DEBUG: https://d3n8a8pro7vhmx.cloudfront.net/london4eu/pages/5/features/original/heart_photo.png?1501497680
DEBUG: PageFeatureDrop
DEBUG: blog_post
Capital gains tax and bendy bananas
16 Jul, 2017

Michael Romberg, London4Europe Committee member and retired senior civil servant, looks at bendy bananas and finds that life as really not simpler when regulations go away.

When I worked in the Inland Revenue I was responsible for Capital Gains Tax.

We launched a tax simplification project, working with private sector tax professionals.

I proposed getting rid of a complex rule which specified the order in which shares were deemed to have been sold for tax purposes. The tax professionals were unanimous. Without the rule, tax would be much more complicated.

The rule applies when you have bought shares in a company on different days and sell some of them. All shares are the same, and you cannot really say which ones you sold. But the tax implications are different depending on whether you are deemed to have sold the ones you bought in 2000 for £10 each, or the ones you bought in 2008 for £15 each.

The advisors explained to me that without the rule they would need to work out every possible permutation of sales in order to claim the biggest tax benefit. True, some of their clients would be able to save some tax. But all would pay higher fees. The benefit would not be worth it.

The rule stayed. And I learned a valuable lesson about the nature of government regulation. Life is not always simpler when government just goes away.

Bendy bananas – the EU rule

So, let us look at what is perhaps the most famous of all pieces of EU rule-making and one that the Leave campaign has been and still is keen to get rid of.

Essentially, the EU banana regulations say that all bananas must meet minimum standards (free from pests etc). They then go on to grade bananas – for marketing purposes – into three classes: Extra, Class I and Class II.

As regards bendiness, Extra Class bananas must be free from defects and Class I bananas must have no more than slight defects of shape. Class II bananas may have defects of shape “provided the bananas retain their essential characteristics as regards quality, keeping quality and presentation”.

So your bananas may be as bendy as anything, but fall into Class II. We do not see them in the shops because supermarkets find that consumers will not buy them. Instead they are used in kitchens and factories – for example, to make Smoothies!!

What if the EU rule were abolished?

There are two options:

  1. We could have national rules. The difficulty then is for an importer of bananas who needs to know how bananas that fall into the Spanish categories of A, B and C compare with French bananas in categories i, ii, iii and iv. Moreover, what if some of the Spanish B bananas fall into English Class 1 and some into English Class 2? The bananas would need to be sorted, repackaged and labelled.
  2. We could have no rule. Then the importer will need to think what each producing company means when it says “highest quality bananas”. The cost of checking companies’ claims would be an added cost of doing business.

As I learned with Capital Gains Tax, it may be simpler just to have a single government rule.

And what Brexiteers do not realise is that there are rules like those on bendy bananas in every state and covering every sector. What trade agreements and EU regulations do is harmonise rules like that. Cutting tariffs is no longer a big deal. Simplifying information flows is the future of trade.

Conclusion

According to data on the EU’s Eur-Lex database, there are at present around 19,000 EU legislative acts in force.

Without the EU, we would not have all these rules. Let’s say we had 12,000 of them. As shown above, that may or may not make things simpler for UK businesses and consumers.

But then, each of the other 27 EU members states would also have 12,000 rules. So instead of 19,000 rules, there would be 28 * 12,000 = 336,000. Anyone selling or buying across Europe would face much bigger difficulties than they do now.

And barriers to trade lead to higher prices/lower quality.

Michael Romberg is a London4Europe Committee member and retired senior civil servant. You can read more from Michael on his Facebook page: Campaign for the Real Referendum – on the Terms of Brexit