George Osborne looked remarkably smug after his autumn statement.
If he was to be believed all is now rises and sunshine in the UK – compared to what was forecast in March this year, and as we all know, that’s now just about as far back as Tory party history goes. If he and the OBR to be believed serious growth is but two years away (it always is in OBR models; it’s the way they’re built) and the groundwork for massive tax giveaways in March 2015 has been laid. Plus, he’s already announced his electoral trap for Labour – a vote on mandatory budget balancing. You’d think a win in May 2015 was already secured, but just maybe not all is as simple as he’d have us believe. It’s time to ask what could go wrong for George.
To understand that the messaging in this autumn statement / budget have to be understood. Those messages are:
- Austerity works
- Good times are returning
- Growth is here to stay
- Mortgage and consumer credit is available to all who want it fuelling housing and consumption even though wages won’t
- Jobs will follow
- It can be promised that debt will come down as a result.
And that’s about it. Seriously, that’s the premise of the Tory election strategy and economic policy.
But there are some key assumptions to this:
- No one builds too many houses too soon to dampen housing demand and so prices
- People won’t realise house price increases are a recipe for disaster
- Mortgage demand will collapse as the prospect of increasing interest rates dawns on people
- The Eurozone continues to stagger and not crash
- People continue to borrow despite falling real incomes
- The stock market does not fall over, anywhere
- Debt does not grow more than forecast (as it has done ever since 2010, this statement apart)
- Jobs do follow
- People don’t get fed up with falling real incomes
- A major pubic service (the NHS, prison service, the courts, etc) dooes not collapse into chaos
- There’s no major infrastructure or IT failure because of a lack of investment
Now, let’s be honest; I can’t say any of these things will happen. If they don’t then all the Tories have to do to won is something no one has done in living memory – which is increase their share of the vote after a term in office. Which won’t happen if the fear factor can be played by the opposition parties the biggest of which, by far, will be to ask the question “What happens when your mortgage increases in June because George borrowed more in the last 5 years then any other government in history?”
But suppose anything does go wrong: almost any one one from that list? I just can’t see how Osborne wins then.
Now don’t get me wrong: right now I am not sure Labour has all the answers either because all too obviously it is still missing sitting ducks whatever jokes Ed Balls had to make at the Despatch Box today. In that sense Labour may be George’s best hope, however much it pains me to say it when like all true democrats I crave genuine opposition to any government – whatever its colour (just as I regretted the Tory failure to oppose for 13 years of New Labour rule).
But on balance I think the chance of something going wrong with Osborne’s wing and a prayer plan seems high with 17 months to go. And for the sake of all who have suffered under this government that is a lifeline of hope.
Yes, I know it’s the Guardian, but this is interesting
This was an autumn statement for the south east.
Most will realise that George is blowing bubbles
And that if unemployment falls in 2015 then interest rates will rise – tipping millions of households into crisis
Few will be fooled, I think, that this policy is sustainable, because it isn’t.
I hope the poll fairly accurately reflects that.
These things were not addressed in the autumn statement:
- The bedroom tax
- The falling incomes of those on benefits
- The lack of business investment in the UK
- The increasing national debt – to continue until 2019, and almost certainly afterwards
- The falling income of the self employed
- The vast majority of the tax gap
- Cuts in staff at HMRC which deliberately drive the need for austerity
- Zero hours contracts
- The living wage
- Increasing personal debt
I could go on, and on.
This was an autumn statement that did not tackle the reality of life for most in this country.
I prepared these notes before going on air to discuss the autumn statement.
What we have seen are:
- tiny tax giveaways which have no focus
- tiny tax breaks
- tiny attempts to tackle tax abuse
- tiny measures to tackle the cost of living crisis
When the reality is we have:
- continuing deficits
- continuing unemployment
- continuing falls in living standards
- continuing increases in the wealth gap
- continuing pressure on the poorest, the disabled and unemployed
- pensions are being deferred
- a bubble is being inflated
- interest rates will increase in 2015 tipping millions into crisis with their mortgage payments
- growth is dependent on increased consumer debt – the last thing we need
- the young are being ever more priced out of the housing market
- debt will be almost £200bn higher at the end of this parliament than he forecast
- and there is no hint of the structural changes to banking, business, the ownership of wealth, the provision of pensions and the supply of public services that we so badly need.
It’s a pretty depressing scenario. How can it be summarised:
- Austerity failed by the standards Osborne set for it
- We remain 15% or more behind where we should be on growth
- There is no sign of the benefit of growth being shared
- The foundations for another downturn post 2015 have been laid
- There remains a debt crisis
- And growth remains a mirage in the OBR’s eyes – as it has always been two years hence.
The BBC said Labour had a problem tackling this. I don’t agree: I thought Ed Balls did OK (but no more) but what’s really clear is that the time to grab the initiative is now.
We’re not looking at an economic success story as Osborne says; we’re looking at a crisis in the making and that’s what has to be said time and time again.
I’ll be on the Jeremy Vine show on Radio 2 at lunchtime discussing the autumn statement – assuming I can find the BBC studio in Brussels on time to see what George has to say.
It’s always more fun to do it from the studio – where there’s always a right wing guest to disagree with – but today it will have to be done from afar.
I am at the Progressive Economy conference in Brussels this morning, speaking on tax abuse and the G20 amongst other things.
This is what I might say in opening comments:
Click for a bigger version.
George Osborne will proclaim on Thursday that a budget surplus is in sight for the first time since the millennium, raising Tory hopes of significant tax cuts in the next parliament after nearly a decade of austerity.
Oh heaven help us is all I can say. The last thing this country needs right now is a budget surplus.
The trouble with George is he has never studied either economics or accountancy. If he had he would realise that there is no merit in a budget surplus, not least because such a surplus is part of an accounting equation. At the macro (national) level, which is what we’re talking about, there are some accounting equations that hold true in economics. One is that the economy does in fact balance. It may well balance at the wrong point with a result that we do not want, but it does balance. And what that means is that if someone is in surplus then someone else is in deficit.
There are not too many variables in this equation either: just the government, consumers (that’s you and me), business and trade. So, if the government runs a surplus someone else has to run a deficit. It’s pretty obvious really: the books will balance. So, a government surplus is matched by increasing consumer debt, business spending or money flows via trade.
We have remarkably little control over trade. First, we almost invariably run a deficit and secondly we have (unless we suddenly and ruinously begin using interest rates to alter exchange rates) almost no control over that rate so let’s treat that as fixed to the extent that it is beyond control. And let’s also be aware that such is the state of the Eurozone we should not be looking for much hope from that source – which is our biggest market.
In that case we’re looking for a government surplus to be matched by consumer borrowing and business spending on investment.
Now, again, let’s deal with the easy one – business spending. This would be on investment of course; we can’t imagine they’re going to start a free for all in pay rises for anyone but bosses. But as we know, whilst they’re laden high with cash (which right now they lend, in practice, to the government) they appear to have no intention of spending that and worse still appear clueless as to what they might spend it on. There is no hope of them creating a deficit on their budget, and so they will not create one for the government.
In that case we’re down to consumers to start borrowing heavily to make the government surplus happen. And you now wonder why George is creating a housing bubble? This is his only hope for creating that surplus that he desires.
But he doesn’t just need a but of a bubble, he wants us to plummet into debt. As Duncan Weldon at the TUC has long argued, George’s growth plan in 2010 – was predicated on consumers going into increasing household debt on the basis of their belief that a budget surplus and tax cuts would be just around the corner. Consumers had more sense: they did not believe him and so we got a recession because they saved instead of spending. Now George is back on the same band wagon – with the same tune – selling the same myth but with the added twist that this time he is literally giving the money away through subsidised mortgage lending to try to make it happen.
Will it happen? Well, yes, there is some evidence that consumers are now borrowing more. When consumption is rising and wages are falling that has to be true. And Osborne no doubt hopes that rising house prices will allow this to continue but I very much doubt it. Far from it in fact: consumers are not that stupid and most simply won’t be offered the credit from anyone but Wonga this time, and that runs out fast.
In other words – that bubble will burst soon. And with it Osborne’s hope of a surplus. All we’ll then get is a Geddes Axe, 1922 style - and we all know what followed that.
And this is utterly absurd. First we do not need a surplus: when the government has control of its currency it can run a deficit equivalent to debt multiplied by the interest rate and sand still – so £30+ billion a year of deficit is balance right now.
When, oh when, will we learn?
According to reports clearly leaked to the right wing press this morning George Osborne will announce a new programme of ‘dynamic tax scoring’ today. According to Fraser Nelson in the Spectator, who can hardly contain his excitement:
When George Osborne releases the bumpf accompanying his Autumn Statement tomorrow, I understand that there will be one paper that will be quite unlike anything presented by a previous chancellor. There will be a study on dynamic tax scoring: ie, recognizing that tax cuts stimulate the economy, and that the Treasury can expect to claw back money when it liberalises.
This paper is seen by Team Osborne as something of a quiet revolution in the Treasury. The machine they inherited was programmed to see tax cuts as a permanent loss to the government, when in fact most tax cuts recoup some of their cost in the extra activity they unleash. The new Treasury paper shows a brand new way of thinking about tax – and one which, if you follow the logic, paves the way for a lot more tax cuts.
Oh dear: poor dear Fraser, and even more, poor dear George; even Allister Heath in City AM has realised that all George has done is rediscover Keynes.
Those of us who know our Keynes have known the Treasury view on this issue has been wrong on this issue (as on so much else) since the 1930s. We have known that there is what is called a ‘multiplier effect’. Wikipedia defines the multiplier as:
In economics, the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it.
The whole issue is well summarised by Duncan Weldon of the TUC here, but in summary the idea of the multiplier is that the impact of a change in government spending or tax is not just on the government budget but also through its knock in effect. This is precisely why, for example, the likes of Ann Pettifor and I argued VAT increases were bad news: they didn’t just raise revenue, they helped crush the economy too. And that’s also why I argued in May 2010 that the only way to cut government debt was to increase spending – because that spending would raise more in tax than was borrowed.
This argument was completely dismissed by the government at that time. Duncan Weldon explained why a year ago:
The OBR, in June 2010, summarised its view on the multipliers as follows:
Change in VAT: 0.35
Change in personal tax and NICS: 0.3
Change in welfare spend: 0.6
Change in departmental spending: 0.6
Change in capital spending: 1.0
By contrast the IMF now believes they are between 0.9 and 1.7.
Now what we will ‘learn’ today is that George Osborne now thinks that corporation tax cuts have a multiplier effect of 0.7 i.e. 70% of the cost of the cuts in this tax will be recovered in additional growth over the next 20 years (note the time scale; I hope he has discounted the impact and allowed for uncertainty, although I should add that all multipliers are subject to time lag, but few as long as this). And us Keynesians will say ‘what took you so long to catch on George?’
But we’ll go a lot further than that. We’ll say that if tax cuts are according to all known multiplier calculations the worst way of boosting the economy why is he focussing on them? And why is he not instead talking of investing in the economy instead of freezing infrastructure spending – as announced this week – when that always has the greatest impact on the economy as a whole.
I welcome George’s conversion to Keynesianism. It’s overdue. But what I should make clear is that he’s just walked into dangerous territory. The multiplier effect of corporate tax cuts will be tiny – indeed the 0.7 is below the expected range of multipliers for the UK as forecast by the IMF precisely because big business is already sitting on enormous piles of cash it has no idea what to do with.
George Osborne will announce dogma today. It’s time for an effective opposition to attack that on the grounds of solid theory and to say that is the multiplier is now in play investment and spending is the way to clear the deficit. But will they?
This debate just got interesting.
Hat tip: Ann Pettifor
Of course the UK can’t and won’t develop graphene further. It may put a patent in an offshore tax haven regarding its use, but that’s as far as UK aspiration now goes.
When tax planning to exploit a rent (and in economic terms a patent royalty is a rent) is believes to be the most important activity in the UK innovation and well-being dies with it.
That’s the point we’ve reached.
From the Guardian business website just now:
And you wonder why I have my doubts about Osborne’s recovery?
Polly Toynbee’s written this in the Guardian this morning:
Now is the time for Labour to make a lot more noise on tax avoidance. Osborne will claim a clamp-down on Thursday which the TUC exposes as puny. His general anti-avoidance rule will let 99% off the hook – Amazon, Google, npower, Starbucks and the rest. The word is that Balls is none too keen on business-bashing. But post-crash, times have changed and the public doesn’t think it’s Marxist to rein in bankers’ pay or stop tax avoiders.
Polly is undoubtedly right on this issue. Tax avoidance is now the number 1 business ethics issue and that gives real resonance to the TUC report, which is here – and I should make full disclosure that I wrote it.
As I said in it:
In our opinion the UK needs a General Anti-Tax Avoidance Principle. Two words differentiate what we want from what the government is delivering in 2014, but they are critical. The first is that we want to tackle tax avoidance and not just tax abuse. The second is that we want a principles based approach to tax avoidance, and not a rules based one. Both points are fundamental, but there are other pragmatic reasons for thinking that the General Anti-Abuse Rule will simply not deliver the clamp down on tax avoidance that the government claims for it.
The difference might be found between the EU demand that member states have what is in effect a general anti-avoidance principle and the UK’s General Anti-Abuse Rule. The EU says:
An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance.
This reference to economic substance is key: the logic here is of tax compliance that I have long defined as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The EU was, I think, influenced by that thinking.
The UK General Anti-Abuse Rule on the other hand tackles:
arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
And as it says, such arrangements must be abusive to be countered, and it adds
whether the arrangement can be considered a reasonable course of action in relation to the relevant tax provisions;
comparing the substantive results of the arrangements with that which might be expected based on the principles on which the relevant tax provisions are based, and with the policy objectives of those provisions;
seeing whether there are contrived or abnormal steps in the arrangement;
seeing whether the arrangements are intended to exploit any shortcomings in the relevant provisions; and
the ‘double reasonableness’ test – i.e. whether the arrangements cannot reasonably be regarded as a reasonable course of action.
This is deliberately defined as a high bar to cross – and for all practical purposes the General Anti-Abuse Rule panel, made up of tax practitioners has also to agree that it has been crossed before it can be used, which is going to make it exceptionally unlikely in practice. And just to add insult to injury, the GAAR cannot be used in international cases according to the UK, although the EU flatly contradicts this.
No wonder people will get angry.
And no wonder Polly Toynbee thinks the Coalition have left a barn door open for Labour, who are already keen on developing the GAAR into something useful.
I look forward to that happening.
My report on the incomes of the self-employed in the UK, published this morning, provides a remarkable insight into the differing fortunes of the 1% or so in the UK economy and everyone else.
From 1999-00 to 2010-11 HM Revenue & Customs have published data on the income of the self employed split into fixed income brackets. The data is summarised in the report like this:
Now of course the significance of the bands changes a little over time with inflation, but what is immediately obvious is that the growth in the number of self employed people has occurred almost entirely at the bottom of the income range whilst those earning between £10,000 and £100,000 has fallen slightly, but with those earning more than £100,000 seeing their numbers increase dramatically (Note: HMRC did not publish data for 2008-09; data for that year is an average of the years either side).
The difference in fortunes is stark: if the incomes of all self employed people is considered this is the average over the period stated in the value earned at the time earned:
This, however, is seriously misleading. The income of those over £100,000 when average looked like this:
And the average income of those earning less than £100,000 did this when expressed in current prices of the period:
Inflation adjusted that last graph is more stark: the fall is much more steady:
Now admittedly, when only those saying that their main source of income is self employment are taken into account the pattern changes again (as shown here) but the fact is that however this data is looked at (and I have looked at it many ways, as the report shows) the trend is consistent. Those earning less than £100,000 a year form self employment have seen their fortunes fall over the last decade despite the numbers involved being at least constant whilst those earning more than £100,000 have seen them rise considerably (albeit with some falling off since 2008) and since patterns of incorporation have not changed radically since about 2003 (although it remains popular) this is unlikely to explain the change.
There are three stories here. One is of a small number enjoying considerable good fortune. The second, as the full time data shows, is of those on middle income facing tougher times and third is of very large numbers of people making very modest amounts from self employment at best.
That’s a tale for modern Britain.
A couple of weeks ago I started to prepare what I thought would be a quick blog on the differences between HMRC and ONS data on the number of self employed people. However, the more I looked at the data I more I realised that the figures on the self employed had a story to tell, and so I investigated further with the outcome that I have published a report on the subject of the declining income of the UK’s growing army of self-employed people this morning.
One of the big surprises in the UK economy over the last few years has been that unemployment has not risen to 4 million, which many, me included, were expecting. What’s often said is that this is because many people are working part time, for low pay, and so are being kept off the unemployment statistics. What this research shows that this is, at least in part, because of the growing number of self employed people who make very little from that activity. The research covers the number of self employed people and their earnings from 1999 to 2011, the last year for which HM Revenue & Customs data is available and the picture is harsh. Excluding the less than 2% of self employed people who earned more than £100,000 a year throughout this period the picture is summarised in one graph
Using HMRC data on the number of self employed people the average, inflation adjusted, earnings of those who are self employed fell from just under £15,000 a year at the turn of the century to £10,400 in 2011, a real decline of just over 31%.
The picture is different using Office for National Statistics data on the number of self employed – which eliminates those who might have a part time self-employment as a well as a job, but comparing that data both unadjusted and allowing for inflation with the data on those who have income from employment makes very clear just how stark the change in fortunes has been for the full time self-employed since 2008 (and this data includes those earning more than £100,000 a year):
Right across all income scales the full time self employed saw their fortunes rise until 2008 – although the vast majority of that increase went to the top 1% or more who had average earnings of £303,000 in that year – after which the income of the self-employed crashed. Allowing for inflation average earnings of those who declare that they have self-employment as their main economic activity fell from £25,400 in 2008 to £18,500 in 2011, a decline of 27%.
Despite this the number of self-employed people is rising. According to HMRC the number has increased from 4.17 million in 1999 to 5.11 million in 2011 – an increase of 22.5%. The ONS, which only records those who have self employment as their main economic activity, think the increase more modest, from 3.21 to 3.92 million over this period, but the percentage rise is almost identical. Despite that national statistics show that the share of national income they have been enjoying has been falling.
As I said in a press release issued yesterday:
These figures are quite shocking. For some time economists have been looking for the missing explanation of what is happening in the UK economy. This data helps explain how we’ve reached a point where incomes are falling, the economy is sluggish and yet unemployment is apparently not rising. The fact is we now have maybe millions of people working in very marginal self-employments for what are poverty wages because they have no other choice available to them. This is not entrepreneurial Britain and the march of the makers as some would like to represent, this is desperation Britain where people left with no choice scratch any living they can out of the limelight and, until now, out of the sight of economic statistics.
In a culture where only the best are rewarded, where cut-price is everything, and where low pay is officially applauded as a sign of productivity life for many self-employed people is very tough. These people are the hidden unemployed and the hidden low paid. They’re self-employed because the safety net has been pulled from underneath them. These are the statistics of desperation UK – the part of the economy that the top 1% or so of self employed people will never know exists.
George Osborne should take note.
The conclusion is based on HMRC data, but also on a report by me on the General Anti-Abuse Rule. As Nicola Smith of the TUC has written:
New TUC research (undertaken for us by Richard Murphy of Tax Research) shows how weak the government’s latest anti-avoidance measure really is. You might think that an initiative labelled as an ‘anti-avoidance’ rule would make some inroads to the UK’s tax dodging industry. But in fact the Government’s own estimates show that its General Anti -Avoidance Rule will, at best, limit one per cent of the estimated £25bn that we lose each year through tax avoidance measures.
How has something that sounded so promising gone so sour? The devil, it turns out, really is in the detail. As our report sets out, there are six key problems with how the General Anti-Avoidance Rule will work:
- The Rule’s definition of tax abuse is far too narrow – none of the big scandals that have recently hit the press (including companies such as npower, Google, Amazon and Starbucks) would have been stopped by the its provisions.
- There is a complex test to determine when the Rule can be used by the government – arrangements must be such that they ‘cannot reasonably be regarded as a reasonable course of action’. This test is so tight very little tax avoidance schemes will be covered by it.
- The Rule is administered by a panel of experts – who are all drawn from the tax avoidance industry and can be expected to have a broad view of what ‘reasonable’ action might be.
- The Rule requires HMRC to show that a scheme is abusive, rather than requiring the corporate taxpayer to show why it is not.
- There is no penalty regime attached to the Rule – if someone is found to be operating an abusive scheme they will be asked to stop but won’t even be asked to pay a fine.
- There is no ‘clearance system’ attached to the Rule – this means there is no arrangement where a taxpayer can ask HMRC whether or not the transactions they are proposing are within the scope of the Rule. As well as creating unnecessary uncertainty, this also means that the rule fails to prevent tax abuse before it happens.
Tax avoidance is no good for our society, our public services or most responsible businesses – it leaves our public finances in a poorer state then they would otherwise be and increases the amount of tax that smaller businesses (who can’t afford the expensive legal expertise that is often needed to engage in tax avoidance) need to pay.
But despite extensive rhetoric on the need to crack down on abuse, so far the Government’s proposals have fallen short of the action we need if tax avoidance is to be tackled. The GAAR provided an opportunity to introduce a real change into the UK’s tax system – but despite the warm words its impact will be practically non-existent.
The Public Accounts Committee is having a hearing on Gift Aid this afternoon. I made my views on this known a year or so ago. As I said then:
* It is completely illogical that some gifts – including many legacies to charity – get no tax relief at all.
* It makes no sense at all – and reveals a belief by many that the wealthy count for more – that their hypothecation of government funding to charity carries more pro rata worth than the giving of basic rate taxpayers and those who do not pay tax at all.
* Large donations to charity are not necessarily benign because of the influence they carry and the work they can prevent, especially when it comes to questioning the reasons for poverty.
* It is as a result obvious that all higher rate gift relief to charity should be abolished – and all inheritance tax relief to0.
* In place of these reliefs all gifts to charity of less than £5,000 should be subject to automatic gift aid relief at 20% – meaning a charity could apply for 25p in the pound back on all these gifts with much, much less admin than now, and gift aid at the same rate should apply to all gifts whatever the source over that sum if shown to originate in the UK.
* The result would be more money for charity, massive savings in charity admin, vast savings in HMRC admin, a simplified tax system by far and more resources to weed out rogue charities.
This builds on suggestions made in 2008 for the TUC in The Missing Billions, where I wrote:
The next tax relief [needing] change appears controversial, but has the capacity to release significant resources for social benefit in the UK. This would be the result of abolishing the tax relief on gifts made to charity in the UK.
The current tax scheme for such gifts is absurdly complex, imposing a considerable administration burden on charities that could use the resources expended in managing tax reclaims much more effectively in pursuit of the good causes for which they have been created.
It must however be noted that charities do benefit from the existing rules that provide tax relief for gifts made to them. They recover income tax at the basic rate on all gifts for which they can secure documentation made from identifiable people who have confirmed they pay tax in the UK. It is this documentary burden that is onerous.
The arrangement is also discriminatory: some forms of charitable giving, such as street collections, are [in most cases] less tax efficient than others but all result from giving with charitable intent. It is strange that some forms of giving are favoured more than others.
The solution is simple. It should be assumed that all gifts to charities are made out of taxed income. This is, after all, highly likely to be true. The charity should then be allowed to make claim to the Government for a sum equivalent to the tax that would have been paid at basic rate. This would be a sum in excess of that charities can claim under the Gift Aid rules since not all that income is subject to tax relief at present. The result would be an increase in the income of UK charities and a massive saving in their administrative costs. Both would, surely, be welcome. The cost of the additional relief would be covered by the withdrawal of the current wholly anomalous situation where UK individuals paying tax at higher rate can actually enjoy a personal tax refund of the difference between the higher rate of income tax and the basic rate on the value of all gifts they make to charities: a tax relief from which the charities themselves get no benefit at all. By abolishing this relief another opportunity for tax avoiders, which has been subject to spectacular recent abuse could be eliminated.
Recent research by HM Revenue & Customs has shown no apparent influence of this tax relief on the decision of higher rate tax payers to donate to charity, or not, and as such it is unlikely that the value of gifts they make will be affected to any significant degree.
I will be curious to see what the committee recommends on this issue. I think what I recommend could save enormous amounts of effort by taxpayers, HMRC and charities and almost double the yield to charities.
What is there to object to unless you’re wealthy and want to use the relief for your own gain?
As the Mirror reported this weekend:
Flag-waving former PM Margaret Thatcher may have avoided millions in inheritance tax by keeping a chunk of her fortune offshore.
A copy of Tory Baroness Thatcher’s will shows she left a £4.7million estate to be shared among family members.
But the £12million Central London mansion where the Iron Lady spent the last years of her life is owned by an anonymous trust registered in the British Virgin Islands – a notorious tax haven.
As they also noted:
The house was bought in 1991 by Bakeland Property Limited, an anonymous offshore trust in Jersey, on a 64-year lease. It was sub-leased to a firm of the same name based in the British Virgin Islands.
It is not known who the beneficiaries of Bakeland are. If Thatcher had owned shares in it when she died, inheritance tax would have been due on their value.
Lawyer Andrew Kidd, of Clintons, said: “The shares in the BVI company would be included in Baroness Thatcher’s estate, and subject to UK inheritance tax, in so far as they were in her ownership.”
Thatcher’s financial advisors refused in 2002 to explain why she did not appear to own her own house, and stated: “No one’s going to tell you about that.”
This is an arrangement that has been explored before and it’s one that’s always left an intriguing question in my mind, which was whether Thatcher was herself a non-dom. I have no evidence to prove it categorically, and her will is not clear on the issue (I have seen it) but Denis was born of a father from New Zealand and so almost certainly acquired New Zealand domicile of origin. He maintained the ties; as is said of his coat of arms:
Sir Denis wanted to celebrate his family history rather than his own achievements. Hence, there is the demi-Lion rampant holding a set of thatcher’s shears and two golden chevrons depicting roofs. A circlet of New Zealand fern is in honour of his grandfather who settled there around 1880.
Of course, that may just be nostalgia, or was it good tax planning? Maintaining links with your domicile is vital is you want to show you have not adopted another, and as a matter of fact at one time the Inland Revenue agreed non-dom status really quite readily for those who could show a domicile of origin outside the UK as I suspect on the evidence available that Denis Thatcher might have been able to do.
The curious fact would then be that if Denis Thatcher did have non-dom status then so would Margaret Thatcher have had it. That’s because they married in 1951 and until 1974 the common law position of married women was that the domicile of a married woman was that of her husband; that is, she acquired a domicile of dependence from him. Her domicile thus changed with his. In other words, if Denis Thatcher was not domiciled (and that is plausible, but, I stress, not certain) then so could Margaret Thatcher have been.
And that would offer an easy explanation for the offshore ownership of the property Thatcher lived in for decades because, as has been noted by a conference review in Tax Analysts today (firewall):
Another audience member argued that the purchase of U.K. property by people using offshore companies isn’t so “scandalous” because those purchases may be made by U.K. residents who qualify as non-domiciles. “You’re not naive,” the audience member said. “You understand the concept of resident non-domicile, and you understand that successive U.K. governments have allowed U.K. resident non-domiciles some tax advantages that are perfectly legitimate. A lot of what you said is very relevant, but there’s a level of naivete if you don’t accept that there are genuine reasons for people to own offshore companies.”
Well of course there are such genuine reasons – they relate to tax avoidance and have only really benefited non-doms for a long time. I can’t say with certainty that Margaret Thatcher was not domiciled in the UK; the evidence is not clear (although the grant of probate does, rather curiously, relate only to assets in the UK, which may be significant in this context) but the possibility has to be considered, and would provide a surprising new angle from which to view this truest of British prime ministers.
I was quoted in a Daily Mail story over the weekend on Thames Water. As the Mail noted:
Thames Water sparked fury yesterday when it announced it will not pay corporation tax for up to a decade.
Britain’s biggest water supplier has already been berated for racking up more than £1billion in unpaid taxes.
But as it reported soaring profits after the summer heatwave, finance director Stuart Siddall said: ‘It will be seven to ten years until we pay tax.’
Labour’s Margaret Hodge, chairman of the Commons Public Accounts Committee, called it ‘deeply unfair’, saying Thames Water – which is owned by an Australian consortium – had an ‘obligation to pay their fair share in tax’.
Tax accountant Richard Murphy, who helped expose tax avoidance by Starbucks, said: ‘The reality is that much of this will never be paid.
‘They are never going to stop spending money on infrastructure, which means they will probably never pay tax. Companies like this have to say when and if they will ever pay tax.’Let me explain the concern. First, let’s make clear that Thames Water is not doing anything illegal – but tax avoidance is not illegal, so that does not mean that tax avoidance is not taking place. Second, let’s also make clear that there have been suggestions made that Thames is engaged in tax avoidance, some of it offshore through the Cayman Islands, and even though it is claimed by the company that this does not impact the UK tax bill there are reasons for this choice of arrangement. But then let me make the point I referred to when being interviewed for this piece. The real problem with companies like Thames Water is that we have no idea when they will pay tax. The company itself says in its interim statement: The annual accounts are, if anything, even less helpful on the use of the deferred tax liabilities: no clue as to timing is given there, and this was my point. In my opinion a company should be obliged to state when any deferred tax will become due and payable, if at all. Of course such forecasts are bound to be illustrative only, but if company valuation is – as most analysts like to claim – based on the discounted value of future cash flows due by the company then such disclosure is vital to all users of the accounts. Right now it is simply not available. There is another dimension to this; even in a regulated business as Thames Water is to claim that payment of tax benefits the customers of a company is disingenuous. I am aware that water charging is not standard but this pushes the boundaries of credibility beyond any known limit. Thames would be wise to stop making such absurd claims. A little more clarity and a little more honesty in terms of tax incidence in their tax accounting would go a long way.
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