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  • The Channel 4 News report on Sunak’s fund management

    The Channel 4 News report on Sunak’s fund management

    Last night, Channel 4 News reported that Sunak had received payments from a tax haven. My view: Sunak did nothing wrong, and the way Channel 4 reported this was unfair and misled viewers.

    The central allegation is that Sunak, when in the US, was a partner in a hedge fund established in the Caymans, and the partners were paid with a share of the tax haven funds they managed.

    This is true. But it omitted three key facts, and that made it misleading.

    First, almost all hedge funds are based in tax havens. Why? Because if you’re based in country A, making the tax and regulatory rules work for investors from countries A thru Z is really hard. Tax havens make it much easier. Channel 4 fail to mention how standard it is for a hedge fund to be offshore. They imply it’s suspicious.

    Second, they also present as an exciting discovery that Sunak, as a partner in the hedge fund, was entitled to a share of the fund returns. But that’s how hedge funds work – managers’ interests are “aligned” with investors by giving managers a share of the fund returns.

    Third, they suggest there’s some mystery and potentially some tax dodginess here – “Did Mr Sunak earn bonuses offshore in the Cayman Islands”. But at the time, Sunak was living in the US and had a green card. So he was subject to US tax on his income, whether it came from the US, the Cayman Islands, or the moon. (They later give Sunak a quote saying this, but it’s not just his view – it’s intrinsic to the US tax system.

    Then they say “There’s no suggestion Mr Sunak did anything illegal”? No – there’s no suggestion of anything remotely out-of-the-ordinary. And what triggers me is that the media use this same caveat when reporting on the most egregious of tax scams.

    Connoisseurs of the genre will spot the absence of any tax experts in the report. Either:

    1. Channel 4 didn’t speak to any. In which case WTF?
    2. Channel 4 did – the experts said there was nothing to see here, and Channel 4 ignored them.

    There are lots of good reasons to criticise the fund industry. And Sunak is obviously very privileged. If the focus of the report was on these issues then I’d have no argument with it.

    Is it possible that there was tax avoidance going on? In principle, sure. Here’s some questions Channel 4 could have asked:

    • Was this “carried interest”, taxed at the lower capital gains rate in the US and UK rather than the full income rate? (For a hedge fund it shouldn’t be)
    • Did Sunak continue to be entitled to payments from funds he used to manage when he was Chancellor?
    • If so, were these fully declared? And was he fully taxed on them as income (45%), at the lower capital gains rate (20%), or something else?
    • What did the funds do? How were they structured? Was there avoidance going on “lower down” in the structure?

    What we got instead was insinuation-heavy, context-light reporting, which damages the public understanding of tax, and undermines our ability to identify people and politicians who really have been engaged in tax avoidance. Mentioning no names.

    Footnotes

    1. More background – almost no funds pay tax. Why? Because if you buy shares in ten companies you pay tax on your income/gains from the companies. If you buy a fund that invests in the same ten companies then the tax result should be the same. If instead there is another level of tax, in the fund, then you wouldn’t invest through a fund. Collective investment management is a *good thing* for a bunch of reasons. So policymakers generally accept that funds should not be taxed. For onshore funds (e.g. unit trusts) it’s achieved by specific exemptions. For offshore funds, it’s achieved by rules that delineate “good” funds that don’t avoid tax, and “bad” funds that do, and imposing punitive taxes on them (the UK offshore fund rules, the US PFIC rules, and other equivalents elsewhere).

      So for a hedge fund to pay no tax is the correct policy outcome, whether that’s achieved by an onshore company within a specific exemption, or a tax haven company that falls within specific rules that permit it.

      There are currently a few initiatives to enable funds to come onshore; that’s a good thing for a large number of reasons, and I’ll talk more about that another time. ↩︎

  • Nine questions for Nadhim Zahawi

    Nine questions for Nadhim Zahawi

    Nadhim Zahawi has provided a series of unsatisfactory answers about his tax affairs. At least two are provably false (and one I characterised as a “lie” – something I do not do lightly). Another answer is, in my judgment, probably false.

    This is a list of the nine outstanding questions, some of which are very serious, as they suggest that significant tax may have been due as a consequence of Mr Zahawi’s peculiar arrangements, but that this tax may not have been paid.

    In summary:

    1. Why did Zahawi initially give a provably false explanation for the Balshore shares, that his father provided startup capital (I previously termed this, I think fairly, a “lie”)?
    2. Why did Zahawi subsequently give a second, different, explanation, that his father provided valuable advice in exchange for the shares? And why is it so contrary to common-sense, usual practice, and the evidence?
    3. If Zahawi’s second explanation is true, why was no VAT paid on the valuable services provided by his father to him?
    4. Why did Zahawi deny that he benefited from the trust, when we know that he did?
    5. Was this a tax avoidance scheme? If not, what was going on?
    6. When a UK person receives a gift from a trust, that is normally taxable. Did Zahawi pay UK tax on the gift from the trust? If not, why not?
    7. Zahawi says he took a loan from a Gibraltar company. He should have paid (“withheld”) UK tax on his interest payments. Did he?
    8. Why is that same loan not recorded in the Gibraltar company accounts?
    9. Zahawi has taken a series of loans from offshore companies. Were these funded from dividends and gains on the Balshore shares? If they were, did Zahawi pay UK tax on this?

    I have drawn Zahawi’s advisers’ attention to this post, and I am hoping that they or he will respond.

    1. Why did Zahawi initially give a provably false explanation for the Balshore shares (which I called, I think fairly, a “lie”)?

    Zahawi and Stephan Shakespeare founded YouGov. Shakespeare held about 42.5% of the YouGov shares. But Zahawi held none. A Gibraltan company, Balshore Investments Limited, owned by a trust controlled by Zahawi’s parents, held 42.5% of YouGov. What was the reason for this unusual arrangement? 

    Following publication of my first report, and an FT article, Zahawi told several newspapers that the explanation for the Balshore holding was that, when Zahawi co-founded YouGov, he was not in a position to provide startup capital. His father therefore provided startup capital and took a shareholding in YouGov through Balshore.

    I investigated this at length and found no evidence that Balshore had provided startup capital. It may have paid £7,000 for its holding (although possibly this was two years’ later), but given that the other founding shareholder, Neil Copp, paid £287,500 for his shares, the £7,000 could not realistically be described as “startup capital”. And the pricing is wildly uncommercial: if Copp paid £287,500 for 15% of YouGov then somebody providing “startup capital” of £7,000 would receive less than 1%; not 42.5%.

    Hence I concluded that either I had made a mistake, there had been a long-running mistake in YouGov’s filings and accounts, or Zahawi was lying. I invited Zahawi to comment. He did not. But, after I published my findings, Zahawi provided a different explanation (which I’ll refer to below). He did not suggest I had made a mistake, or that YouGov’s accounts and filings were wrong.

    I therefore used the word “lie” to describe his first explanation because I drew a blank as to how else to describe someone saying something that was clearly untrue, and he surely could not have believed was true.  Of course, I don’t know what was in his mind. But my question for Zahawi would be: if you really thought this was a true explanation – why? You surely know £7k isn’t startup capital (and if you don’t, then you should probably take another job). And what changed two days later that altered your belief?

    Absent an explanation from Zahawi I will continue to describe his original, false explanation as a “lie”. I do not do so lightly. I have never before publicly described something as a “lie”, and I only did so after much consideration, and speaking with a variety of legal, tax, accounting experts.

    My question for Mr Zahawi is: you presumably object to me saying that you lied. In which case: can you provide a credible explanation for why you said something that was provably false? If you can, I will of course withdraw my accusation. Otherwise, I will not.

    2. Why did Zahawi subsequently give a second, different, explanation? And why is it so contrary to common-sense, usual practice, and the evidence?

    Following publication of my refutation of his original explanation, Zahawi’s spokespeople started to brief journalists with a new and startling different explanation – that Zahawi had no experience of running a business at the time and so relied heavily on the support and guidance of his father, who was an experienced entrepreneur. His father had also provided Zahawi with financial support, as he had given up his job. It was for these reasons that Balshore received the shares. Startup capital was no longer mentioned as a rationale.

    It’s naturally very plausible that Zahawi’s father provided him with advice, assistance, and financial support – what father wouldn’t? That, however, is very different in nature from the claim being made. The normal kind of parental advice and support would in no way justify receiving *all* the founder shares.

    This second explanation seems unconvincing for a number of reasons.

    • It contradicted the first explanation. In my experience, if a person raises one defence to an allegation, and responds to challenge by raising a second, different, defence, that suggests that both defences may be false.
    • I have come across many successful entrepreneurs, both in my professional practice and socially. It was to be expected that a father would help his son with living expenses, and give him advice and assistance. In return he might receive some shares in the company (although this would be unusual). However, for him to receive the entire founding shareholding, and his son none, was inexplicable to me. I spoke to several entrepreneurs of my acquaintance, and they agreed with my conclusion.
    • One of the hallmarks of generational wealth planning, whether or not it involves tax avoidance, is that it involves passing wealth down the generations. Zahawi’s father, as a successful businessman, would surely have been familiar with this. For the son to make a gift to the father was contrary to usual practice.
    • If Zahawi’s father had been as involved as Zahawi now claims, he could well have been a “shadow director” for company law purposes – “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. This would have undesirable consequences for Zahawi’s father and for YouGov – whilst a startup might not be aware of these issues, I expect that they would have been identified and disclosed in the run-up to YouGov’s IPO in 2005. They were not.
    • It is unclear to me from a company law perspective that it is permissible for a company to issue shares at an undervalue to someone who has provided *no value* to the company. If Zahawi’s story was true, the shares would have been issued to him as a founder (in the usual way) and he would have gifted some (or, just about possibly, all) of the shares to his father (but see below).
    • I searched through other YouGov documentation, news reports, and Zahawi’s own description of his time at YouGov, and could find no evidence of his father having been involved. He could of course still have been involved providing advice to Zahawi behind the scenes (as I would expect any father with business experience to have done), but that did not support the claim that the support was so invaluable as to justify Zahawi’s father receiving all the founder shares.
    • I discussed these matters with journalists from The Times. They spoke to employees who had worked at YouGov in its early years; they had no recollection of Zahawi’s father being in the office and were surprised to hear of his alleged involvement with the business. YouGov then provided an official statement:

    “To YouGov’s knowledge, YouGov had/has no association with Hareth Zahawi beyond any interests he may have held/holds in Balshore Investments Ltd in its capacity as a YouGov shareholder”

    After the publication of The Times‘ article, Peter Kellner, who joined Zahawi and Shakespeare after YouGov’s founding, wrote:

    “For the record, I met Hareth Zahawi during YouGov’s early months. I recall his similarity in appearance to Ariel Sharon. Although he had no formal role in the company’s operations, it was clear that his advice and experience were helpful to Nadhim and, through Nadhim, to YouGov”

    Joe Twyman, an early YouGov employee, wrote:

    “I also remember meeting Nadhim’s father on a few occasions during the early years of YouGov. I always found him to be an extremely friendly and kind man.”

    I regard both as consistent with the reports in The Times. They are also consistent with my previous view; that Zahawi’s father may have provided him help and support behind the scenes, but it is very unlikely that was to the degree that would justify receiving all of Zahawi’s founder shares. “Helpful” seems a long way from sufficient. Hence I regard Zahawi’s second explanation as most likely false (by contrast, I am almost certain that the first explanation was false).

    My questions for Mr Zahawi are therefore: do you acknowledge how unusual it is for a founder share to be issued to someone who is not a founder, and for the actual founder to receive no shares? How do you answer the points above?  Do you have any actual evidence that your father’s support was so significant that it justified the extraordinary step of him taking all of your founder shares?

    3. If Zahawi’s second explanation is true, why was no VAT paid on the valuable services provided by his father to him?

    Let us suppose for the moment that Zahawi’s explanation for the Balshore shares is correct. His father provided him with help, advice and support that was so extensive that it justified Zahawi giving all of the founder shares in YouGov (that would ordinarily have been his) to his father.

    People often think a gift has no UK tax consequences – and inheritance tax and capital gains tax aside, that is generally true. However, sometimes a gift is not a gift.

    If I provide you with free legal advice, that will have no UK tax consequences for you. But if I provide you with free legal advice, and you then make a gift to me of £5,000, then it’s pretty clear that these were not gifts at all. In reality what happened was that you paid me £5,000 for legal advice – and that will have tax and VAT consequences. By “pretty clear” I meant that this is the technical UK tax and VAT result, but also that I think most non-specialists would be unsurprised that this is the result.

    And that is of course what happened here. Zahawi’s father made him the “gift” of substantial advice and assistance. In return, Zahawi gave his father the YouGov shares (or, to be more precise, caused the Balshore shares to be issued to his father’s subsidiary at a considerable undervalue).

    I expect this means that UK VAT was chargeable on the value of the services provided by Zahawi’s father. Naively, if Neil Copp paid £287,500 for 15% of the shares, then the value of Zahawi’s 42.5% stake was over £800,000 – and if Zahawi’s story is correct then this is our starting point for the value of the services his father provided.

    The VAT rate at the time was 17.5% – so we should have expected one of Zahawi, his father and YouGov to account for somewhere in the region of £140,000 of VAT. I doubt very much they did. Why?

    There are four possible explanations:

    • There is a technical reason why VAT did not apply which I am missing (I have considerable VAT expertise but would not say I was one of the leading advisers in this area).
    • The parties intentionally conspired not to pay VAT that was due – i.e. criminal tax evasion. That seems highly implausible.
    • VAT did not technically arise because Zahawi’s father did not in fact provide material value, and Zahawi’s explanation is false.
    • This was a poorly implemented tax avoidance scheme, and the consequences were not thought through.

    Many people will think the concept of a “poorly implemented tax avoidance scheme” is odd, so I should explain this.

    I am familiar with the tax avoidance schemes the Big Four and others created in the 2000s. They were generally carefully constructed and implemented, with legal documentation created to support the scheme and minimise the risk of it failing. This scheme looks amateurish by comparison. There appears to be no documentation at all justifying Balshore’s receipt of the shares. Hence I expect that Mr Zahawi received very limited tax advice when the scheme was put in place (unsurprising given his relatively limited resources at the time). Perhaps it even arose from a casual suggestion from a relative or friend, and no adviser was involved at all – but that is pure speculation on my part.

    The amateur nature of the planning means that mistakes may have been made which meant that, far from avoiding tax, the trust actually triggered a series of undesirable tax consequences. This VAT could be one of those consequences. There may be others, which I discuss below.

    So my question for Mr Zahawi is: was VAT payable on the valuable services you say your father provided? Did you pay it? If not, why not?

    4. Why did Zahawi deny that he benefited from the trust, when we know that he did?

    Zahawi responded to initial reports by saying (in an interview with Sky News on 11 July):

    “There have been claims I benefit from an offshore trust. Again let me be clear, I do not benefit from an offshore trust. Nor does my wife. We don’t benefit at all from that.”

    Later in the same interview, the discussion turned to Balshore. The transcript is as follows:

    Burley:           You or your company once held £20m of YouGov shares in a Gibraltar-based company. What was the reason for using offshore financial structures like this, if not for the purpose of avoiding tax?

    Zahawi:          I was not the beneficiary of the Balshore investment that held those shares.

    Burley:           Who was?

    Zahawi :         My family. It’s the public record – my father.

    On 17 July, Zahawi’s spokesman repeated the denial to the Guardian:

    “Nadhim and his wife have never been beneficiaries of any offshore trust structures.”

    However, all of this is false. Zahawi has demonstrably benefited from the trust and been a beneficiary of the trust (both as the terms “benefit” and “beneficiary” are used in ordinary language, and within their technical tax/legal meanings).

    In 2005, a YouGov report disclosed that a number of loans had been made by YouGov to its directors in contravention of the provisions of the Companies Act 1985. Balshore agreed that a dividend on its shares could be used to repay some of the loan. Zahawi’s spokesman has described this as a gift to Zahawi from his father – that is accurate.  I believe most people would say that was a “benefit” from the trust (given Balshore was controlled by the trust), and therefore that Zahawi was a beneficiary. Furthermore, and importantly, from a UK tax perspective, a person receiving a gift from a trust, or a company controlled by the trust, is receiving a benefit from the trust, and (absent a breach of fiduciary duty by the trustees) is a beneficiary of the trust.

    Zahawi’s statements that he does not benefit from the trust, and has never been a beneficiary, are therefore false. It is hard to understand why he is making them. He must be aware that he benefited from the trust in 2005 (and possibly on other occasions as well). Whether he is setting out to lie, or attempting to carefully word his responses to avoid revealing the truth, is to my mind of little consequence. Both are forms of deception.

    If Mr Zahawi disagrees, then he will have to explain how receiving a gift from a subsidiary of a trust is not a “benefit” – although I confess I do not see how he can do this. The obvious next question is why, then, he made a denial that was false, and that he knew was false.

    The other obvious question is: if Mr Zahawi falsely denied a benefit that is a matter of public record (albeit only found after some digging), then what other benefits did he or his family receive that are not a matter of public record? What assurances can Mr Zahawi give that he has received no other gifts, loans, or other funds from the trust and its companies? How can we believe them, after the previous false denial?

    5. Was this a tax avoidance scheme? If not, what was going on?

    Whether something is a tax avoidance scheme is a question of judgment – there is no single legal definition. However, I would say that it is a scheme if it (1) results in a reduced tax liability compared with what would normally have happened, whilst (2) does not fundamentally change the economics from what would normally have happened, and (3) has no obvious commercial rationale.

    In this case, there is clearly reduced tax liability – dividends and gains that would have been taxed were they received by Zahawi, were not taxed when received by his father. If that was all that happened then this would not be a tax avoidance scheme – it would simply be a gift from Zahawi to his father (albeit a very unusual one). The economics would have fundamentally changed because what would have been Mr Zahawi’s property instead became his father’s.

    However we have reason to believe that at least some of the benefit of the untaxed dividends and gains were returned by Balshore, and/or Berkford to Zahawi, whether by gifts or loans. At this point it does look like a scheme – because it is putting Zahawi in the same position as if he had received the dividends/gains, but without paying tax on them. The degree to which it is an avoidance scheme will depend upon how great the gifts/loans were.

    Mr Zahawi is adamant this is not a tax avoidance scheme. But why? Where funds derived from dividends/gains on the shares are provided to him, and he pays no tax on that receipt, he has very literally avoided tax on what would otherwise have been his dividends and gains.

    We also have to return to the absence of a credible rationale for Balshore receiving the shares. Uncommercial and inexplicable transactions are typical hallmarks of tax avoidance schemes.

    6. Did Zahawi pay tax on the gift from the trust? If not, why not?

    When a trust (or a company under its control) makes a capital payment to a UK person, that person is considered a UK beneficiary of the trust. The payment is taxable in the hands of the recipient, and the trust itself has to file UK tax returns. The 2005 gift to Mr Zahawi was therefore almost certainly taxable (probably as a capital payment from a trust, but the precise basis will depend upon the precise facts, which I do not have; however it is overwhelmingly likely the payment was taxable).

    So: did Mr Zahawi declare the 2005 gift to HMRC and pay tax on it? If not, on what basis? Has the trust been filing UK tax returns?

    It is important to note that failure to pay tax that is due is not tax avoidance. It is simply a breach of the law. If intentional, it would be criminal tax evasion – although in this instance I expect that this was simply a badly implemented tax avoidance scheme, and Mr Zahawi and the other participants did not understand the consequences of what they had done.

    Did Mr Zahawi and his family receive other gifts, loans, payments or other benefits from the trust and the companies associated with it?

    7. Zahawi says he took a loan from a Gibraltar company. He should have paid (“withheld”) UK tax on his interest payments. Did he?

    Mr Zahawi acquired the Oakland Stables in Warwickshire in 2011 for £875,000. At the time, it was reported that he acquired the property with a secured loan from Berkford Investments Limited (Berkford), which I believe to be owned by the same trust as Balshore. Zahawi asserted that this was a commercial loan

    In my experience, UK residents do not ordinarily borrow from Gibraltar companies, because the UK applies a 20% withholding tax on interest payments to Gibraltar (in the way it would not for interest payments to e.g. Ireland). The tax adds an additional cost that most borrowers and lenders would not regard as commercially palatable. This is a very simple tax point, that I would expect a competent trainee lawyer or trainee tax accountant to be able to identify.

    So my question is, for the eleven years the loan has been in place, has Zahawi been withholding tax from the interest and accounting for it to HMRC?

    Failure to do pay the tax would again not be tax avoidance; it would simply be a breach of the law. If that failure was intentional it would amount to criminal tax evasion. Again, if this occurred, I expect it was a consequence of a badly implemented tax avoidance scheme, and the participants therefore not understanding the tax consequences of what they had done.

    8. Why is that same loan not recorded in the Gibraltar company accounts?

    In 2010, 2011 and 2012, Berkford’s tangible assets were £3.2m, with debtors of £100. The Oakland Stables loan should have increased the debtors by a material amount over this period – but it did not. Nor is there any obvious correction in subsequent periods. I have posted the relevant documents here. The full Berkford accounts are here.

    It is possible that the accounts are wrong (although to miss several hundred thousand pounds for ten years would be extraordinary). It is also possible that a peculiar accounting methodology was adopted for some reason (although the accountants I have spoken to view that as unlikely).

    The other possibility is that Berkford did not regard this as a loan, but a gift. The land registry entry was made so that the arrangement appeared to be a loan from the UK “side”, but the parties did not consider that the Gibraltar accounts of Berkford would become available. That would (if it resulted in tax not being paid) take us into the territory of criminal tax evasion. However I find it hard to believe that Mr Zahawi would engage in this kind of conscious, and rather involved, deception, and therefore I shy away from this explanation as well. [Update: a commentator below makes the excellent point that a gift would also have depleted the balance sheet, meaning this scenario also involves error or fraud in Berkord’s accounts. So I would now regard this explanation as even less likely]

    So my question for Mr Zahawi is: why is the Oakland loan not in Berkford’s accounts.

    I appreciate he will have to ask his father to ask the law firm running Berkford. However, given how peculiar this looks, I trust he will see that it is an important matter to clear up.

    9. Zahawi has taken a series of loans from offshore companies. Were these funded from the Balshore shares? If they were, did Zahawi pay UK tax on the loans? If not, could the loan charge apply?

    It appears that a property company controlled by Mr Zahawi and his wife, Zahawi and Zahawi Ltd, has received perhaps £29.8m of unsecured loans. In my experience, commercial real estate lending is almost always made on secured basis (i.e. secured over the real estate). Hence my expectation is that these loans are not commercial, and therefore that they were made by a related party – perhaps Balshore or Berkford.

    My question for Mr Zahawi is: were these loans, or any others to Mr Zahawi, his wife or their companies, made on or after 9 December 2010, funded directly or indirectly from dividends or gains on the YouGov shares held by Balshore?

    If they were, and the loans were made on or after 9 December 2010 then the disguised remuneration rules in Part 7A ITTEPA 2003 may apply, with the principal of the loans then taxable as PAYE income. If HMRC is outside the normal limitation period, and reasonable disclosure was not made to HMRC at the time, then the loan charge in Schedule 11 Finance (No. 2) Act 2017 would apply; the loans would again (speaking broadly) be taxable as PAYE income.

    Mr Zahawi will be aware that the loan charge was, and remains, highly politically controversial, within Parliament and outside. The suggestion that the Chancellor himself could be subject to it is likely to be greeted with general astonishment. I would therefore urge Mr Zahawi to be as clear as possible whether any loans to him, his wife, or their companies were funded directly or indirectly from the YouGov shares.

    Why does this matter?

    As I said when I first wrote about Mr Zahawi, the public has a right to know if there are specific and obscure provisions of the tax code from which the Chancellor personally benefits. The public interest is even more powerful if it appears likely that the Chancellor, who is ultimately responsible for HMRC, will be the subject of an HMRC investigation. All the more so if, as I believe is the case, there are credible reasons to believe that the Chancellor has provided a series of false answers about his tax affairs.

    These questions in large part result from help and assistance I’ve received from tax lawyers, tax accountants, commercial lawyers and entrepreneurs. I am immensely grateful for all of their help. If you have any further thoughts, please do post comments below, or contact me.

    Footnotes

    1. https://youtu.be/l4fIgYX9RAY ↩︎

    2. https://www.theguardian.com/uk-news/2022/jul/17/zahawi-urged-to-explain-source-of-26m-mystery-loans ↩︎

    3. See here -the Guardian says £26m but an accountant I am working with believes that the correct figure, even after excluding loans from directors, is £29.8m. I earlier suggested the figure was £12m – this was my error (and mine alone). ↩︎

  • Did Jeremy Hunt avoid tax on his £15m payout from the sale of Hotcourses?

    Did Jeremy Hunt avoid tax on his £15m payout from the sale of Hotcourses?

    No.

    This is the next in my series of posts on the Tory leadership candidates.

    Jeremy Hunt made a sweet £15m from the sale of Hotcourses, the company he founded. There were a number of ways he could have avoided tax on the sale:

    • Hold Hotcourses through an offshore company (saving stamp duty and, more importantly, capital gains with a bit of extra “planning”).
    • Move abroad before selling the shares.
    • Hold through a UK company and at least try to defer the capital gain.
    • Make some dubious claim to be a non-dom, and hold the Hotcourses shares offshore.
    • Use some dodgy tax avoidance scheme to try and magic the gain away (in 2017 this was about as plausible as a chocolate teapot, but that doesn’t always stop people trying).
    • Get some non-dom relatives to establish an offshore trust, have the trust establish a company in Gibraltar, and have that company hold the Hotcourses shares. Then the Gibraltan company makes a tax free profit. Hard to believe anyone would do something so transparent.

    There’s no sign Hunt did any of this. The Companies House documents show that he held the shares himself and sold them himself. He probably paid around £2m in tax. Good for him.

    Footnotes

    1. Stamp duty is paid by the purchaser, but they typically knock it off the purchase price. Yes, it’s only 0.5%, but people still routinely avoid it ↩︎

  • Did Nadhim Zahawi’s family trust provide any capital for its 45% founder stake in YouGov?

    Did Nadhim Zahawi’s family trust provide any capital for its 45% founder stake in YouGov?

    This is now largely of historic interest; after I published this analysis, Zahawi’s people started putting out a different story – that Balshore received the shares because Zahawi “had no experience of running a business at the time and so relied heavily on the support and guidance of his father, who was an experienced entrepreneur”. That always seemed unlikely, and has been debunked by The Times.

    Rather than complicate my already long report on the Zahawi/YouGov arrangements, I’m putting this onto a separate page. It consolidates my Twitter thread posted earlier this morning.

    Nadhim Zahawi founded YouGov, but took no shares in it. A Gibraltar company, Balshore Investments, did instead. Zahawi says this wasn’t tax avoidance, but was his father injecting capital into the business. Is there any evidence for that?

    I’ll go through the trail of evidence of YouGov’s capital, from its founding in 2000 to the IPO in 2005.

    Executive Summary

    There are only three possibilities:

    1. I am missing something.

    2. Balshore did provide capital, but this was omitted from all of YouGov’s accounts and filings, and not even picked up during the IPO.

    3. Zahawi is lying, and this was tax avoidance.

    The evidence

    When a company issues shares, it has to complete Companies House form 88(2). I’ve consolidated all of YouGov’s pre-IPO forms here. Going through them one-by-one:

    YouGov’s first share issuance, May 2000

    The original share issuance looks like this (first two pages of the PDF):

    • Neil Copp provided £287,500 of capital & got 15% of the shares.
    • Stephan Shakespeare provided no capital and got 42.5%. He was one of the two principal founders – so that’s unsurprising. The shares were a reward for his work.
    • Zahawi, the other founder, got nothing. That is surprising and unusual
    • Balshore, on the other hand, got the same deal as Shakespeare. 42.5% of the shares for no payment. There is no suggestion Balshore provided any services (and that would have been disclosed as a related party transaction).

    But perhaps the form is wrong and Balshore did provide capital. Let’s look at the accounts – here’s the balance sheet from two months after that share issuance:

    No sign of any equity capital other than Copp’s.

    Startups often make mistakes, and Companies House filings and accounts can be wrong. This is generally picked up as a company matures… particularly if it’s planning an IPO (which is the path YouGov was on).

    YouGov did just that… in 2002, YouGov filed a Companies House form showing Shakespeare and Balshore each acquired more shares back in 2000. But for “nominal” value – only £7k each. It is likely (but we cannot be sure) that the £7k was paid in 2002, not 2000, and that the document was backdated. It is also possible the £7k was really paid in 2000, and they just forgot to file the form until 2002… but that would mean all the accounts between 2000 and 2002 were wrong, which feels unlikely (and would ordinarily have been corrected subsequently when the mistake was recognised).

    This wasn’t a capital injection – just (typical) cheap shares for founders.

    Balshore wasn’t a founder. Why did it get this?

    Other pre-IPO share issuances

    There were a load more share issuances in the next few years – starting on page 5 of the PDF.

    • The wonderful Peter Kellner got involved, so got shares for free. As did Roland Berger & Partners (consulting firm).
    • A series of small freebie shares were dished out to employees and consultants (including @JamesDuddridge). Again, perfectly normal for a startup.
    • Chime Communications then acquired 27,500 shares for the (bargain) nominal price of 10p each. There’s a good reason for that – we’ll come to it later.
    • 27 November 2001. More consultants got to acquire cheap shares.
    • Then Peter Kellner gets to buy more shares at the cheap but eccentric price of 6.1p each. Then the same a few months later, and again, and again. He’s paying a bit, but it’s not what you’d call capital.
    • We’re up to page 24 of the PDF, and it’s August 2003: another consultant pays nominal 1p each for some shares.
    • There are now a lot of shareholders. At this point, founders often want to preserve their ability to take dividends without giving dividends to everyone. That happens on page 26 of the PDF: Shakespeare, Zahawi, Kellner each get two special shares (with Shakespeare’s giving one of his to his wife).
    • Start of 2005 – another consultant gets shares for 1p each:

    And that takes us up to the April 2005 IPO.

    At this point I count £113,630 of share capital, £312,711 of share premium.

    None of that was from Balshore.

    That is broadly consistent with the Jan 2005 balance sheet – except it shows £370,767 of share premium:

    I can’t see where the additional £58k comes from, but it’s hardly a significant amount of capital, and it wasn’t Balshore (as they haven’t received any shares since 2000).

    Debt finance

    There are broadly two ways to finance a company: equity (shares) and debt (loans, bonds, etc). Could Balshore have provided debt finance and that’s how it got the shares for free?

    Back in 2000, the year Balshore got its shares, there were £91,459 of “other creditors”. Could that be debt finance from Balshore?

    Doesn’t look like it. The £91k is still there in the next few years, but there’s no corresponding entry in Balshore’s accounts – just £35k (which I assume is an estimate of the value of its YouGov stake, but could be something else).

    It’s possible Balshore’s accounts are wrong, and the £91k was a loan from Balshore.

    But it’s not credible for Neil Copp to pay £287,500 cash for a 15% stake, but Balshore to *lend* £91k and get a 45% stake. Commercially people just don’t behave like that (and it probably would have been contrary to company law).

    There was some reasonably significant debt funding, but from Chime Communications and not Balshore. Which explains why (way upthread) Chime got cheap shares.

    The conclusion

    Zahawi is saying that Balshore got a 45% stake in YouGov because it provided capital to YouGov.

    There is zero evidence of any capital from Balshore (except, just about possibly, a £91k loan – but that wouldn’t justify a 45% stake).

    I see only three possibilities:

    1. I am missing something. What?
    2. Balshore did provide capital, but this was omitted from all of YouGov’s accounts and filings, and not even picked up during the IPO (when financial statements are carefully checked).
    3. Zahawi is lying, and this was tax avoidance.

    I don’t accuse someone of lying frivolously. But Zahawi is making a definitive claim and, right now, there is just no evidence for it. If the answer is indeed that I’ve made a mistake, or the YouGov and Balshore filings are all mistakes, Zahawi should prove it by pointing us towards some actual evidence. Not just making assertions in background briefings to journalists.

    For anyone wanting to go hunting:

    And this was my previous analysis, for which this post really serves as an appendix.

    Footnotes

    1. Thanks to K for the correction here – I’d wrongly said they were special voting shares ↩︎

  • Did Nadhim Zahawi use an offshore trust to avoid almost £4m of capital gains tax?

    Did Nadhim Zahawi use an offshore trust to avoid almost £4m of capital gains tax?

    January 2023 update: the article below was written on 10 July 2022 and then updated over the next few days, with the final amendments on 16 July 22. It hasn’t been updated since, and so doesn’t reflect what we now know: that at the time I wrote this, Zahawi was in the midst of negotiations with HMRC to settle unpaid tax on the Balshore structure.

    This has now been overtaken by events – Zahawi’s two contradictory explanations for why a Gibraltar company came to hold his founder shares in YouGov now both look fairly clearly to be false. So, whilst I could replace all of this piece with the single word “Yes”, I will instead update it properly over the next day or so. For the moment, see The Times’ excellent report here.

    This is the third of my pieces on Tory leadership contenders.

    I’ve spent some time looking into Nadhim Zahawi’s tax affairs, and that’s culminated in Sunday’s FT story, and the report that follows below. I’ve used information in the public domain, my tax expertise, and input from other tax experts, to try to “reverse-engineer” Zahawi’s tax and corporate planning, and work out what’s going on. This may or may not relate to yesterday’s report in the Times that HMRC is investigating Zahawi, following a tip-off from the National Crime Agency.

    Zahawi is an impressive businessman who deserves plenty of credit for his part in founding YouGov. However, his tax affairs raise some serious questions:

    • Zahawi and Stephan Shakespeare founded YouGov in 2000. Shakespeare held 42.5%. Another director, Bruce Copp, held 15%. The remaining 42.5% were held by Balshore Investments Limited, a company incorporated in Gibraltar. Zahawi held none, which is odd. All this is visible in YouGov’s first Companies House return.
    • What is Balshore Investments Limited? The 2009 YouGov annual report says “Balshore Investments is the family trust of Nadhim Zahawi, an Executive Director of YouGov plc” (see page 25 here). Balshore was established around the same time that YouGov was incorporated (compare this with this).
    • A perceptive anonymous commentator below spotted that the founder shares are stated in YouGov’s filings to be issued for the “knowhow expertise and effort” which was provided by Stefan Shakespeare, Neil Copp and Balshore Investments. Either Zahawi’s role in the company has been exaggerated, or Balshore was a front for Zahawi. Which is it?
    • Zahawi now says that Balshore provided capital to YouGov, and that’s why it got the 42.5% shareholding. I’ve been through the historic filings and accounts, and there’s no evidence of that. See my separate post here.
    • A company isn’t a trust – this is likely shorthand for “a company owned by a family trust”. We can see that a trust exists, separate from Balshore Investments Limited but linked to it, in other Companies House filings. These show that Zahawi’s parents each have “significant influence or control over the trustees” of a trust.
    • Zahawi denies that he benefits from the trust. But the obvious conclusion from the peculiar shareholdings is that Zahawi engineered for his family’s trust to hold the shares that otherwise would have gone to him, as the founder. The obvious rationale for this is tax avoidance. If Zahawi disagrees, he needs to explain why Balshore came to hold so many shares, and why Zahawi held none.
    • Zahawi says he and his wife “[do] not benefit from an offshore trust”. This is not quite the same as saying he, his wife and children, have never benefited from the trust and will never benefit from it. If Zahawi wishes to make the position clear, he needs to make a clear denial. Did any of his family benefit from the trust – payments, loans, anything? And could they in the future?
    • And – as the same commentator pointed out below – Zahawi absolutely did benefit from the trust in 2005, when a dividend that would have gone to Balshore was instead used to repay a loan YouGov had made to Zahawi. See page 36 here.
    • If Zahawi had held the shares directly, he would have paid about £3.7m of capital gains tax when they were sold in 2017. The trust likely paid no tax. So – unless there is an innocent explanation I am missing – £3.7m of tax was avoided.
    • The trust may also avoid UK inheritance tax on assets that ultimately will go to Zahawi’s children. If its assets were just the £24m, that would be almost £10m of inheritance tax avoided. Are there other assets in there? Are the trust assets fully subject to inheritance tax? Again, only Zahawi can clarify this.
    • Zahawi denies he was ever a non-dom. This is not correct. Zahawi was born in Iraq and moved here aged 11. Until age 16 he was absolutely a non-dom. At 16 he could have acquired a UK “domicile of choice”, but more likely remained a non-dom for some time. Being a non-dom is not tax avoidance – it’s just how the rules work. The question is what a person does with their non-dom status. Zahawi surely didn’t set out to deceive – he just didn’t speak to his tax adviser before issuing the denial. But that means we can’t believe anything else in the denial.
    • If Zahawi or his children have benefited from the trust, or could benefit, then why is it not included in Zahawi’s entry in the register of Members’ Interests or the register of Ministers’ Interests?

    There may be straightforward answers here, and no tax avoidance at all. Only Nadhim Zahawi can clarify the position. He should disclose what was paid in tax on the YouGov disposal, and disclose the purpose and tax treatment of the offshore trust.

    The suggestion that we have a Chancellor who’s used an offshore trust to avoid tax is hugely damaging to public faith in the tax system. Worse still, the chancellor is ultimately responsible for the UK tax code. The public has a right to know if there are specific and obscure provisions of that code from which the Chancellor personally benefits.

    And there’s an obvious contrast with Jeremy Hunt, who made a similar sum from selling his company, but used no trust or holding company and, I expect, simply paid the tax.

    A personal note: I’m not some hopeless naïf, gasping with horror at what are straightforward corporate arrangements. I was a tax lawyer for 25 years, I’ve acted for hundreds, perhaps thousands of businesses – large and small – and seen tax planning of all kinds. This is not normal. And I’m not a partisan, smearing a Tory for the fun of it – Tory Ministers have lauded some of my previous work.

    What we know – the initial shareholders in YouGov

    Nadhim Zahawi founded YouGov in 2000 with Stephan Shakespeare. Initially Shakespeare held 42.5% of the share capital, Neil Copp held 15%, and Balshore Investments Limited held 42.5%. Zahawi held none. This is all clear in YouGov’s first Companies House return.

    The shares were stated in YouGov’s filings to be issued for the “knowhow expertise and effort” which was provided by Stefan Shakespeare, Neil Copp and Balshore Investments. Copp paid £287,500 cash; Balshore and Shakespeare paid nothing. This is reflected in YouGov’s first set of accounts, which show £287,500 share capital and premium, and nothing else. Balshore provided no additional funds.

    Zahawi’s people are currently claiming that Balshore provided capital – but there’s no sign of this in the Companies House filings, the 2000 accounts or any later accounts. Startup companies get things wrong, but it tends to get corrected later when things become more formalised. Their explanation either isn’t correct, or the money vanished without trace. My full analysis of the historic filings and accounts, step-by-step, is here.

    These shareholdings were reduced over time as shares were given to others involved in the business, and outside investors provided equity financings. When YouGov was listed on AIM in 2005, Balshore Investments held 18.77% of the shares (see page 15 of this document).

    What we know – there is a family trust

    Zahawi’s parents control an offshore trust which holds two Gibraltarian companies, one UK company, and has a minority interest in a US LLC.

    There is clear evidence for this:

    • As the Guardian reported in 2017, a YouGov filing described a Gibraltar company called “Balshore Investments” as the “family trust” of the Zahawis. Zahawi then refused to answer whether he was the beneficiary of a trust.
    • The 2009 YouGov annual report says “Balshore Investments is the family trust of Nadhim Zahawi, an Executive Director of YouGov plc” (see page 25 here). This is not a one-off – the status of Balshore is also confirmed here and here. And given Zahawi’s senior role in YouGov at the time, it’s unlikely he was unaware of this disclosure.
    • A company is not a trust, so the disclosure is a bit mangled. Zahawi would surely not have mentioned a trust if no trust existed. So the obvious inference is that Balshore is owned by a family trust.
    • Strictly I’m sure it’s right that the trust is controlled by Zahawi’s parents. But the way such trusts work, one would normally expect that that Zahawi himself, and/or his children can be beneficiaries of the trust (now, in the past, or in the future). Why else would Zahawi arrange for the trust to receive his, very valuable, YouGov shares? If that’s right, it’s a way for Zahawi to get the benefit of owning the shares, but escape the tax.
    • I can now confirm the existence of a trust from Companies House filings. These show that Zahawi’s parents each have “significant influence or control over the trustees” of a trust which has significant control over a company called Crowd2Fund Limited. Balshore Investments Limited, used to be a shareholder of Crowd2Fund, but no longer is. So this provides independent confirmation that the trust and Balshore are linked.
    • YouGov disclosures also show that, from 2008, Balshore Investments held 25% of Privero Capital Advisors Inc, a US hedge fund advisor

    So it seems reasonably clear that Zahawi’s parents controlled a trust, which held Balshore, which held the YouGov shares (possibly with other entities in the ownership chain). Neither the trust nor the companies it holds are mentioned in Zahawi’s list of Ministers’ Interests or Members’ Financial Interests. Parliamentary rules expressly require that property held in trust has to be disclosed (see footnote 47 here). The fact Zahawi does not himself control the trust shouldn’t change this. If, as I am assuming is the case, Zahawi or his children can benefit from the trust, then it should be disclosed (regardless of whether they benefit today).

    What we know – the trust made at least £27m of capital gains

    Balshore Investments Limited sold about £24m of YouGov shares between 2006 and 2017/18

    • On 14 July 2006, Balshore Investments Limited sold 830,478 shares for just over £3.6m (see page 15 of the YouGov annual report).
    • On 4 April 2008, Balshore Investments Limited sold 2,518,500 shares for just under £3.6m (see this directors’ share dealing report). Many thanks to @ChrisDavidStone on Twitter for finding this.
    • At some point between 31 July 2017 and 31 July 2018, Balshore sold its remaining stake – Balshore is not listed as a major shareholder in the YouGov 2018 annual report (compare page 52 here with page 56 here). My assumption is that Balshore sold all its shares – this will have yielded at least £20m

    So likely total sale proceeds of £27m.

    This is much, much larger than the returns made by Zahawi and his wife over their personal shareholdings. Zahawi’s wife, Lana Saib, held about 0.8% of YouGov shares, which she sold in 2007/8. I’m going to assume that was taxable in the usual way. And Zahawi held options over 359,447 shares. Again I’ll assume that was taxed in the usual way.

    The obvious question is: why does the founder of a company hold less than 1% of the shares in his company, but his parents hold 19% (and originally 42.5%)? The obvious inference is that they were holding the shares on his behalf, to avoid the tax that would have been paid had he held directly.

    Putting all this together, what actually happened?

    Absent a better explanation of why Zahawi’s parents came to hold 42.5% of YouGov, I am assuming something like this happened:

    • Zahawi arranged for the YouGov shares that would have been his, as a founder of the company, to instead be issued to Balshore Investments, a Gibraltar company held by his parents’ offshore trust.
    • The trust was established when his parents were non-doms, and so the shares became “excluded property”, not subject to UK income tax, capital gains tax or inheritance tax, even if his parents subsequently became UK domiciled.
    • The shares were held through Balshore, and not by the trust directly, so that the trust did not hold “UK situs” property – that would have stopped the scheme from working.
    • Prior to 2008, Zahawi’s parents could have lived in the UK and remitted the trust funds back to the UK with no capital gain. After 2008 they would be taxed, but only on the post-2008 gain (this is all an over-simplification, because the post is too long already).
    • Once Zahawi’s parents left the UK, everything became easier, and they could deal with the trust property entirely free from UK tax. The one thing they couldn’t do is pay out the trust funds directly to Zahawi or his family in the UK – but there are plenty of ways he and his family could still have benefited from them.
    • The capital gain on the 2006 and 2017/18 share sales therefore avoided UK tax.

    There are some additional complications, but it’s reasonable to assume they were solved, as otherwise why would valuable YouGov shares be in a Gibraltar company held by a trust?

    How much capital gains tax was avoided?

    If the above is right, the actual tax paid on the £24m share sales was zero. To calculate the tax avoided we should look at the tax that would have been paid if the trust didn’t exist, and Zahawi held the shares directly, and sold them personally. Like Jeremy Hunt did.

    I’m assuming Zahawi paid next-to-nothing for the shares originally, as he was a founder. So the £24m proceeds from the sales of the YouGov shares would all have been taxable capital gain.

    Let’s do the math:

    The £3.6m gain in 2006: the CGT rate at that point was 40%. But business assets benefited from a “taper” which after six years of ownership reduced the gain by 75%. So tax = £3.6m x 25% x 40% = £360,000.

    The £3.6m gain in 2008: this sale was right before taper relief was abolished (and was stated to be motivated by that – presumably that was the other shareholders’s concern; Balshore, as a Gibraltar company, wouldn’t care). So again £360,000

    The £20m gain in 2017/18: the rate was 20%, but Zahawi would have benefited from the special 10% entrepreneurs relief rate. From 2008 to 2020 there was a £10m annual limit to entrepreneurs relief. Tax = the first £10m at 10%, then the second £10m at 20% – i.e. £3m in total.

    Total tax: around £3.7m.

    Could there be inheritance tax avoidance as well?

    Not on the original YouGov shares. The shares would, if held directly by Zahawi, have benefited from the very generous inheritance tax relief for business property (see my blog). No inheritance tax on them, and no avoidance needed.

    But what about the cash the trust received after selling the shares, and any other assets purchased with the cash? If Zahawi held the cash/assets directly then that would have formed part of his inheritance tax estate. But if Zahawi can say the shares were contributed to the trust by his parents, who at that time were non-doms, then any non-UK assets (i.e. the shares in the Gibraltar companies) will be entirely outside Zahawi’s inheritance tax estate.

    That suggests potential inheritance tax avoidance of almost £10m. More if the assets have grown since (as is likely).

    Does the structure as described work?

    If the above is an accurate description of what happened, then I would have very serious doubts that it is effective. Realistically the shares were not settled on trust by Zahawi’s parents – they were originally within the control of Zahawi, and he settled the trust via his parents. If I was HMRC I would challenge the 2017 capital gain position on that basis.

    Of course if I am misunderstanding what happened, then my claim in the previous paragraph is irrelevant.

    Caveat

    Much of the above is speculation, based upon public domain information and my and others’ tax expertise. I will happily correct any technical mistake; and if Zahawi confirms or denies any element of this analysis then I will amend my post.

    Credits

    Thank you to all the tax experts – accountants, barristers and solicitors – who contributed to this research. I can’t name them, but I’m incredibly grateful for their help.

    Footnotes

    1. Updated 11am on 11 July with YouGov’s shareholdings back in 2000, which makes clear that the offshore structure was there from the start; updated at 12pm with a personal note.

      Updated again 12.20pm on 11 July with the incoporation dates of Balshore and YouGov.

      Then updated later that afternoon with more on Balshore thanks to the brilliant commentator “Tigs”.

      Updated on 12 July reflecting Zahawi’s purported explanation for why Balshore got its shares, and referring to my full analysis of that claim here.

      Updated on 13 July with the 2008 share sale, courtesy of @ChrisDavidStone.

      Updated again on 14 July because my autocorrect just can’t can’t spell “Zahawi” ↩︎

    2. Zahawi did acquire a small shareholding later, as did his wife, but these were a fraction of the Balshore holdings ↩︎

    3. There’s a neat example of this in the company’s second form 88(2) dated 25 October 2002 but backdated to 6 May 2000. It shows further shares being issued to Balshore and Shakespeare for £7,000 each – much cheaper shares than Copp received, and typical of founder shares. Presumably this reflects a deal the parties thought they made in 2000 but never formalised – strictly a breach of company law, but one with no real consequence once corrected. The idea hundreds of thousands of pounds of capital could disappear without trace, even after all the due diligence that comes with an IPO, is for the birds ↩︎

    4. By that time Balshore had 8 million shares, just under 8% of the total. Down from 25% (the same as Shakespeare) in 2005, at the time of the IPO. The number is hard to track, given share splits over time, but it’s reasonably clear Balshore didn’t buy any additional shares after 2000 ↩︎

    5. It’s possible that Balshore didn’t sell all its shares, but retained a holding of less than 3% (so it’s not visible in the reporting), but it’s unclear why Balshore would do that; even if it did, that just makes the tax avoided prospective rather than historic, and the abolition of entrepreneur’s relief means the potential avoidance will be larger. ↩︎

    6. For example, section 13 TCGA will deem capital gains of a foreign “close” company to be gains of its UK owners; a possible solution here is that Balshore, whilst a Gibraltar company, was made tax resident in an EU country such as Cyprus, Malta or Luxembourg. Another possible solution is that the Zahawis took the position there were no UK “participators” in Balshore. Another is that they had left the UK by the time of the capital gain. There’s no way to know based on the information we have ↩︎

  • Are the Sunaks using an offshore trust to avoid £m in UK tax?

    Are the Sunaks using an offshore trust to avoid £m in UK tax?

    I’m writing a short series of posts on the Tory candidates and tax. Today: the Sunaks. A recap of what we know, what we don’t, and the two big outstanding questions.

    The following has been overtaken by Sunak’s recent denial to Andrew Marr that he’s used tax haven trusts. My assumption is that this denial is correct, and the Independent report was wrong. I’m keeping the rest of this post up because I think the point is of general interest. Right now there is no reason to believe the Sunaks are using an offshore trust to avoid tax.

    The following is speculation based upon information on the public domain, my experience as a tax lawyer for many years, and conversations with other tax experts. I could be wrong – and if the Sunaks confirm that their tax position is actually completely straightforward, I’ll happily post a correction and delete my Twitter thread.

    What we know about the Sunaks

    After some initial resistance, the Sunaks eventually admitted that Akshata Murty is a non-dom, and that she had historically claimed the “remittance basis”. Which means she wasn’t taxed on her considerable overseas income – primarily several $million a year from Infosys, the Indian IT company started by her father.

    After a considerable kerfuffle, Mrs Murty eventually agreed to stop claiming the remittance basis. Does that mean the Sunaks now pay UK income tax on the $m in Infosys dividends? Not necessarily.

    The key piece of the puzzle: The Independent reported back in April that both Akshata Murty and Rishi Sunak were beneficiaries of offshore trusts in the British Virgin Islands and the Cayman Islands. This was never denied – the Sunaks refused to comment.

    What we know about wealthy non-doms

    Non-doms aren’t taxed on their foreign income and gains (my previous post explains this in more detail). That’s very generous of the UK, and very lovely for them. But, like all good things, it comes to an end. Either the non-dom becomes so attached to the UK that they can no longer credibly claim to be a non-dom. Or, after fifteen years, they become “deemed domiciled” in the UK by operation of law.

    But what if you really, really, don’t want to lose the lovely ability to rack up foreign income and gains tax-free? Easy: set up an offshore trust before you lose your non-dom status. The trust then effectively preserves the tax-free nature of the assets in the trust forever. This kind of arrangement is called an “excluded property trust” and is absolutely standard planning for wealthy non-doms – and you can see just how standard it is if you Google “excluded property trust”.

    So it would be extremely unsurprising if Mrs Murty set up an excluded property trust.

    What we don’t know – but can speculate

    Let’s speculate that one of the trusts disclosed by the Independent is an excluded property trust holding Mrs Sunak’s Infosys shares. This could be completely wrong – in which case the Sunaks should say so, and I’ll correct this post.

    But if that’s right, when Mrs Murty said she would now be taxed on her overseas income, she was being exceedingly cute. The reality would be that the dividend income is received by their offshore trust, and so isn’t Mrs Murty’s income at all. The Sunaks would then be avoiding several £m of UK tax on the dividends, and – if the trust sells the shares in the future – there’s no capital gains tax on the sale.

    Whether or not Mrs Sunak is claiming the remittance basis would then be a red herring. Her non-dom status enabled her to set up the trust and put the shares in it (in a way a normal UK resident couldn’t). But the trust income/gains remain untaxed.

    Why we shouldn’t forget inheritance tax

    Most of the press coverage around the Sunaks and tax focussed on income tax – and if the above speculation is right, the Sunaks are avoiding several £m of income tax each year on the Infosys dividends. But inheritance tax is much much more important – with holdings of close to a billion dollars, the Sunaks’ estate would face inheritance tax of several hundred million pounds if the Sunaks held their assets directly. An excluded property trust would avoid that tax.

    The key questions

    There are really just two:

    • What is the purpose of the offshore trusts and what do they hold?
    • Does Mrs Murty hold the Infosys shares and other foreign assets directly, so she’s now fully taxed on their income? Or are they in trusts, structured so as to escape UK tax?

    Is this tax avoidance, and does that matter?

    Whether something is or is not tax avoidance is a subjective question. But my view is: being a non-dom and claiming the remittance basis is not tax avoidance – it’s how the rules are supposed to work (stupid as that may be). It does, however, feel inappropriate for the family of a Minister.

    But using offshore trusts to artificially extend the benefits of non-dom status is in my view clearly tax avoidance. And for a Chancellor or Prime Minister, it creates an impossible conflict of interest – it’s the job of Government to close tax loopholes, not secretly benefit from them

    David Cameron was criticised for inheriting £30,000 from his father that had been in an offshore unit trust. I thought that was unfair – a unit trust is not very avoidance, and you can hardly blame Cameron for what he inherited. In any case, Cameron later confirmed he and his family did not benefit from offshore trusts.

    By contrast, Sunak is asking to be Prime Minister whilst refusing to comment on whether he is a secret beneficiary of an offshore trust which conceivably avoids £100m of tax. He should clarify the position.

    Inevitable caveats

    I am speculating based upon information on the public domain. If the Sunaks confirm they don’t have valuable assets in an offshore trust, and are actually paying income tax on the Infosys shares and other foreign income, I’ll correct this post and delete my Twitter thread.

    Footnotes

    1. . Of course it’s a load more complicated than this, but I think that’s the essential truth ↩︎

    2. Payments by the trust to the Sunaks in the UK would be taxable (although loans can be used to get around that). ↩︎

  • Mrs Thatcher – tax snatcher?

    Mrs Thatcher – tax snatcher?

    Mrs Thatcher is still heralded as a tax-cutter by many. But what actually happened to UK tax revenues, as a proportion of GDP, over her premiership?

    They went up a lot, then down a fair bit, but not as much as they went up. Was this the result of specific policy decisions to raise tax? Or something else?

    But first – can we make any general statement about the relationship between tax vs GDP and the political party in power? Not really:

    One nice symmetry: the overall Thatcher increase in tax from 1979-1990 is almost exactly the same amount as the overall Blair/Brown increase in tax from 1997 to 2010.

    So is politics irrelevant? Are the wild swings in fact just driven by recessions, with GDP contracting and so tax/GDP increasing?

    That looks like an inadequate explanation, only (arguably) fitting the data for the 1973-75 recession.

    What if we look at the actual changes in individual taxes?

    Now we have it: three drivers for the big tax increase over 1979-82: VAT rising from 10% to 15%, the North Sea oil boom, and the increase in employer NICs. Income tax was certainly cut, although not very dramatically, and that was more than overcome by the increase in VAT.

    Seems fair to say that the Thatcher tax increase was an intentional policy-driven rise in tax, not a mere incident of GDP contraction.

    All data from the wonderful OECD tax database, with similar taxes consolidated together to produce a reasonable like-for-like comparison across 1965-2020. Full spreadsheet here.

  • Tax Policy Associates report: UK taxpayers have £570bn in tax haven accounts, and HMRC has no idea how much of this reflects tax evasion

    Tax Policy Associates report: UK taxpayers have £570bn in tax haven accounts, and HMRC has no idea how much of this reflects tax evasion

    FOIA requests made by Tax Policy Associates reveal that £570bn is held in tax haven bank accounts by UK taxpayers, but HMRC has made no attempt to estimate how much of this is undeclared in UK tax returns, and therefore reflects tax lost to criminal tax evasion.

    The background

    Since 2018, almost all UK residents with overseas bank accounts have had their name, tax ID, and the balance and income on those accounts automatically reported to HMRC every year. That’s part of a revolutionary global project – the OECD Automatic Exchange of Information/Common Reporting Standard (CRS), under which €10 trillion of accounts were reported worldwide in 2019.

    This should be a bonanza for HMRC. We’re all (except non-doms) supposed to declare income from foreign accounts in our tax returns, with up to 300% penalties if we don’t. So if someone has foreign account income reported under CRS which wasn’t included in their tax return, and they’re not a non-dom, HMRC should be able to immediately identify potential tax evasion.

    The amounts are very large – in 2019 UK taxpayers had over £850bn in foreign accounts, of which £570bn was in tax havens – see chart above (and my definition of “tax haven” below). And the average account size in tax havens is considerably larger than the average in the rest of the world:

    Update: the FT story on our report is here.

    Why is it important to have an estimate of the proportion of the £570bn that reflects tax evasion?

    Because the scale of the estimate has enormous public policy implications.

    If 30% of the accounts are undeclared (as some have previously suggested), then it’s a massive scandal and immediate action of the most serious kind will need to be taken. I’d say the same if the figure were 3%.

    If, on the other hand, it’s 0.1% then all we should expect is efficient and effective HMRC enforcement.

    The options

    When HMRC started receiving this data back in 2016, it had several options:

    1. The traditional approach. Build a computer system to cross-check the CRS data with everyone’s tax return, to see who has an offshore account on which they’ve received income that wasn’t declared on a tax return. Version 1.0 doesn’t need to be very expensive or complex – just pull out matching tax IDs (national insurance numbers or UTRs) from the two sets of data, where CRS data indicates large tax haven accounts but nothing is declared in the “offshore income” section of the tax return. See what comes out. Build up the complexity and sophistication from there.
    2. The quick option. Set a bunch of junior tax inspectors to work manually pulling out a random sample of say 1,000 high-value individual CRS accounts in tax havens, locate those individuals’ tax returns, and look for anything suspicious. Then apply statistical tools to the result so you can estimate the overall level of non-compliance (albeit with significant uncertainty). Use that to inform whether you build a big system to automate this, and how you do it. Or maybe you find it’s slim pickings, and so just continue random manual checks for the largest accounts.
    3. The nerd option. Anonymise all the CRS data, hashing names, addresses, and tax IDs. Do the same with the overseas income section from tax returns. Hand both datasets over to a bunch of smart academics and data scientists, so they can do all the hard cross-checking for you. For free.
    4. The Thatcherite option. Do the anonymising thing again. But ditch the nerds – instead, offer private sector companies the chance to crunch the data and identify tax evaders, in return for payment of 10% of tax evasion recoveries. The nerds could apply too.
    5. The implausible option. Don’t do any cross checking, automated or manual, large scale or small scale. Make no effort to match up CRS data with tax returns.

    Right now it’s unclear quite what HMRC have done – they’re refusing to say. They’ve told the FT’s excellent Emma Ageyemang that they “systematically” check the CRS data, but won’t reveal more. We can speculate they’re looking only for huge anomalies (e.g. millions in CRS accounts but nothing in a self-assessment return) but not cross-checking everything (or they would surely say so).

    That speculation is consistent with the letters we know HMRC have sent to people with foreign accounts disclosed under CRS, reminding them of their responsibility to declare foreign income. HMRC has made clear these letters are sent on the sole basis of the CRS data, and without cross-checking with actual tax returns.

    What is clear is that HMRC have made no attempt to estimate the scale of the offshore tax evasion problem, or even determine if it is a problem. The FOIA response says:

    Why?

    We’ve had several justifications from HMRC.

    First, in the FoIA response:

    “A number of the accounts reported through the Common Reporting Standard (CRS) are not actually chargeable to UK tax, nor is every account of a suitable value to impact on a persons’ UK tax position”

    These, and many other factors, are why the CRS data has to be used with care. They are not reasons to discard the statistical value of the data altogether. You’d expect any kind of audit or cross-check to exclude non-taxable accounts and low-value accounts. (Although the obvious reason why some accounts of UK residents are not taxable is that they are held by non-doms, and given HMRC normally receives no data at all on non-doms’ foreign assets, you’d think this itself would be very useful data.)

    Second, when speaking to the FT, HMRC said:

    Not all of the worlds’ jurisdictions are signed up to CRS and we could not say with certainty whether each account was ‘properly disclosed’. We would not publish a figure where we did not have certainty that is accurate.

    Here HMRC seem to be taking the odd position that no estimate can be made unless it is certain to be accurate. That is not what the word “estimate” means, and statistical methods have been developed to deal with errors for at least two hundred years.

    HMRC is certainly familiar with producing estimates which are highly uncertain – they do so very competently in their annual tax gap report. This contains estimates for tax evasion and avoidance which have very large uncertainties – HMRC describes them as the “best estimates based on the information available”. And that’s fine. What’s not at all fine, and in fact inexplicable, is using uncertainty as a reason for making no estimate at all.

    Furthermore, the stated reasons for uncertainty do not seem very hard to overcome. Whilst there are some jurisdictions not signed up to CRS/FATCA, they are generally ones where rational tax evaders would not risk keeping funds. They’d make any estimate a baseline/lower bound, but that would not diminish its usefulness.

    “Properly disclosed” is also not terribly challenging to overcome. For example: focus on CRS accounts where the income/gains is larger than the annual exemption, and where there is a straightforward national insurance number/UTR match with the tax return of a taxpayer who is not a non-dom. Again that would result in a lower bound estimate, but still a useful one.

    So HMRC’s explanation for the lack of any estimate doesn’t make sense.

    Can we use other sources to estimate how much of the £570bn reflects tax evasion?

    I don’t think we can – which is why HMRC’s failure to product estimates is so unfortunate.

    I am very sceptical of some of the claims that have been made that over 30% of offshore accounts are undeclared. Tax authorities have now had the CRS data for five years or more, those that aren’t asleep at the wheel have been cross-checking against tax returns, and there have been a handful of prosecutions rather than thousands. And the existence of CRS means that pre-2016 estimates are of limited value.

    It’s also important to remember that there can be many entirely legitimate reasons for having a financial account in a tax haven:

    • Private equity funds, hedge funds and other types of non-retail funds are very commonly established in tax havens (most often Jersey, Bermuda, Guernsey and the Cayman Islands). As with most investment funds, the investors expect to pay tax on their return from the fund, but don’t expect the fund to also pay tax – that would be double taxation. You could achieve this in e.g. the UK with a great deal of work, but is much, much easier in a tax haven. So this isn’t tax avoidance – it’s tax lawyer avoidance. I expect a substantial part of the £570bn reflects fund holdings, and that almost all of this is properly declared to HMRC.
    • Corporate joint ventures often use tax haven companies for the same reason – preventing double taxation is just easier/cheaper.
    • Many companies will have legitimate business in some of the tax havens, e.g. shipping companies in Panama, lots of companies in Hong Kong and Brazil.
    • Non-doms who are trying to avoid taxable remittances will often do so with a tax haven account. I don’t like the non-dom regime, but given we have that regime, they’re making a legitimate choice.
    • Some of the tax havens have sizeable ex-pat populations in the UK, who have excellent reasons for retaining their home bank accounts.

    But historically tax haven accounts were certainly used by the wealthy to hide assets away from tax authorities. Chances are some people are still doing this, whether because they are too disorganised to appreciate the risk of CRS, have some legal impediment which prevents them reacting to the risk (e.g. missing documentation), or are gambling that HMRC won’t spot them.

    So I would be equally sceptical of any claim that there is no evasion hidden in the £570bn.

    Are most of the offshore accounts held by non-doms?

    Plainly not. The FOIAs show over a million tax haven accounts held by UK taxpayers in 2019. In that same year, there were fewer than 100,000 non-domiciled taxpayers claiming the remittance basis (i.e. for whom offshore accounts have a permitted tax benefit).

    What should happen now?

    In the interests of transparency, HMRC should publicly commit to:

    • Annually publishing aggregated CRS statistics, such as number of accounts, and the mean and median balances. It shouldn’t take FOIAs to extract this information.
    • An initial analysis of the CRS data, with – as a first step – the aim of estimating the proportion of accounts that haven’t been declared in tax returns. Any such estimate will be highly approximate, and number to numerous uncertainties. The HMRC tax gap report ably deals with much more difficult uncertainties (“unknown unknowns”); this is straightforward by comparison (“known unknowns”).
    • Publishing the result of that analysis (minus any details that could assist tax evaders).
    • Sharing the two key datasets: CRS data and the self-assessment foreign income returns – with academics, with suitable measures in place to protect taxpayer confidentiality.
    • Equivalent measures for FATCA.
    • To assist the ongoing public debate about the non-dom regime, publish the total balance of foreign accounts disclosed under CRS which are held by non-doms, the number of those non-doms, and the median account balance.

    HMRC obviously should not reveal precisely how it uses CRS data, but it should be open about the results. How much additional tax has been collected from investigations sparked by CRS? How many penalties and prosecutions have there been?

    This transparency is important for three reasons: keeping HMRC accountable; deterring tax evasion; and bolstering public faith and confidence in the tax system.

    Full details

    Everything is in three FoIA responses. The first reveals that the total amount held by UK taxpayers in foreign accounts is £850bn, the second says that £570bn of this is in tax havens, and the third admits that no effort has been made to estimate the proportion of CRS accounts which are undeclared to HMRC.

    HMRC prefers not to use the term “tax haven”, so I defined the term using a particular technical definition which covers the following countries: Andorra, Antigua and Barbuda, Aruba, Barbados, Belize, Brazil, Colombia, Cook Islands, Costa Rica, Curacao, Faroe Islands, Gibraltar, Greenland, Grenada, Guernsey, Hong Kong, Isle of Man, Jersey, Korea, Lebanon, Lichtenstein, Macao (China), Mauritius, Monaco, Montserrat, Niue, Panama, Samoa, San Marino, Saudi Arabia, Seychelles, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Vanuatu.

    That’s not a perfect list of tax havens (I’d exclude Brazil and include Switzerland and possibly Singapore), but it’s a good approximation.

    The data covers all financial accounts (cash bank accounts, security custody accounts, interests in investment funds) held by UK resident individuals and corporates that are not financial institutions.

    This is CRS data only, and so doesn’t include accounts in the US, as the US reports under a different set of rules (FATCA) and HMRC wasn’t willing to disclose anything about the FATCA data it had received. So the actual total for non-tax haven accounts is likely much higher than the figures above.

    Footnotes

    1. A tax professional with a huge amount of experience in this area made the excellent point that we need to be careful to distinguish actual account holders vs UK controlling persons of companies (“Passive NFEs”) are accountholders. Otherwise we can be double or multiple counting – i.e. because one company can have multiple controlling persons, and some of those (trustees) won’t be taxed on the account. My FOIA should have extracted the accountholders only, but absent full disclosure by HMRC it is possible they have mistakenly given me UK controlling person data as well ↩︎

  • How much tax do we actually pay on our wages?

    How much tax do we actually pay on our wages?

    That’s not an easy question.

    In the UK there’s income tax, and national insurance – both shown on our wage slip. But also employer’s national insurance – which the employer pays, and isn’t visible on our wage slip, but evidence suggests is mostly borne by workers (i.e. because the employer has an amount they’re willing/able to pay as wages, and employer NICs come out of that).

    Take all that together, and of the average UK wage of £37k, the total tax (sometimes called the “tax wedge”) is 22%. This is the “effective tax rate”, not to be confused with the “marginal tax rate”, for which see here.

    How does the rate change as incomes increase? The chart at the top of this post looks at income vs tax wedge, measuring income as a multiple of the average wage (thanks to a little bit of python). Caveats below.

    Obvious points: looks like a nicely progressive upwards curve until we hit £100k, at which point the personal allowance starts to be withdrawn and the curve kinks upwards way too steeply. Then eventually the curve trends towards the eventual marginal rate of 47% (45% income tax plus 2% national insurance).

    How does this compare with other countries? Thanks to the wonderful OECD tax database and that bit of python, we can say it looks like this: (caveats caveats caveats below).

    Click on chart for interactive version that lets you add/remove countries

    Obvious conclusion: until you get to quite high incomes (almost twice average) the UK taxes income less than any comparable country, with only a few small countries/tax havens taxing less. I haven’t cherry-picked the comparisons here – if you click on the chart you can play around, clicking on different countries to hide/reveal them.

    What about high earners? That’s clearer if we re-run the code to go up to 20x average incomes (which in the UK equates to about the top 1% of earners):

    Click on chart for interactive version that lets you add/remove countries

    The UK (purple line again) tracks lower than most of Europe, but (surprisingly) shows a higher effective rate of tax on high incomes than Germany or Spain. Way less than Belgium, France, Sweden.

    There are political conclusions from both charts I will blog about another time.

    Now the extensive, but probably incomplete, list of caveats:

    • All data is for 2020, the latest available from the OECD. UK national insurance has of course gone up since.
    • The code and underlying spreadsheet are “quick and dirty” and there are almost certainly mistakes and omissions. Please don’t use this for anything serious without checking carefully, ideally going to local experts to verify the data and assumptions. With a bit of work this could be a robust and useful project; it’s not there now.
    • The underlying data comes from the OECD tax database, and the average earnings figures from the OECD labour/wages database. Adapted in places (e.g. the Belgian local income tax figures reflect the revenue position for the Belgian local authority and not the position for taxpayers). I added the withdrawal of the UK personal allowance, because it is so significant; there may be similar issues in other countries which I have missed. All errors are mine.
    • The data takes into account employer and employee social security/national insurance, and national and state/local income taxes (at the national average). No other taxes.
    • The data completely ignores the benefits system. That has two big consequences. First, it means the apparently high effective rates on low incomes in many countries are misleading, because we’re missing the other half of the picture. Second, where benefits are means tested, there is often a high marginal rate at the point they’re withdrawn.
    • The data excludes mandatory pension contributions.
    • The data ignores deductions/reliefs (with the exception of universal allowances/credits). That doesn’t matter much for countries like the UK, where reliefs for employees are very limited; but it makes the US data unreliable given the very generous deductions/reliefs permitted in the US.
    • Where countries have different rates for different family types, the rates/allowances used are for wage income of a single person without dependants. This will somewhat affect the effective rate for someone on a lower income, but will have little effect on higher incomes.
    • The code assumes that local taxes use the national tax base (after personal allowance/credits) and national insurance/social security exclude all personal allowances/credits. That won’t always be right, and will cause errors for (in particular) lower incomes.
    • The fact VAT isn’t included has the overall effect of flattering every country except the US (i.e. because they’re the only major economy with no VAT).
    • Private medical insurance isn’t included. That has the overall effect of flattering the US figures (because we’re not comparing like with like). Possibly this and the VAT effect cancel out. Or possibly they don’t. Someone could do the math!
    • Property taxes aren’t included. That’s significant for countries like the UK where local authorities are funded by property taxes not local income taxes. So the chart is somewhat flattering the UK (particularly at middle incomes where there is no council tax relief, but the council tax bill could be 10% or more of a household’s total tax bill).

  • How to avoid UK tax if you’re an oligarch

    How to avoid UK tax if you’re an oligarch

    You are the beloved daughter of the dictator of Freedonia. You have oodles of cash, investments, real estate etc etc, all of which you earned through your legitimate occupation as a podiatrist. You aren’t taxed in Freedonia (because local tax inspectors generally take the view that taxing the dictator’s daughter is not compatible with their continued good health).

    As we approach 2023, you’re thinking about moving to London. Yes, Daddy says it’s a decadent imperialist hell-hole, but the schools are awfully good, the Bottega Veneta salon top notch, and the chance of being executed for treason pleasingly low.

    You engage a top team of private client tax advisers and give them a short set of instructions: you are arriving in the UK on 6 April 2023 and won’t be returning home any time soon. You want to spend lots of money in the UK, pay zero tax in the UK, and declare none of your assets to HMRC.

    You expect this will be very hard indeed, and so are most surprised to find that the solution fits on a postcard.

    This is what it says:

    1. You should continue to own a large and gaudy estate in Freedonia, and write an Important Note documenting the fact that you intend to spend a few years in London and then return home. This is a huge fib; but absent HMRC employing a team of psychics, they have no chance of disproving it. Ta da: you’re a non-dom.
    2. Next, open a bank account in Honduras (which maintains strict bank secrecy and doesn’t share account information with other countries).
    3. Before 6 April 2023, make sure you put a modest amount of money into the account, enough to fund your lifestyle for a few years – say $1bn.
    4. The new bank account has one unusual feature – any interest earned on the account is paid into your normal account (on some other tropical island).
    5. You then move to London on 6 April 2023. Make sure all your expenses are paid from the Honduras account. Never use any other account for UK spending.
    6. $1bn isn’t what it used to be. What if you start to run out of money in the Honduras account? You ask someone to make you a gift, straight into that account. Where does the gift come from? Who cares! (HMRC might, but they probably won’t even find out about it.)

    Mission accomplished. You can now spend lots of money in the UK, but you’ll pay zero UK tax. Your tax return will show none of your foreign income or assets.

    How can this be? Poor Dania had a horribly complex tax treatment when she remitted a modest amount of money to the UK from Germany. Why don’t you have an even worse time?

    Because non-doms are only taxed when they remit funds/assets to the UK. This is often abbreviated to “bringing funds into the UK” but that’s wrong – bringing stuff into the UK is only a remittance if it derives from foreign income and gains after the point someone becomes UK tax resident. The Honduras bank account is, in the jargon, a “clean” account – because everything in it derives from before the time you became UK tax resident. Gifts are also “clean”, even if made after you become UK tax resident. So you can bring in what you like and there’s no remittance, and you pay no UK tax.

    And as a bonus, you don’t declare any of your foreign income and assets on your UK tax form.

    • You’d declare any taxable remittances – but you don’t make any.
    • And you’d declare any UK income and gains – but you don’t have any.

    Literally all HMRC know about you is that you’re a non-dom. HMRC can’t tell you – with your $1bn of liquid assets – apart from poor Dania.

    All good things come to an end, and after seven years you will have to start paying the £30,000 charge to continue to use the remittance basis, and after twelve years, £60,000. A pretty sweet deal. After fifteen years you should lose the remittance basis entirely… but there are ways round that (I’ll discuss in a future post).

    So:

    • The non-dom regime is of little or no use to normal people, in part because of its complexity, and in part because it turns off the allowances that shield middle class people from tax on modest investment income and gains.
    • The non-dom regime is a simply fantastic amount of use to the very wealthy, who with a little effort can live in the UK without paying any tax. If you have a huge amount of offshore cash, it isn’t even very complicated.

    What should we do about this? That’s my next post.

    Tiresome caveat: none of this is legal advice. Anyone stupid enough to plan their tax affairs on this basis deserves everything they get. Any oligarchs reading this and looking for tax advice should go to this well respected independent adviser.

  • How does the non-dom regime work? Part 2

    How does the non-dom regime work? Part 2

    This was written before the Conservative Government announced the replacement of the non-dom regime.

    One response to the non-dom kerfuffle is to say: let’s just burn it all down, and replace it with nothing. Tax everyone the same. This is a powerful argument, but the messiness of international tax makes it hard for me to resist the conclusion we should have some form of special, nicer, UK tax regime for recently arrived immigrants.

    Here’s an example.

    • Take Dania, the recent arrival from Germany* in our last example, but let’s make some changes.
    • First, say we’ve abolished the non-dom regime, and so she’s taxed like every other UK resident.
    • Second, instead of having €50,000 of savings in a Luxembourg investment fund, let’s say instead her savings are instead in an extremely sensible and boring German investment fund. Again €50,000, of which €10,000 is gain.
    • And Dania also has a house in Lederhose she bought for €500,000 in 2014 – now worth €490,000,
    • After moving to the UK, Dania sells her German house and her investments to fund the purchase of a flat in London.

    What happens next?

    Dania probably expects the sale of her investment fund to be taxed as a capital gain, and so entirely sheltered by the annual allowance – so no tax to pay. But the UK has a complex set of anti-avoidance rules for foreign funds which only permit capital gains treatment for “approved offshore reporting funds“. Most domestic German funds don’t have this status.  That means that Dania’s sale is subject to income tax and she has €4,000 of tax to pay.

    Dania probably expects a capital loss on the sale of her Lederhose house. Sadly UK capital gains tax works in Sterling. The Sterling value of the house when she bought it was about £400k; the current value is £420k – so she has a CGT gain, and tax to pay, even though in reality she has a loss.

    Of course if Dania has no German/foreign property at all then she’s not going to run into any of these problems; but the more she has, and the more complex her affairs, the messier things will get… and the more likely the potentially horrid UK tax treatment will put her off moving to the UK.

    So there’s a good argument – from both a fairness perspective and a utilitarian one that we should have a some kind of gentler, nicer, tax regime for newly arrived immigrants. One that avoids catapulting them straight into a complicated and potentially unfair tax result, and which gives them time to think things through (and potentially move their assets into types that have a more favourable UK tax treatment). The non-dom regime is absolutely not that – it does a terrible job at this for normal people, as we saw in my first example. On the other hand, it does an altogether spectacular job for the very wealthy – as we’ll see in my next example.

    Here’s a thought: how about replacing the non-dom rules with something that helps those we want to help, without giving a massive handout to oligarchs?

    * If I wanted to bang the point home even more, I’d have made Dania an American citizen, subject to US taxation on her worldwide assets even when UK tax resident. But (1) it’s just a horrid, horrid mess, and I don’t have the heart to go into it, and (2) it’s the fault of America for having such a uniquely unjust system..,. not reasonable to expect the UK to twist our tax system out of shape to accommodate it.

  • How does the non-dom regime work? Part 1

    How does the non-dom regime work? Part 1

     I’ll start with something simple and try to build up. Let’s start with a normal non-dom – the kind of person most people agree we want to attract to the UK.

    Example 1: Dania vs Dan- the basic case

    Dania is our non-dom. She was born in Germany, but moved to the UK to get experience in her profession, but sees her long term future back in Germany. So she is UK resident but German domiciled. That wasn’t a choice – it’s an automatic consequence, and it doesn’t change her income tax position one bit. Dania then ticks this box on her tax return :

    there's a box you tick to claim the remittance basis

    That absolutely was a choice, and changes her tax position significantly.

    Dania has a job in the UK and savings in the UK and is fully taxed on both. Because she’s claiming the remittance basis, Dania gets no personal allowance .

    By comparison, Dan was born in the UK, has always lived in the UK. So he is UK tax resident, and also clearly UK domiciled. He has a job in the UK and savings in the UK. He is fully taxed on both (after using his personal allowance of £12,570).

    Both Dan and Dania hold shares in the same Luxembourg investment fund. Dan is fully taxed on that – income tax on dividends, and capital gains tax if he sells (with an allowance of £12,300). But because Dania is a non-dom, the UK doesn’t tax her dividends and gains on the shares, provided she doesn’t bring (“remit”) the funds into the UK. She can pay the funds into her German bank account, use them to pay for holidays etc outside the UK. But bring it in, and it’s a taxable remittance.

    Here’s the important thing: no other country will tax Dania’s dividends and gains on the shares. She’s not resident in Germany, so Germany won’t tax her. Nor is she resident in Luxembourg. Some countries impose withholding tax on dividends, but dividends on Luxembourg investment funds aren’t subject to withholding tax.

    Note lots of people claim that the remittance rule just avoids double taxation. That’s somewhere between wrong and an over-simplification – and in this case, it’s dead wrong. The non-dom rules mean that Dania pays no tax, anywhere, on her Luxembourg investment fund.

    So Dan is better off than Dania on their employment income – to the tune of about £5,000 cash (assuming they’re both 40% taxpayers). Dania is better off on her investment fund dividends and gains, which aren’t taxed at all. But actually the generous dividend allowance and CGT personal allowance means Dan won’t be taxed either, unless his portfolio becomes substantial.

    Dania may be starting to think she got this one wrong.

    Example 2: Dan and Dania buy a house – unrealistic example

    Dan and Dania coincidentally both decide to buy a house, funding the deposit with their savings from not buying avocado toast, and by selling their substantial investment funds.

    Now the unrealistic bit to make things easy: Dania bought her shares in the investment fund right before she became UK tax resident, paying €50,000. Six months later, after she’s become UK tax resident, the shares are worth €56,000 – in part because they’ve gone up in value by €5,000, and in part she received €1,000 of dividends which she reinvested.

    At that point she sells the shares, and (another unrealistic bit) she has the €56,000 proceeds wired straight to her account in the UK. This is a taxable remittance, and Dania has to pay income tax on the €1,000 of dividend income – but because she’s a non-dom she doesn’t get the lower dividend rate or the dividend allowance*, so €400 of tax.  Plus capital gains tax at 20% on the €5,000 of gains (with no allowance). So total tax of €1,400.

    If Dan’s investment fund performed the same, he also has a gain of €5,000. But Dan will pay no tax at all, because the gain is entirely sheltered by his personal allowance.

    Dania is probably shouting at her tax adviser at this point.

    Example 3: Dan and Dania buy a house – realistic example

    Everything is the same as in Example 2, but Dania didn’t buy the shares in the investment fund right before she became UK tax resident – she’s had them for years. The value when she became UK tax resident was still €50,000, and the value when she sold €56,000.

    Now Dania has to work out all the historic gain on the shares (not just the gain during the period she was in the UK), and the taxable income on the shares (the income earned during the time she was UK tax resident). So a potentially tricky calculation, and – as there is more gain – more tax to pay.

    Let’s make things more realistic still. Say Dania didn’t wire the sale proceeds straight to her UK bank, because her German broker couldn’t do that. The proceeds were paid into her German current account, which had €5,000 in at the time, and then paid straight out to her UK current account.

    Because the funds mixed with other funds in Dania’s German current account, we now enter the twilight world of the mixed fund rules. Dania has to look at the €5k previously in her current account and ask: how much was was derived from income earned whilst she was UK resident?; how much was derived from capital gain whilst she was UK resident?; how much is capital (i.e. neither)? Then a priority rule is applied which basically gives Dania the worst possible tax result she could get from any combination of the funds in the account.

    At this point Dania has probably paid considerably more tax than if she hadn’t claimed the remittance basis, probably lost another £5k in adviser fees, and very possibly lost the will to live.

    This is why, in the real world, Dania really shouldn’t claim the remittance basis. It probably only makes sense for a “normal” person if they’re a good bit wealthier than Dania, so the remittance basis benefit eclipses the CGT allowance (probably meaning assets of well into six figures) and they positively, definitely, won’t remit a significant portion of those assets into the UK and they’re happy lobbing a few £k at a tax adviser on a regular basis.

    The real world

    Back in the real world, most non-doms are like Dania – it makes no sense for them to claim the remittance basis, and therefore they don’t.

    How do we know this? 9.5 million people living in the UK were born abroad, so there are probably millions of non-doms. But only about 50,000 claim the remittance basis.

    And for most of those, the benefit is pretty limited. How do we know that? Because of this chart from the ONS:

    After 7 years of being a non-dom, you have to pay £30,000 a year to claim the remittance basis. After 12 years, £60,000. After 15 years, you used to be able to pay £90,000, but now you’re simply deemed UK domiciled.

    Fewer than 2,000 people pay the £30,000. Telling us that there are only a few thousand people for whom the remittance basis is worth more than £30,000.

    My next post looks at why we need any kind of non-dom regime. After that, I’ll look more closely at those few thousand people, and how the non-dom rules work for them. If your guess is “very well indeed” then you’re not wrong.

     

    *many thanks to Nimesh Shah of Blick Rosenberg for correcting the initial version of this blog. I’d assumed the remittance of a dividend is taxed at the dividend rate, and benefits from the dividend allowance. Dead wrong. Unchecked assumptions are dangerous things.

  • Blog comment policy

    Blog comment policy

    Lots of people asking about the blog comment policy. I don’t have one. I was going to disable comments, and suggest people instead respond on Twitter, but some people thought comments could be useful for longer-form responses (and allegedly some people aren’t on Twitter). So I’ve enabled them for now, moderated for boring legal reasons, and will see how it goes. If the comments section becomes a ghost town I’ll remove it.

  • Who am I? Why am I here?

    Who am I? Why am I here?

    I decided, about a year ago, to retire from partnership with Clifford Chance LLP. It’s a job that I loved, and I’ve nothing but good things to say about Clifford Chance and my colleagues in London and around the world. It’s a genuinely meritocratic place, and an amazing way for people from all sorts of backgrounds, often (like mine) pretty ordinary, to reach a level of professional success that a generation ago was only available to a very few.

    So I was and remain thankful for all the opportunities Clifford Chance gave me, but after almost 25 years I felt it was time to move on. My family deserves to see more of me, and I’m privileged enough to be able to make that decision. But I also felt I had a chance to use my accumulated expertise and contacts to make a difference, and achieve better tax policy in the UK and abroad. That’s what Tax Policy Associates Ltd is about. As the name suggests, it’s about tax policy, and about working in association with a bunch of different people: policymakers, academics, journalists, and others.

    What’s my agenda? To improve public debate around tax policy, and improve tax policy. The two are linked. Change can’t be achieved from a purely tax-technical direction; it also can’t be achieved by gotcha stories about famous companies and celebrities avoiding tax (even when they are). It sounds trite to say we need both – but we need both.

    What are my biases?

    Many and varied.

    I describe myself as a “tax realist”, with a firm bias towards evolution rather than revolution, and what is achievable and workable. Any tax proposal that doesn’t take account of past experience here and abroad, and which doesn’t consider likely taxpayer responses, should be DOA.    

    My political views have never been very well hidden – I believe the UK should have a larger and more generous welfare state, and a greater degree of redistribution, and tax should rise to pay for it. But that should be achieved with as few taxes as possible, and they should be simple and have as few exemptions as possible. Wide base, low rate.

    Plenty of room for disagreement on the size of the state, and what tax rates should be – but no reason people across the spectrum can’t agree on what the taxes should be, and how they should work.

    So that’s who I am, why I’m here, and what Tax Policy Associates Ltd aims to achieve. To help create better tax policy, in association with policymakers, academics, journalists – and anyone else interested in tax and improving our tax systems.