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Tax Explained (thanks to Stevedog)

VAT was introduced back in the early 60's and there are people out there who still do not understand how it works.

Here is a simple primer (which I have copied from the Wysuckie College for the Totally Dumb accountancy course):

If you are rich and you have a rich man's hobby, for example sailing yachts, flying or setting up a recording studio, then you set up a company to cover this activity. If Customs and Excise query this, you get your accountant to submit a business proposal and projected business plan and they soon fall in line and grant a VAT registration.

Now you can indulge yourself in your new hobby to your heart's content and now and then you take in a little outside work to help cover costs and keep things looking kosher.

But why would you want to do this? Well children, gather round and I'll tell you.

You see, poor people pay taxes. When they earn money, they pay income tax and when they spend money, they pay Value Added Tax. So when a poor person earns £20,000, he only gets to keep about £16,000. Becasue he has to pay VAT on most things, that £16,000 is really only worth about £14,000 to him.

Now lets see how a poor person goes about buying a valve compressor. Well, the price is £1,200, except that he has to pay £1,400 because he is poor. But he had to earn £1,750 to buy that £1,200 compressor.

The rich person not only does not have to pay the £200 VAT, but the entire compressor becomes part of his business and therefore is 100% tax deductable.

This is very important in the UK because in Britain, you can carry losses forward from one year to the next - and the next - and the next . . . So if our rich person 'looses' £100,000 on his studio in 2006, he can sell that house he was renting out at a £100,000 profit a few years later and do so completely tax free. If we factor in interest costs and opportunity costs (i.e. he could have invested that money) that compressor now only cost him £850 or there abouts.

But of course there is so much more to the story.

If our rich person records the local band Raving Jim Grunt and the Pubes and they make it big and earn him a great deal of money, you might be tempted to think that our rich person would start paying taxes for a change. You would of course be totally wrong.

Because he had the Pubes in the studio, he did of course earn £5,000, but the rights are held by Raving Jim Grunt and the Pubes Publishing, Luxembourg. This is fortunate because the management and the record company all have their holding companies for their internation rights in, yes, you've guessed it, Luxembourg.

Even Raving Jim Grunt has his rights company there, though we leave it up to him to handle the Pubes.

These comapnies do not make a profit. They pay out their revenues as wages to, well, their main shareholders. Except that there is almost no income tax in Luxembourg. Particularly if you have children.

Which brings me to our rich person's other hobby . . .
posted by kwacky at 4:11 pm