Rolls Royces and Canned Carrots

True stories of the absurd consequences of government's meddling in business

Good evening. I'd like to hire one of your cars for a wedding."

"Certainly, sir. Can I have your address and so forth, and I'll give you a quote."

"Well, I live in Dartford, and I—"

"Sorry, sir, we can't do any jobs in Dartford!" "But my daughter Linda has her heart set on having one of your lovely Rolls Royces for the big day!"

"Well, if you lived anywhere else, sir, we could help, but not in Dartford, sir."

"This is ridiculous—what do you have against us in Dartford? If you're worried about being paid, we'll let you have the relevant amount in advance."

"No, sir. It's nothing personal, and I've nothing against Dartford. We used to have a lot of good jobs down that way.

"It's like this, sir. Some time ago, Parliament passed a bill giving local councils the power to make very strict rules about private hire (car rental) firms. Now, in this area, only Dartford has chosen to bring in such rules.

"First, Dartford authorities told me that if I wanted to do any jobs in their borough, my drivers would all have to take a medical. Now, we only have three cars, but I use about 20 part-time drivers in a year. At £10 per man for the medical, that's 200 quid!

"Next, they said that my cars would have to be inspected by one of their mechanics, and could they all be driven to their garage? Well, sir, all my cars are Rollers and the warranty on the engines says that only Rolls Royce–trained mechanics can touch them—or the warranty's no good. Do you think that Dartford has a Rolls-trained mechanic?

"But the real killer was the next one. The council decided that no car more than five years old would be allowed to do private hire work. Well, sir, as you know, all our cars are veteran and vintage white Rolls Royces.…"

The conversation continued for some time. Eventually, the proprietor said to his would-be client, "If your Linda's so keen to have one of my cars, I'll come and do the job myself—for free. The regulations only cover jobs that are 'for hire and reward,' so it'll be okay if I don't charge."

His offer was gratefully accepted, and a few months later he did indeed do the job at no cost to the bride's parents. However, the story of his kindness in the face of such bureaucratic nonsense had spread, and on the big day the national press turned up to cover the "free ride." "Rolls Bride Cuts Red Tape" was just one of the subsequent headlines, and the press reports detailed precisely why the car-rental proprietor could not charge for the job.

Naturally Dartford's council took quite a beating, and it retaliated. A few days after the wedding (in late 1978), Dartford legal officers began a court case against the car-rental proprietor, claiming that his actions had generated substantial publicity for his firm and that this publicity was so valuable that it constituted "for hire and reward."

The case eventually fizzled out. And by listening to solicitors and others who know how to interpret and advise on the regulations, the proprietor learned to avoid such future legal confrontations. He was told that as long as a job starts outside the borough and is one continuous job, with no breaks to pop off and do another quick job elsewhere, then he may accept weddings in Dartford. Consequently, when contacted by potential clients in that area, he now starts off by saying: "Yes, we can do it. But I'm afraid you'll have to bring the groom to the borough boundary and drop him off a few yards this side of it!"

So if you are ever in Britain's Dartford area one Saturday and see a groom getting into an old white Rolls Royce a few yards before a sign that reads, "Welcome to Dartford," you'll understand what's going on.

As a private economist from 1976 to 1982, with Britain's National Federation of Self Employed and Small Businesses (NFSE) as my main client, I saw dozens of cases—like the one above—of government interference with small businesses. And from my observations in the United States, there are few major differences between the position of small businesses here and in the United Kingdom.

Founded in 1974, NFSE—Britain's equivalent of, in the United States, the National Federation of Independent Businesses—grew almost overnight to its present membership level of about 50,000. Though the organization was established just as Labour swept back into power—and much of its spectacular growth can be attributed to a fear of socialism—its creation was prompted by a proposal of the outgoing Conservative government, Edward Heath's, to introduce an extra 8 percent tax on the earnings of the self-employed.

For the most part, the federation takes a fairly principled position. Its membership overwhelmingly favors competition, free entry to the marketplace, and denationalization and opposes subsidies, tariffs, high taxes, marketing boards, and bureaucracy. Occasionally the federation is beguiled into an interventionist position—more through naivete than a conscious decision—but such lapses usually are promptly rectified.

From its earliest days, NFSE not only acted as a pressure group but also as a troubleshooter sorting out members' problems. This latter role was adopted somewhat reluctantly—after all, what were self-employed accountants and solicitors in business for? Partly, of course, to sort out problems. Nonetheless, cases keep flooding in from members.

While I worked for NFSE, hardly a month passed when I didn't see some small business victimized by government meddling. Planning regulations, licensing laws, value-added tax, wages councils, employment-protection laws—all these created a continuous stream of cases that, if they had not caused so much worry, aggravation, and expense—not to mention several suicides—would have been a great source of mirth. The following few tales further illustrate the personal and economic havoc governments end up inflicting upon small-business proprietors when they get into the business of regulating business.

Bill Bedward is a former Guards officer and Dunkirk veteran. In 1964 he opened a restaurant on the outskirts of Bournemouth, Hampshire. It was a family business; his wife helped, as did his son.

In 1973, Britain's Conservative government introduced the value-added tax, and Bill duly registered with the tax authorities as required. Despite the complexities of the VAT—which is a tax assessed on each mark-up of a good at the various stages of production or distribution—Bill managed for several years to comply with all the requirements.

In 1977, however, VAT inspectors began to inspect his premises, both overtly and covertly. One group of inspectors began calling officially to go through Bill's records, while a second group started coming regularly to eat at Bill's restaurant, without identifying themselves.

After a few months' work, the VAT inspectors claimed that Bill had underpaid his VAT by £8,000 (about $40,000 by today's standards), a considerable sum of money for a small business. Slowly but surely Bill's professional advisers began to chip away at this claim, managing to bring the figure down to £4,000, and eventually to £1,500 (about $7,500 today). But the VAT officials refused to go any lower.

Knowing that he was innocent of tax evasion, Bill decided to appeal to the VAT Tribunal in London. Not only was he moved by his belief in his own case and by the money in question; he was further motivated by the attitude of the VAT officials. At one interview, for example, Bill had asked, "Are you calling me a thief?" only to be told, "Yes!" And on another occasion, officers attempting to work out the mark-up on every menu item asked such petty questions as this: "How many prawns do you put in a vol-au-vent?"

At the two-day tribunal, Bill was once faced not just with the three official members and their clerk but also with a team of six VAT officers. One by one, Bill knocked down the remaining VAT claims on his business.

Typical of these was the claim that Bill's records showed a high percentage of wastage on steak (the value of which Bill was permitted to deduct from his VAT liability). However, Bill pointed out that he bought untrimmed steaks, which he then trimmed himself. The VAT officers had assumed that he bought trimmed meat, despite Bill's inviting them to witness a meat delivery and his trimming, an invitation that the officers had refused. Indeed, it was not until during the tribunal hearing itself that Bill was given a chance to demonstrate his steak trimming.

Another demonstration followed. Bill served carrots with many meals. The officers had determined that an average portion of carrots weighed 5 ounces—Bill concurred. From this point, however, their claims diverged. The VAT men claimed that since a can of carrots weighed 19 ounces, Bill should get at least three portions from each can. This, they said, would mean a mark-up of 428 percent. Bill claimed he only got two portions out of each can, working out to 230 percent mark-up. Fortunately, Bill had come well prepared and defiantly produced a can of carrots.

Lord Grantchester, the Tribunal's chairman, halted the proceedings to send a VAT officer out to buy a can opener and scales. On his return, the scales were set up, the can opened, and the carrots weighed.

On the face of it the VAT men had a good case: the contents did indeed weigh 19 ounces. But the officers had forgotten to account for the preservative solution—as the tribunal witnessed, the carrots weighed 10 ounces (Bill's two 5-ounce portions) and the solution 9 ounces.

In his report, Lord Grantchester found for Bill on all counts. He went on to award full costs to Bill, costs that the VAT lawyer opposed most strenuously.

Victorious, Bill returned to Bournemouth to pick up the reins at his restaurant, The Crooked Beam. That night he collapsed and was immediately admitted to the hospital. A year of investigations, slanders, claims, worry, and aggravation had taken an inevitable toll.

Some weeks later I took Bill to see his M.P., David Atkinson, at the House of Commons, to ensure that the matter was pursued further. Bill was still shaky, the lines on his face so deep that John Wayne would have looked like a fresh-faced baby in comparison.

"It doesn't matter to VAT officials," he said, "if costs are awarded against them, because it is not their own money. But if I had lost the appeal, it would have bankrupted me. I want to make sure this sort of nightmare does not happen to anyone else."

Bill was stronger than many, and he survived. Others did not. Each year, during such investigations, there were a few suicides.

There was the pub owner who had a dispute with the tax authorities over the correct percentage of beer wastage to use in figuring his tax accounts. He was found in his beer cellar, gassed, with a plastic bag over his head.

There was the antique dealer in North Wales who, during a tax investigation, blew his head off with a 12-bore shotgun. At the inquest the coroner called him "Mr. Honesty."

And there was the elderly businessman who had fled to London from Nazi Germany. One night when he was sitting down to dinner with his children and grandchildren, VAT officers raided his home. While the place was ransacked, the family was separated and held for hours, not even allowed to visit the bathroom alone. After the VATt officers left, the family went to bed. The old man stayed up, and in the early hours he hung himself. A few days later, several hundred self-employed businessmen demonstrated outside the main London VAT office, on Shaftesbury Avenue. Some of the VAT staff responded by leaning out of the windows and making obscene gestures.

In the late 1960s, Harold Wilson's Labour government attempted to move employees from the growing service industries into the declining manufacturing industries. To this end it introduced a new tax, the Selective Employment Tax (SET). All service-industry employers were to pay the tax on every employee every week. Wilson's reasoning was that it would make the service industries shed laborers, who would then move to manufacturing.

The SET had a peculiar effect on the building industry. Until the SET was passed, construction workers tended to be "on the cards"; that is, they were employees. Since the new tax did not apply to self-employed people, however, many contractors told their men to "come back Monday on the lump"—that is, as self-employed workers receiving lump-sum payments (leaving it to the now self-employed workers to pay their own taxes, rather than having them withheld). This device, while not strictly legal under contract law, enabled the contractors to avoid millions of pounds in tax.

Many of these newly self-employed men, however, did not realize the implications of their change in status. All they knew was that they had more cash in their pockets every Friday night down at the pub. So after a year or so had passed, a number of them began to get into trouble with the Inland Revenue, Britain's version of the IRS. Some disappeared back to their native Ireland, and some began to use false names and addresses.

The Heath government eventually abolished the SET in the early '70s, but by then self-employment had already become the norm for many building workers. The Revenue fretted over losing out from unpaid taxes and in the mid '70s persuaded the Labour government to act. A draconian scheme was introduced: All "reputable" self-employed builders who were up to date with their taxes were to be issued with photo-identity cards, known as 714s. Contractors were to make no payments without such a card being produced. If a self- employed laborer couldn't show a card, the contractor had to deduct 35 percent of the worker's pay and forward it to the Revenue. Naturally, a worker not up-to-date with his tax would not receive a card.

When Adrian Alderslade, a young builder from Gosport, Hampshire, applied for a 714, he had a beard. He had his photo taken, filled out the papers, and sent them off. A few months later he was called to his local tax office to pick up his card. At some time during those few months, however, Adrian had shaved off his beard. The Revenue officer consequently refused to issue the card and suggested Adrian reapply with a new photo.

"How long will you keep the card here before you send it back?" asked Adrian.

"It will be returned at the end of the month, in two weeks time," replied the taxman.

"Okay," said Adrian, "I'll call back on the last day of the month."

He returned home, stopped shaving, and two weeks later went back to the tax office sporting a beard. The Revenue issued the card; Adrian then went home and shaved off his beard!

For many small businessmen the value-added tax is, in theory at least, simple. But the administration and paperwork can be a different matter.

Take a typical VAT-registered trader. In the first quarter of '83 he sells, say, £20,000 worth of goods. At a VAT rate of 10 percent he would collect 2,000 in tax. In the same quarter he has bought £5,000 in supplies, on which he has paid £500 in vat. At the end of the quarter he deducts the VAT he has paid (£500) from the VAT he has collected (£2,000) and sends in the balance (£1,500). It seems simple.

To accommodate for the peculiar circumstances of certain industries, however, various special schemes were devised. One of these is for second-hand dealers who buy items from the public and sell them to the public.

Joe Corbitt of Newcastle Upon Tyne was a coin dealer and typical of such traders. A regular trader would charge £10 VAT on an item selling for £100. However, Joe was on the "margin" scheme. If he bought a coin for £90 and sold it for £100 he charged VAT only on the margin, that is to say, 10 percent of £10 (£100–£90) or £1.

To run the scheme, Joe had to keep a huge 13-column register. When he bought a coin, he filled in the first six columns: the item number, a description, name and address of seller, the date, and the price. When he sold it, he filled in the next seven columns with similar details as well as the margin and the VAT due.

To begin with, everything went well. Joe had a number of inspection visits and passed with flying colors. Then one day in 1977 a new inspector called. He noticed that sometimes Joe had not filled in every single column, and he took him to task for this. Joe was apologetic, but he made two points in his own defense. First, all the columns relating to money and tax were perfect. Second, the only gaps that occurred were ones relating to details such as the vendor's name and address.

"People walk in off the street," he said. "They ask me to buy items from them, but when I say I need their names and addresses for tax purposes, they often refuse. What am I to do? Turn away business?"

The VAT man wasn't satisfied. He decided that wherever a gap occurred, then that item should be disqualified from the margin scheme. The potential effect of this on Joe's tax bill was enormous. Remember, if he bought an item for £90 and sold it for £100, he charged £1 in tax. What the VAT man was asking for, though, was £10 in tax, £9 of which Joe had not collected and would have to pay from his own pocket.

Joe was not happy. "I'll appeal," he said.

"You can't," said the VAT man. "My decision as to whether or not to accept your paperwork is final."

But Joe did appeal, and after a two-day hearing, his local tribunal decided that it had the authority to look at his paperwork and to decide whether or not it was acceptable. Before the tribunal had a chance to do so, however, the VAT lawyers halted the proceedings and appealed the question of the tribunal's authority to the High Court.

With NFSE funds, the fight continued. The High Court said the VAT man had the final word and there was no appeal, but a few months later the Appeal Court overturned this decision. Eventually, in 1980, the case came to the House of Lords, Britain's highest court, which in turn overruled the Appeal Court and found for the VAT men.

Joe lost, but his efforts were not entirely in vain. The obvious injustice of the situation had attracted much press and parliamentary attention. And within the year, Parliament amended the VAT legislation to give more authority on VAT matters to local tribunals and less to VAT officers. So while small-business owners are still subject to the VAT, there is likely to be less injustice in its administration.

The NFSE's files bulge with hundreds of such cases on a bewildering number of topics. Some additional examples:

David Prigmore, a demolition contractor, lives near Bedford. Before he can do a day's work, he must have 16 different licenses, registrations, certificates, or permits. The first five are required because he operates a lorry and the next four because he is in the building industry. Since he extends credit, he needs two credit licenses. Then there are his VAT registration, national insurance card, business-name registration, and two types of planning permits (one for his yard and office and one for each job he tackles). Total: four certificates, five registrations, and seven licenses—none of which has anything to do with his ability to demolish or dismantle dangerous structures!

Barrie Tinker owned a tiny cafe on Bodmin Moor. Over a single year it had lost £3,369, so in the spring of 1981 Barrie decided to close it down. His sole employee, Jean Webber, was very upset. She liked her job, and in a remote area like Bodmin, with already high unemployment, she would be unemployed for the foreseeable future. However, she had an idea. Prime Minister Thatcher and Mr. Tebbit, the Employment Secretary, were forever telling people to "price yourself into a job." So Jean went to Mr. Tinker and offered to take a wage cut sufficient to allow the business to stay open. He agreed to her plan, not realizing that it was illegal. Under legislation first introduced by Winston Churchill in the early '20s, about 20 "wages councils" had been established to set minimum terms and conditions for some 2.5 million employees in industries dominated by small firms with little or no trade-union presence.

Jean and Barrie's agreement was discovered by the authorities, and Barrie was prosecuted by the Wages Inspectorate. Fortunately, however, he appeared before sympathetic magistrates who imposed the minimum possible fine and ordered him to pay Jean the legal minimum wage for only one week (thereby, in essence, leaving any future arrangements entirely up to Barrie and Jean).

Then there was the Liverpool pub owner, James Shinner, who ran The Sportsman. In this case, the VAT men caused their mischief by using a method of determining Shinner's turnover that is both inaccurate and all-too-common in the case of pubs and restaurants. As with Bill Bedward above, they started by making secret visits. Their main concern was the lunches he served as a sideline. Two meals were available: chicken and chips, or scampi and chips, both with peas.

From their visits, the VAT officers determined that 60 percent of the patrons ordered chicken and 40 percent scampi. They also discovered by lunching at The Sportsman several times that there were 30 chips in a typical portion, that a typical chip was 2½ by ¼ by ¼ inches, and that a typical portion of peas numbered 70. They knew the prices of the respective dishes and, from the accounts, the total tonnage of potatoes and amount of peas purchased in a year.

All they needed to do now was to work out the weight of a typical portion of chips. With this, they could calculate the total number of such servings and, from this figure, the turnover of the food side of the business. They could then presumably double check by dividing the total number of peas purchased by 70!

Returning from the pub one day, the VAT officers purchased a bag of potatoes and a potato peeler. In their office they cut 30 chips of the appropriate size, weighed them, and got busy with the calculators.

Let me illustrate. Say the portion of chips prepared by the VAT officers weighed 4 ounces and the pub had bought one ton of potatoes. The calculators showed 8,960 portions; 5,376 (60 percent) with chicken and 3,584 (40 percent) with scampi. If the chicken dish cost £1 and the scampi £1.50, then the turnover must equal £10,742.

On the basis of this exercise, the tax authorities asked Shinner for an extra £746.93 in VAT. Shinner appealed and took his case to the VAT tribunal. The tribunal selected 30 of his chips at random and found that they weighed not 4 ounces but 8 ounces. The VAT officers' whole case against Shinner had been built up like a pyramid on one figure. Fortunately, the cornerstone was rotten and the whole structure came tumbling down.

Many, if not the vast majority, of the problems Britain's small-business owners face are caused by government interference. The same could probably be said of American proprietors of small businesses. Such interference is of itself bad enough; but matters are made even worse by the fact that the politicians and bureaucrats who enact and enforce the regulations are, for the most part, completely and utterly ignorant of what it is like to operate a small business and ignorant of the sort of people who do so.

In the United Kingdom, small businesses are run, on the whole, by people who are very good at doing one thing, say plumbing or book binding, but are not necessarily competent to deal with paperwork and handle complex rules and regulations. Educational statistics show them to have far less formal education than their employed counterparts. They may be very bright and very good at their jobs, but that is not the same thing necessarily as being good at filling in forms, keeping spotless records, and so on. An illiterate employed bricklayer can go through life without any trouble from the authorities, but an illiterate self-employed bricklayer soon ends up in trouble.

On some issues, British small-business regulations seem to be more draconian than those in the United States, and on others the American laws seem more damaging. Product liability is certainly more of a problem in the United States. Martyn Hopper, chief lobbyist in Sacramento for the National Federation of Independent Businesses (NFIB), tells, for example, about a lady who put her wet cat in a microwave oven to dry it. The cat exploded, the lady sued, and the microwave manufacturer lost! On the other hand, British employment laws on matters such as redundancy payments and unfair-dismissal compensation are more excessive than anything I can find in the States.

The American small-business community seems better organized to defend itself and to promote the conditions necessary for enterprise. Take the NFIB. Its level of funding, its sophisticated lobbying and propaganda, and the extent and impact of its work exceed those of its UK counterpart, the NFSE, by a long way. The sole area where the NFIB is perhaps not as advanced is that of legal protection for its members. For several years now, the NFSE has insured every single one of its members for professional costs in fighting VAT and Inland Revenue investigations and employment, health, and safety cases.

As in America, Britain's self-employed and small-business proprietors are often depicted as tax-fiddling, slave-driving, consumer-swindling, profit-raking scrooges. That politicians and bureaucrats do not live with the same degree of ignominy is an unfortunate circumstance—on both sides of the Atlantic.

John Blundell is director of public affairs at the Institute for Humane Studies in Menlo Park, California.