Short Circuit - How LETS earnings are trested for Tax

HOW LETS EARNINGS ARE TREATED FOR TAX

One of the first questions many people ask about local currency systems is how they are treated for tax. For members, however, the question rarely arises because either their national currency incomes are insufficient to place them in the tax net in the first place or, if they are income tax-payers, because they do so little of any one thing within the system that the tax authorities are happy to ignore the tiny amounts of imputed income involved. "There's nothing like a detailed account of dog-walking or granny-sitting to convince and inspector that further investigation is likely to be less than cost-effective" says Angus Soutar, who has advised British LET systems on tax and worked with Michael Linton to set up Greater Manchester LETS.

As a result, only those members who do part of their normal business or profession through a LET system are liable for income tax on their local currency earnings. For example, if a solicitor agrees to accept payment of his fees in the local unit, he or she would have to declare these earnings for tax at the national currency value they placed on them. Even in a system which nominally tied its unit to the national currency, this would not necessarily be one-for-one but systems using some other basis of valuation obviously have an advantage when it comes to convincing a tax inspector that this should not be the case.

"Two of our members, both alternative health care practitioners, have submitted tax returns listing their LETS earnings" Val Oldaker wrote in the LETSlink newsletter ⁵. She belongs to the Newbury system whose NewBerry (NB) is a time-based unit with no fixed parity with Sterling. "In one case, the inspector took the view that since the standard, listed, rate for the treatment was £20, this meant that the value of the 25NB currency received was £20. In fact, one of the reasons that the alternative health people are so keen on LETS is that they are primarily interested in health, not money, and if a patient who needs help doesn't have any money, they will often be treated for nothing, or very little. If such a patient joins LETS, at least the practitioner gets something, So we managed to convince the inspector that the choice in treating a LETS patient was not between 25NB and £20 but 25NB and nothing. He said that 'as long as you can prove that the practitioner has treated the patient for little or nothing, then we can use this figure as an exchange rate.'"

The other practitioner produced a 25NB cheque which the inspector was claiming was worth £20, endorsed it on the back and handed it over to his receptionist in payment for an hour's telephone answering. "How can you explain the fact this cheque, by your calculation, has devalued from £20 to £3.50?" the practitioner asked. "The officer tied himself in knots trying to be fair, by realising that the value of the NewBerry is dependent on what it is spent on, rather than what is earned. So we'd be taxing spending, not earnings but the Inland Revenue has no way of doing that" Oldaker commented.

The best way out of this valuation problem would obviously be for the revenue authorities to agree to accept any income tax due on a local currency income in the unit in which it was earned but there seems little chance of this and, throughout the world, they insist on payment in the national currency. However, many members of LET systems are equally insistent that if a transaction is completely in the local unit, that unit should also be used to settle any tax liability incurred because a system designed to enable people to manage with less official money is obviously weakened if users are obliged to earn national currency to make their alternative arrangements work.

A lot is at stake here because, if governments accepted locally-produced money in payment of taxes, it would give that money enormous credibility. Moreover, since this revenue could only be spent in the area from which it came among members of the group which generated it, the area would benefit twice: first in terms of the jobs created when the tax was spent and, second, as a result of whatever the spending achieved. The payment of taxes in local units could suit local councils too, since it would give them an additional source of income independent of central government, something they badly need. But national governments are going to be very unhappy to see even a trivial part of their financial power slip away.

Sooner or later, someone who has sent his tax inspector a cheque drawn on his LETS account and refused to replace it with one in national currency will court imprisonment on this issue. In Australia, several systems have opened accounts for the tax authorities and substantial sums have accumulated in them, which the government has refused to touch. In one case, after waiting two years for the their local currency taxes to be used, LET system members spent them themselves on the projects they felt were of most benefit to their area, a wonderful first for true local democracy.

The other major issue dividing local currency earners and the taxman involves the determination of just how much of a particular activity they can do before they are judged to be carrying on a business and therefore liable for tax. So far there is no definitive answer. John Bolger, a former tax inspector who now has his own practice as an accountant and tax consultant in Kilkenny, where he played a leading role in setting up a LET system, puts it this way ⁶ : "The Revenue is not interested in someone who is doing very small bits and pieces. Whether someone is carrying on a business is a matter of degree and a pragmatic approach must be taken. However, if the person is not carrying on a business, whatever he or she receives is not taxable irrespective of whether local units or national currency is taken in payment."

Frank Brennan, perhaps the leading Irish tax consultant, agrees ⁷ : "Nothing in the LET system would bring a person within the tax net who might not otherwise be there. If, for instance, I give someone a lift in my car and even though they might give me a gratuity, that will not constitute taxable income in my hands since I am not in the business of providing taxi services. The position is obviously different for somebody who is in that line of business."

An identical position has been taken by the Inland Revenue in Britain: anything earned from one's normal line of business is taxable, whatever the currency used in payment. Other activities constitute 'social favours' and are tax exempt. In both countries, therefore, there is a strong incentive for anyone paying income tax to forget their day job and do other things entirely when they join a LET system.

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