battle over the introduction of a VAT-type tax has been fierce.

It was a measure set effectively to be imposed on the British overseas territory by the UK government.

But a sustained campaign against it has been successful, even though the Foreign and Commonwealth Office still insists VAT would provide a fairer, broader and more stable revenue stream and that without this the burden of taxation will fall on a smaller number of businesses and households.

Each jurisdiction obviously has unique circumstances in their economies.

But the argument put forward in an independent report by Richard Teather, an adviser on tax reform including to Jersey, is that small island economies are not suited to VAT.

It is, he argues, 'administratively complex and expensive to operate'.

VAT was first introduced in France in 1954 and has since spread to most of the world's large countries.

'VAT is still much less common amongst small jurisdictions – and for very good reasons,' stated the Teather report.

'VAT is an administratively very complicated tax, because it is charged and collected at each stage in the supply chain and then generally refunded at the next stage. So a manufacturer will charge VAT to a wholesaler, but the wholesaler will reclaim that VAT from the tax authorities. The wholesaler will then charge VAT to the retailer, which the retailer will reclaim, and so on down the supply chain.'

There is also the difficulty of defining what is subject to VAT, particularly when there are multiple rates and exemptions.

Just think about George Osbourne's 'pasty tax' debacle.

A 2004 UK Treasury Select Committee study found that small businesses spend an average of 1.8 hours per week dealing with VAT administration.

Teather argues that there are easier ways of collecting consumption taxes in simple economies – for example, import duties.

'It is not that a VAT cannot be implemented in a small island economy; Barbados and Jamaica in particular show that it can be done. No, the real question is not whether it can be done but whether it should be done, or if there is a better tax (or combination of taxes) that would be more efficient.'

Several small islands have adopted VAT – the Isle of Man and Jersey among them.

'Jersey introduced a VAT-type tax in 2008, but that was because its relationship with the European Union meant that, although not an EU member, it was unable to charge import duties on goods from the EU, which make up virtually all its imports. The option of an import duty was therefore not available to Jersey.'

None of the British Overseas Territories has introduced a VAT or equivalent tax.

This includes Bermuda, with a population of 64,000, the Cayman Islands at 52,500, the British Virgin Islands with 31,000 people and Gibraltar with 29,000.

The Isle of Man operates VAT jointly with the UK.

Malta introduced VAT in 1995 and repealed it in 1997 because it was so complex and compliance costs were high, before reintroducing it as part of preparations for joining the EU, where it is compulsory.

And then there is the impact on consumers – the argument most often heard in Guernsey against it is that it disproportionately affects those on lower incomes.

The Teather report was commissioned by the Turks and Caicos Independent Business Council.

But the manifest difficulties it highlights for that jurisdiction apply elsewhere.

Many deputies have spoken out in the past against a sales tax – the danger is that when the cost cutting gets difficult, they see it as an easy option to make money.

Evidence from elsewhere suggests otherwise.