Absolutely fascinating about Hodge the Dodge

HM Revenue and Customs is facing legal action over its failure to prosecute hundreds of British customers who used HSBC’s Swiss bank to evade tax.

Online campaign group Avaaz, which claims 40 million members worldwide, has initiated judicial review proceedings against the UK tax office over its decision to offer an amnesty to hundreds of the 3,600 UK customers it identified as potentially hiding money in Switzerland.

OK. So they’re seeking review of the Liechtenstein Disclosure Facility. Essentially, why were these tax cheats allowed to simply cough up and not be prosecuted nor heavily fined?

“In consequence, large sums in penalties have been foregone,” Avaaz states. “Further, HMRC has lost the opportunity to bring criminal prosecutions against those guilty of widespread tax evasion.”

In evidence to parliament this February, the HRMC chief executive, Lin Homer, told the public accounts committee that HSBC customers had been encouraged to use the amnesty. She said 1,100 individuals had settled with HRMC. Asked about the process, she said: “When we talk abut the numbers that went on to settle under this, they will be under Liechtenstein. Of the 1,100, some will already have been in [the LDF] … Some will already have taken themselves into the disclosure, and we think about another 500 went in as a result of us encouraging them to do so.”

This was in front of Hodge the Dodge of course.

Margaret Hodge, former head of Britain’s parliamentary public accounts committee, was among the beneficiaries in 2011 of the winding-up of a Liechtenstein foundation that held shares in Stemcor, the private steel-trading business set up by Hans Oppenheimer, her father.

The shares were brought onshore using a scheme, known as the Liechtenstein Disclosure Facility, that offered reduced penalties and no risk of prosecution for Britons moving undeclared assets back to the UK.

Ms Hodge said she had not been a beneficiary of the Liechtenstein foundation until the shares were brought onshore using the LDF in 2011, and that she had not played a role in setting up or running it.

But the disclosure, reported by The Times, has exposed her to charges of hypocrisy. At issue is whether she should have been more transparent and made a public statement about her interest sooner.

Ms Hodge became one of the UK’s best known politicians in the last parliament by denouncing businesses and individuals over their tax arrangements, and criticising Revenue & Customs for its handling of avoidance. But she has previously made no public statement about the use of offshore vehicles or the LDF associated with the family shareholdings.

Her committee has been particularly critical of the lenient terms offered by the LDF, not least last month during its investigation into alleged tax evasion by clients of HSBC’s Swiss bank.

Just wondrous, eh? Just. Absolutely. Fucking. Wondrous.

So, what Avaaz is really asking for is that Margaret, Lady Hodge, be fined and jailed. Well, let’s be honest here, can’t say fairer than that, can we?

And as a comment on this blog has it (a comment that Ritchie did not allow to be published at his site):

Posted at TRUK – unlikely to survive moderation:

I have to take minor issue with one of the points here.

The only reason for using the LDF is to declare tax evasion, not avoidance. Using the LDF guarantees no criminal proceedings and minimises penalties for the evasion. Avoidance is not illegal, therefore there would be no purpose to using the LDF. I think we can safely assume evasion took place here.

Whomever carried out the evasion, whether Ms Hodge or not, has used this facility to avoid criminal proceedings. I had a similar case with a client and a secretive European trust which we disclosed under the old Swiss regime for similar reasons. She had no idea she was a beneficiary (despite being in her late 80s, early 90s from memory), and the Trust was so secretive is was a nightmare getting information on the income which had been omitted (and, needless to say, which she had not seen a penny of. However, tax doesn’t work like that: as beneficiary, she was obliged to declare the income and pay tax). I don’t believe we ever did find out who the Trustees were; the only reason it came up was the Swiss bank which held the Trust’s funds wrote to her as part of the UK-Swiss agreement going on at the time. How they knew she was involved we never did fully find out..

But I digress. It is entirely possible in my view that Ms Hodge knew nothing about this Trust at all until recently, as she has stated. However, that does not mean that if she was beneficiary she is not guilty of tax evasion. Ignorance is no excuse in the law. I find it less easy to accept at face value that she was not a beneficiary prior to this point (albeit ignorant of the fact): who has she received the shares from? We can only assume it is a close family member (unfortunately random strangers are not in the habit of passing on shares in companies to people they don’t know), in which case why pass shares on to someone in the family who has no need of them (I think it fair to state she doesn’t need the money). It doesn’t pass the smell test that she has only recently inherited shares from a family trust. Who were the previous beneficiaries? In family trusts this would normally be the previous generation. Are they really still with us? Beneficial ownership would have passed to Mrs Hodge on their death.

What this highlights to me in particular is the dangers of strict liability for tax evasion, which I believe you are unfortunately a supporter of Mr Murphy. It is possible, and we have now seen, for people to be unaware of income for completely innocent reasons. But a beneficiary of a Trust must declare to HMRC; to fail to do so is evasion.

Perhaps you might speak privately with Mrs Hodge for the real details. If my suspicions are correct, then I would hope you revise your position on strict liability.

Ahem:

Margaret Hodge, the chair of the public accounts committee in the last parliament, who has since been revealed to have used the Liechtenstein facility to disclose her own tax affairs, criticised the procedure as sending a “really rotten message” to tax evaders.

HMRC’s handling of the Falciani files in effect told them “it’s a risk worth taking”, she said. “The worst that can happen to you if HMRC can be bothered to catch up with you is that you may have to pay, you won’t have a prosecution, you won’t have any shame, you won’t be an example to anybody else, you’ll get away with it.”

I think it would be fair to point out that she said that before she was revealed to have used the Facility.

28 comments on “Absolutely fascinating about Hodge the Dodge

  1. I always thought that Hodge’s (and the LHTD’s) jihad was entirely coherent with having skeletons in various cupboards in tax havens.

    Anyway, someone with deep pockets and an evil streak should name Ritchie as a beneficiary (even a small one) to some offshore trust, just to watch the fireworks.

  2. Hmmm.

    One point. Reduction of penalties – which are payable on avoidance as well as evasion – provides a further motive to use the LDF in addition to avoidance of prosecution.

    I think.

    Doesn’t excuse the breathtaking hypocrisy of Hodge the Bodge of course.

    I do hope that Murphaloon has an Anstalt somewhere, just for laughs.

  3. PS Is there potential for Hodge the Kludge to be held to account under Parl. Procedure for this? Perhaps bring Parliament into disrepute?

  4. Yet another argument for moving to a consumption tax, rather than an income tax. This would also make everyone a non-dom. Your income (whether from labour or capital) sits in a tax-free savings account until you decide to move it to your current account, at which point you pay tax. This would work just like pensions today, only you could withdraw money at any time.

    You can even keep the money offshore, like Hodge; and only be taxed on it when you move it to your UK current account.

    How much money would the exchequer stand to lose under this arrangement? Would it be worthwhile?

  5. Matt, no, there are no penalties for tax avoidance. Penalties are a percentage of the tax that was due but not paid when due; if it was genuine tax avoidance there was no tax due.

    And under the LDF you pay tax, interest and a 10% penalty – which you wouldn’t do if you had properly avoided tax, only if you had evaded it and thought you might be stung for much worse.

    Having said that, there will be penalties for failed attempted tax avoidance, that is if you thought you had avoided tax so that nothing was due, but actually you’d screwed up and it was due. And so you might use the LDF if you weren’t confident enough that your tax avoidance works.

    So the best she could say is that they had tried to avoid tax but weren’t very good at it.

  6. Like Hodge, I only have a basic understanding of tax. Can someone point out any errors in my thinking here please:

    – Hodge received these shares as the beneficiary of a trust
    – She did not personally set up the trust, so has not taken any steps to engage in tax planning/mitigation/avoidance/evasion (delete according to taste)
    – She has complied with the law
    – however, she has benefitted financially from someone else’s tax planning/mitigation/….

    Therefore, under the spirit of the law and following the precedent set with Starbucks, we can harass her, shout at her, protest outside her place of work, until she makes a payment of some kind to HMRC in respect of “tax foregone”.

  7. This is the real problem IMO. It’s not that we clamp down on tax avoidance. It’s not that we clamp down on tax evasion.

    The problem is that we are in danger of having a tax system which varies depending on whether you have political support or not.

    I struggle to think of anything that will drive away investment faster.

  8. Tim

    In fairness to Murphy he did allow the excellent Jim (of this parish) through, albeit on a post about a law for chocolate biscuits – in fact the exchange was arguably the closest you get to civilized exchange of ideas that I have seen on Tax Research UK in some time – the earlier response to Agamemnon on the same thread was more in keeping with what I would expect.

    Look at page 2 ‘The ‘no chocolate biscuits law 2015’

  9. Does anybody else find it deeply troubling that a bunch of individuals can sue the government for not prosecuting certain citizens?

  10. Hodge said she had not been a beneficiary of the Liechtenstein foundation until the shares were brought onshore using the LDF in 2011

    Did she really say that?

    Because it looks like manipulating language to a degree that is tantamount to a great big fat fib.

    The gents in Vaduz have cunning ways of providing anonymity but that anonymity of necessity evaporates when a foundation is wound up and the proceeds distributed.

    So she’s caught in flagrante and tries to dissemble.

  11. @Van-Patten: there appears to be two Jims now frequenting this place, as although I have commented on here for some time, I didn’t comment on TR regarding chocolate biscuits!

  12. I suspect that a bunch of stuff brought onshore under LDF was plain vanilla avoidance, but that it was cheaper and easier to pay a small penalty than engage in protracted proceedings with HMRC.

    Btw, the yanks have form for assessing massive penalties on non-disclosure of assets abroad upon which no tax is due, and of which the beneficiary was genuinely unaware of the existence. Apparently in certain countries (Italy and India i.a.) it is common practice to name your kids on an account without ever telling them. Then they find out when you die that for years they have owned (at least as a share of) certain assets, which are thus shielded from inheritance tax.

  13. What confuses me is that the LDF doesn’t move shares around, it just resolves a potential dispute with HMRC.

    She may mean that the shares were brought onshore so there’d be no complications going forwards, and separately the past liabilities were settled through the LDF, but that’s a different matter.

    If she didn’t know that she was a beneficiary then I have no problem with her having been one but not declared the income or gains – I’ve seen that happen often enough to know it can happen quite easily.

    I’m slightly disappointed however that she’s been so disparaging about the LDF if she’s used it herself. After all, no-one needs to use it: you always have the option of simply disclosing the position under the normal rules.

    Mind you: if you can demonstrate that you’ve not been careless (and if you didn’t know about your interest in a foundation you can’t carelessly leave it off your return) then there are no penalties when you disclose things to HMRC, so the LDF’s offer of reduced penalties is irrelevant; and it looks as though a prosecution would be out of the question too. The only benefit of the LDF then would be that it gets you a named person to talk to at HMRC to settle the position – but in this sort of case you’d normally get a caseworker anyway (and I’m sure an MP would!).

    Overall, in my view the LDF is only worthwhile if you think HMRC might be able to pin something on you.

    So using the LDF suggests that Hodge considered that there was a risk that the facts were such that HMRC wouldn’t believe she was ignorant of the position – or her advisors persuaded her that this was the case and so paying the advisors’ fees to use the LDF (which can be pretty significant) would be worthwhile.

    Mind you, I suppose it could be that although Hodge was ignorant some other beneficiary wasn’t, so the LDF was used to protect them and Hodge was just taken along for the ride, maugre her head.

    Summary: it could be entirely innocent, but LDF-coloured smoke suggests there’s some fire (or at least some potentially combustible material) somewhere… and using the LDF at all is a bit inconsistent with saying taxpayers shouldn’t benefit from favourable treatment by HMRC.

  14. Avaaz, which claims 40 million members worldwide, has initiated judicial review proceedings against the UK tax office over its decision to offer an amnesty to hundreds of the 3,600 UK customers it identified as potentially hiding money in Switzerland.

    Sneaky use of language there. I’m sure Avaaz know full well that HMRC said there were only about 1000 cases worth looking at and the remainder had no case to answer. Yes, I suppose HMRC identified 3,600 customers as potentially evading tax. They could identify a few tens of millions as potentially evading tax. But then they looked at the files and identified most of them as not actually evading tax.

    Since the records were released into the wild, I assume it’s possible to identify individuals. In which case, some of the innocent ones should start suing for defamation.

  15. Pellinor: I always read your measured, well-informed and well argued contributions with interest but the thing which struck me about Hodge’s comment which I quoted above is that she appears to claim that she only became a beneficiary when the shares came onshore.

    Surely that can’t be correct and there are some fumets to examine in that statement? She may not have been aware that she was a beneficiary, as you say, though that’s stretching credulity a bit.

  16. Define “beneficiary” 🙂

    Technically, if the foundation says you could potentially benefit, then you’re a beneficiary.

    In plain English, though, it would be reasonable enough to say that you’re not a beneficiary until you *actually* receive some benefit.

    So say there was a trust which included Hodge among the class of people who could benefit; and in 2011 the trust was broken and the assets dished out. If that were the case then she would technically have been a beneficiary before 2011, but could common-sensibly be regarded as not being one until the dishing-out.

    I’m fairly sure Hodge uses jargon in more of a common-sense way than a technical one.

    As a general rule I assume incompetence (in a non-pejorative sense) before malice (even with politicians). I’d interpret the quote as meaning simply “I got no money out of it until everything was above board”.

  17. What tax would be due on an offshore trust that isn’t paying you any money? Outside Ritchie-world, of course.

    There isn’t even any space on _my_ tax forms* for investments that I haven’t sold and haven’t paid me any interest or other form of disbursement in the relevant tax year.

    * I may not have the right ones, of course.

  18. It depends on exactly what’s in the trust. Dividends and capital gains would be the obvious things, and interest (if it’s not rolled up).

    A common problem with this sort of structure is where dividends are reinvested in further shares in the company. People often assume that because they haven’t received any cash there won’t be any tax to pay. Entirely reasonable, but wrong.

  19. I know from personal experience that discretionary trusts set up inside the UK can have named beneficiaries, which doesn’t mean that person has a right to any assets or income, just that the Trustees cannot disperse assets or income to anyone who isn’t a named beneficiary (or towards the general aims of the trust, which may be charitable in nature as well). Thus a trust may have a general aim (to provide help for medical research for example), and the Trustees can disperse money to anyone in furtherance of that aim, and individual named beneficiaries who they may likewise give assets/income at their total discretion. Being a beneficiary of a UK discretionary trust does not give rise to any tax liability unless assets/income are actually dispersed. And even then there may be no tax liability, depending on how much tax the trust has already paid on the income/assets, and the tax status of the beneficiary.

    Whether the trust in question is similar, or how the tax rules apply to foreign trusts I couldn’t say of course.

  20. I wonder if she declared these shares on the register of interests?

    If so, it would knock rather a hole on her claim not to have been (or to have known she was) a beneficiary. If she didn’t, will the Parliamentary Standards muppets take a look?

  21. Jim (apologies for stealing your moniker)

    I can’t see how a discretionary settlement can be relevant here given they’ve used the LDF. Someone, somewhere, evaded tax on these shares, and the most likely explanation is that it was undeclared dividend income. I can’t come up with a plausible scenario for CGT or IHT to be in play.

    And I don’t buy RM’s (and apparently Lady Hodge’s) comment that it was a remote, distant relative who left her the shares. No one, not even the super rich, leave £1.5m to a remote relative who’s near retirement age. I think she’s being economical with the truth, and she has beneficially owned these shares for years (but perhaps didn’t know until 2011).

  22. I suppose it’s possible that she was the “last man standing” of the pool of potential beneficiaries of a discretionary trust. In that case it may have been a “distant relative” who died and resulted in her getting possession, even if the trust had been set up by a closer relative.

    But it stinks of hypocrisy at the very least.

    I do think a trawl through the register of MPs’ interests would be worthwhile, if someone can bear to do it. If she only found out about these shares in 2011, they should suddenly appear on the register around that time.

  23. Jim2 – It doesn’t have to be evasion, it’s just that for some reason the tax hasn’t been declared. It could be evasion, it could be ignorance, it could be an honest mistake, it could be careless error… hard to tell what it is in a specific instance, unless you’re close to the facts.

  24. Richard, all she has ever declared on there is:

    9. Registrable shareholdings
    (a) Stemcor Holdings Ltd.; international steel trading.

    Never any more detailed than that.

Leave a Reply

Name and email are required. Your email address will not be published.