Margaret, Lady Hodge. Such a card, eh?

Tax avoidance by multinational companies such as Google, Starbucks and Amazon has sparked a public outcry. Now we can add Thames Water to the list. A recent poll commissioned by ActionAid found that 80% of people want the government to take tougher action. People are furious that while they are working hard and paying their fair share, big corporations are cheating the system to avoid paying theirs.

In 2012 Amazon paid just £2.4m of UK corporation tax on UK sales of £4.2bn – less than the £2.5m it received in government grants. Thames Water paid no corporation tax and pocketed a £5m credit from the Treasury. In an age of austerity, maximising government income is essential. Every pound lost through tax avoidance could have been spent on protecting public services – yet last year HM Revenue & Customs wrote off £5bn in tax as uncollectable. It estimates the overall \”tax gap\” at £32bn, while many tax experts believe the true figure is twice that.

Amazon didn\’t actually make a global profit in hte year under discussion. Companies are not taxed on their turnover but their profits. Starbucks was making a loss even after you add back in the royalties and the coffee beans. The £5 billion in tax uncollectable is people and companies going bankrupt. You know, just not having any money to pay their debts?

So the list of complaints isn\’t all that impressive. And here\’s the solutions:

There are a number of things the UK government could and should do now: name and shame companies and individuals, and open up the books of FTSE 100 companies to scrutiny; police the tax system more aggressively, by ensuring that HMRC has the right staff with the right skills to investigate and challenge the tax arrangements of multinational companies; simplify the tax code; deny public sector contracts to companies engaged in aggressive tax avoidance; draw up a new code of conduct to prevent big accountancy firms helping to government devise tax law and then advising clients how to get round it. These are just a few ideas to start with on the domestic front.

None of which would make even 1 pence of difference to the complaints being made.

I dunno about you but I would prefer that our legislators, even the ones I disagree with, would be able to come up with something that actually works on the problems that they perceive. But maybe I\’m just picky that way.

By the way, something interesting about Margaret, Lady Hodge\’s, trust for shares in the family company, Stemcor. Apparently it\’s not about dodging tax at all: for shares in a family company are not subject to inheritance tax. Although, to be honest, I\’m pretty sure they were back in the 80s when the trust was set up. But no matter.

In completely unrelated matters, do you recall what happened to Shirley Porter and her inherited money?

28 thoughts on “Margaret, Lady Hodge. Such a card, eh?”

  1. Shares in a family company aren’t taxed if the inheritor will be running the company afterwards. Hodge the dodge always says that she doesn’t have any controlling interest in Stemcor, only a tiny tiny percentage of it. If that is true then she’s taxed. If there is no tax due as its a proper family inheritance then she has a controlling interest and it’s not a tiny tiny percentage. Either way she’s fucked.

    All information I’ve picked up and I’m no tax expert and all the info that I’ve read has not been totally clearcut so I could be totally and utterly wrong in which case I apologise for libelling Hodge the Dodge, sorry Margaret, Lady Hodge

  2. Just out of interest, what has her party done over the years regarding these tax issues? They aren’t anything new after all, many of these companies have been around for a while – so what has her party done?
    Or are these tax issues a feature of what her party has done or not done over the years?

  3. At present you can get Business Property Relief for shares in an unquoted trading company, which basically means that you ignore the value of the shares for IHT purposes (well, technically you include them but apply a 100% discount).

    You don’t need to have any control over the business or any involvement in the running of it (there are other tax reliefs that require these, but not this one).

    If Stemcor is an unlisted trading company then transferring shares from one person to another wouldn’t have any IHT consequences, so the trust can’t really be avoiding that.

    However, transferring shares around could have capital gains tax or stamp duty reserve tax consequnces, and having them in a trust might avoid the need to incur those costs (or just avoid the paperwork, to be honest). The trust might also allow income from the shares to be directed to different people at different times, either to make use of tax reliefs or to give income to people who need it. It all depends on the type of trust and what it’s meant to achieve. Avoiding tax could be a main purpose, a minor purpose, an incidental benefit, or not happen at all.

  4. To my mind, the hypocrisy about Stemcor is just that it pays the sort of tiny percentage of turnover in corporation tax that Hodge complains about Google et al paying.

    Hodge is wrong to attack them on those grounds, and if she were paying any attention to Stemcor’s tax position she’d know why. Either she’s a hypocrite or she’s being wilfully ignorant. Neither is entirely praiseworthy, to my mind.

  5. “In an age of austerity, maximising government income is essential.”

    Good to know Hodge has denounced Keynesianism.

  6. She even says “many tax experts believe the true figure is twice that”.

    Of course, no tax experts say that. Richard Murphy says that, but he’s a retired small company accountant with no qualifications in tax so doesn’t count. Although as someone who’s been an entrepreneur (boo, hiss, don’t need those) and made his money through a tax dodging licensing arrangement, maybe that qualifies him as an expert in tax dodging.

  7. I think that if Lady Hodges trusts were set up in the 1980s then they were undoubtedly done so in a time of considerably higher inheritance taxes on business assets. There’s good summary of the changes post 1975 (when Labour introduced capital transfer tax) through to 1992 when 100% agricultural and business property relief were introduced here:

    http://www.ifs.org.uk/mirrleesreview/reports/wealth_transfers_apps.pdf

    My guess is that they were set up to avoid the depredations of Capital Transfer Tax, the top rate of which was 75% over £2m. Even if they were set up in the 80s under the Tories, the IHT rules did not get to their current state (100% Business relief) until 1992. So while Lady H may be correct is saying that the rules NOW don’t tax holdings in private limited companies, and thus she is not avoiding any IHT, that was not the case when the trusts were set up, and the intention at the time undoubtedly was to avoid IHT, and indeed may have done so, depending on when the original owners of the shares died (if they indeed have).

  8. A little bit of wikipedia research suggests that Lady H’s father died in 1985. It would be interesting to know when exactly the trusts were set up (presumably prior to 1985), and what exactly was the IHT regime in 1985, and how much would have been payable on such assets if they hadn’t been put in trust.

  9. ” simplify the tax code”

    Err. Yes, well. And whose fault is the complexity. Lawson did simplify it. Brown? Darling? Osborne?
    “Double, double, toil and trouble.”

    Even so, as regards the basis of the Hodge complaint, it would as you say make no difference.

    It is shocking how many MPs and (Prime) Ministers really do not understand this, at all. To be fair to Brown, I think he did.

  10. So whatever the IHT consequences of the trust of which Lady Hodge is a beneficiary or life tenant, there are – according to Pellinor – advantages (which probably include tax advantages) in settling a trust. Whatever reasons Mr Oppenheimer had for settling the trust it is evident that somewhere along the line Lady Hodge is a direct or indirect recipient of those advantages.

    Although trust settlement is not necessarily the zero sum game Lady Hodge ascribes to tax avoidance, it’s evident that there are benefits accruing to the beneficiaries of such trusts which can be described as quote avoidance unquote of the consequences of not putting in place legal and legitimate constructs such as trusts or tax schemes. As such Lady Hodge – and her father – are and were avoiding disadvantages – which could include tax – which would have accrued had the Stemcor-related trust arrangements not been put in place.

    As Pellinor notes the hypocrisy of Lady Hodge attaches more to her wilful ignorance – or worse – of the way corporate profits and corporation tax are computed and her political grandstanding on the issue than to being the apparently passive recipient of her father’s largesse.

  11. @ Umbongo: An interesting post, though I suppose it’s possible that the Stemcor Trust was originally set up for entirely innocent purposes, such as provision for those who at the time were unable to manage their own affairs (young children, for example). We’ll never know – unless of course Lady Hodge, in the spirit of openness which she appears to champion, chooses to explain.

  12. Companies are not taxed on their turnover but their profits. Starbucks was making a loss even after you add back in the royalties and the coffee beans.

    It’s a minor point, but Starbucks really was making a profit for corporation tax purposes after you add back in the royalties and the coffee beans.

  13. Ah, the other edge of the ad hominem – if the target convinces the audience you’re wrong you’re back at square one.

    Best to stick with the basics: call foul at any attempt to link tax paid with anything other than profits, and and point out that the vast majority of these tax arrangements are legal. Where legal means ‘acceptable to HMRC, given the tax code they are expected to enforce and the resources available to them’.

    If there’s a problem, it’s with HMRC, not with the companies.

  14. @Churm Rincewind: Margaret Hodge was over 40 when her father died in 1985, so mostly likely in her mid 30s when the trust was set up, having been married, divorced and remarried, with several children as well. She wasnt a teenager or 20 something who wasnt able to manage her affairs. There may well have been legitimate family reasons to put the Stemcor assets in trust, but no-one can convince me that given the political zeitgeist of the time (late 70s into early 80s), of having just had a Labour government who wanted to make the rich’s pips squeak, and the by no means obvious Thatcher victory in 1983 (there were long periods in the early Thatcher days when she looked like a one administration pony), and the potential return of the Michael Foot/Tony Benn dominated Labour party, that IHT mitigation wasn’t the biggest factor in the decision.

    If Margaret Hodge had any honour she would keep very quiet about other peoples tax affairs, having personally benefited handsomely from her fathers wise administration of his tax matters. But she is a socialist, so it goes without saying she has none.

  15. Churn Rincewind

    I’m more than willing to accept that Mr Oppenheimer set up the trust in question for entirely laudable and legal purposes, one of which might have been the avoidance of tax. As you say, we-ll never know unless Lady Hodge makes the trust deed public.

    As to schemes designed purely or mainly to avoid tax and having no commercial or other purpose, AFAIAA and as I’m sure Pellinor could confirm or otherwise, these are illegal/ineffective under the tax legislation now – and then – applying.

  16. Commerciality is tricky with IHT avoidance schemes, as most of the transactions to which IHT applies are nothing to do with commerciality. So it’s very hard for the legislation to attack schemes that have no commercial purpose, as they’re no different in that regard from things like granny paying for grandson’s school fees, which is perfectly acceptable.

  17. @ PaulB

    “It’s a minor point, but Starbucks really was making a profit for corporation tax purposes after you add back in the royalties and the coffee beans.”

    I’ve seen sums ‘proving’ this both ways. But when quibbling over which side of the line it all falls I think that the correct answer is to refuse to play the game. We can argue about the value of the royalties and the coffee markup, but to calculate the profits of a high-street coffee shop, without including the costs of coffee and branding/marketing, is a nonsense.

  18. TTG: it’s not at all close. The corporation tax loss claim is just a mistake: the correct figure is plainly shown in Starbucks’ financial report. And the number is relevant because Starbucks itself has promised to end the transfer payments.

    Besides, Tim’s arguments work better when he gets his facts right.

  19. @The Thought Gang @PaulB

    I f you look at Starbucks UK tax disclosures in their accounts you can see that they were actually profitable for tax purposes in six of the nine years that they paid royalties. Without adding back all their royalties or coffee beans.

    The link to my website shows the graph of trading profits that would have been shown in Starbucks tax computations. This is extracted from the movement in trade losses and tax liabilities from their accounts.

    It will not take much of an adjustment to get them to taxable profits. Or it would not have taken much before their reputation and turnover took such a pummelling.

  20. Pellinor

    That’s an interesting point about commerciality having little play in deciding on the legal acceptability or otherwise of IHT mitigation arrangements. However, and not wishing to bore everyone rigid on this, does that mean that there is no quote reality unquote test at present for an IHT scheme? In other words, no matter how artificial the arrangements, as long as the rules are followed, is an IHT scheme immune from challenge? Or is there some leeway for HMRC to assert that part of a scheme is so patently unrealistic that it could only have been part of the scheme for tax avoidance purposes – and thus be ruled as ineffective?

    Seems to me, and my ignorance is profound on this one, that including IHT in the GAAR would bring an end to the acceptability in law (if it is indeed acceptable at present) of wholly artificial IHT avoidance arrangements.

  21. There is a test of acceptability, it’s just that the “commercial” aspect of other taxes is a nice easy test, so without that IHT is necessarily a bit vaguer.

    The essential point about IHT is that it’s a tax on value moved out of your estate. There are two main ways to avoid IHT: one is to actually move stuff out of your estate now without an IHT charge, and the other is to set things up now such that when the value does actually move it’s covered by a relief that wouldn’t be available at that point, but is now.

    The first sort of avoidance is really just planning: the Potentially Exempt Transfer regime means that, braodly, if you give stuff away to someone and survive for 7 years then it’s outside IHT. So HMRC find it hard to object to the situation where you actually give stuff away, as there’s an explicit relief for that.

    What they do particularly object to is disguised gifts, where you seem to be giving stuff away but don’t really. The classic example is to say you’ll give your house to your son, but with a lifetime tenancy for yourself, so you can still live there freely. If you survive seven years then the gift of the freehold is going to be exempt, and on your death he already owns the house so there’s no transfer. So the son gets to live in the house when you die, but there’s no taxable transfer on your death because you did a potentially exempt one 7+ years ago.

    This is a so-called “gift with reservation”, and doesn’t really work now because of the anti-avoidance rules. Essentially, it says you haven’t lost anything : if you owned the freehold you’d get to live in the house till you died, and after giving the freehold away you still can, so you’ve not made a gift.

    So the IHT equivalent of “not commercial” is “not really a transfer”. Instead of “no businessman would do this”, you have “you didn’t actually do this”.

    This is my main problem with IHT: that if you do something now it’s exempt, and if you do exactly the same thing in the few years before you die it’s taxable. Why should the taxability of something I do today depend on whether or not a bus-driver notices me crossing the road tomorrow?

  22. Historic rates of inheritance tax relief on unquoted companies are here:
    http://www.hmrc.gov.uk/manuals/svmanualnew/svm111290.htm
    (warning; poorly formatted table)

    In the 80s there would have been some relief, reducing the tax by 20% or 30% (that’s % of the tax, not % points) for a minority shareholding.

    100% relief for minority interests didn’t come in until 1996.

    But of course there could be other reasons for putting assets into a trust. Stopping ex spouses getting their share, preventing creditors from recovering their money, stopping the addicted blowing it all, whatever.

    If Lady Hodge says it was not for tax planning, it would be interesting to know what it was for.

  23. Certainly one wealthy client of mine wants to start divvying up his property empire (self-built, from nothing up to tens of millions) to provide for his children, but is absolutely paranoid about the idea that if they get divorced the ex-spouse would be able to get half of the assets. So he wants to use trusts so that he has some control over what happens.

    This is, incidentally, horribly inefficient for IHT purposes given the sort of assets he has. For some reason he considers 40% of the gross value of the assets to be a rather steep insurance premium for protection against rapacious ex-spouses 🙂

  24. Pellinor, the saying used to be that the only people who pay inheritance tax are the ones who hate their family more than they hate the Revenue.

    I suppose your client hates his children’s spouses (or perhaps just rapacious ex-spouses in general) more.

  25. As far as I’m aware he likes them perfectly well.

    But he’s a control freak (which is possibly why he managed to build up from nothing to where he is now), and the mere possibility that things might move from where he puts them gives him the willies 🙂

    I mean, what if his son dies, the assets go to his daughter-in-law, she remarries, new husband turns out to be a bad ‘un, she gets divorced, new chap takes half the assets. So someone he’s never met gets a chunk of his stuff! Without him getting a say!! It doesn’t bear thinking about!!!

  26. @ Pellinor et al

    Just goes to show you can’t take it with you (or control it after you’ve gone).

Leave a Reply

Your email address will not be published. Required fields are marked *