Tag Archives: moral hazard

The Moral Hazard of Osborne’s Band Aid VAT exemption.

So we learn that Band Aid has been given exemption from VAT by Chancellor George Osborne. Yet again politicians fail to recognise the moral hazard in such decisions, and instead bask in a smug false morality. Can there be a moral justification for the tax authorities arbitrarily discarding their rules, giving preferential treatment to certain high profile individuals or events, charitable or otherwise, just to court popularity or to save the government embarrassment? Meanwhile other event organisers, scrabbling to raise every meagre penny they can, find themselves taxed without redress.

This is not the first time. Michel Platini, president of UEFA said the choice of Real Madrid’s Bernabeu stadium to host the 2010 Champions League final in preference to Wembley was because the UK failed to guarantee that the players taking part would not be taxed. Suddenly an exemption was given for the 2011 Champions League final so that it would be played at Wembley. FIFA also asked for exemption for teams competing in the 2018 World Cup as a precondition of the British bid to host the competition. The London 2012 Olympics was also given an exemption, for otherwise the games would have proved an unmitigated disaster with all the star names staying away. To prevent such national humiliation, the government simply changes the rules in such ‘special cases’.

While all taxpayers are equal, some it seems are more equal than others. The HMRC persists in taxing competitors in all but politically sensitive events, hence international stars will just boycott non-premier UK events. These second division events, which rely on the odd star name to draw a crowd, will become unviable. Some players may even refuse to take part in prestige events like Wimbledon. The organisers of a Diamond League international athletics event held at Crystal Palace, London, on 13/14 August, 2010, had hoped a £166,000 fee would entice Usain Bolt, the 100 and 200 metres world record holder, to compete in a 100 metres showdown with his arch rivals Asafa Powell and Tyson Gay. Bolt was keen; he even agreed to pay the 50 per cent tax on this fee. But he refused point blank to come if he wasn’t given an exemption on his global appearance income. He did, however, compete tax free in the 2012 Olympics, and won three gold medals, lighting up the Games and drawing in taxable revenue from attendees in the process.

The sports industry in the UK could face some serious economic consequences, since if the stars stay away, then so will TV coverage and the paying crowds. The government has suddenly woken up to the threat, and fearing a disaster in the July 2013 Diamond League event that was designed to celebrate the ‘Olympic Legacy’, it offered a “one-off exemption” for Bolt and other superstars. That’s one-off until the next big event that needs the top names.

The government seems unaware of the moral hazard in giving exemptions to the stars in top events or high profile charity shindigs, while journeyman athletes attending second division events and second tier artists still have to pay through the nose.

A ‘fair’ tax system cannot allow arbitrary exemptions at the whim of mere politicians, whatever the virtues of the individual case. For where will it all end? Doling out exemptions to gain votes? And what about all the meritorious but lower profile cases. Osborne has taken the first step down a very slippery slope. He can expect to receive begging requests from every well connected charity in the coming months.