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  • Can we “windfall tax” energy companies’ capital appreciation?

    Can we “windfall tax” energy companies’ capital appreciation?

    The EU Tax Observatory have just published an excess profits tax proposal which would tax listed energy companies on 33% of the increase in their market capitalisation in 2022. EU headquartered companies get fully taxed. Non-EU headquartered companies get taxed pro-rata to their sales in the EU.

    So, for example, if the UK was to implement such a tax then BP and Shell, whose market cap has increased by c£150bn so far this year, would pay £50bn in tax.

    This is a highly unusual proposal, and therefore interesting from a tax policy standpoint. I’m very conscious of the “not invented here” problem in tax policy, and I don’t want to bash this proposal just because I view my, simpler and more conventional, windfall tax proposal as preferable. However, there are five issues with this proposed tax which illustrate why conventional tax designs are often more effective. These kinds of design choices are going to be critical when (and I think it is a “when”) ambitious windfall taxes become a political inevitability.

    1. Breaching the norms of international taxation

    There is much to criticise about the norms of international taxation, but one thing is inarguable: the further a tax departs from these norms, the more likely there are to be geopolitical complications. The various digital services taxes causes ructions and the threat of a trade war, even though the amounts raised were extremely modest.

    Imposing a very unusual €10bn+ tax on national champions such as Saudi Aramco, Equinor, Exxon and BP seems much more provocative than the digital services taxes, and is therefore very likely to trigger complaints that the tax is contrary to international norms. Others can comment on the likely geopolitical consequences with more authority than I can.

    2. Potential breaches of WTO/GATS

    As a practical matter, complaints about taxes breaching international norms often take the form of arguments that the taxes are contrary to WTO/GATS. Often this is theoretical (on the part of academics) and rhetorical (on the part of politicians) rather than leading to an actual WTO challenge; we certainly saw this dynamic playing out for the digital service taxes.

    Here there would be two arguments:

    • The excess profits tax breaches the EU’s national treatment (NT) obligations under GATS, because it is (in its effect) discriminatory in disproportionately applying to non-EU companies. This is precisely the same point that has been made about digital services taxes.
    • The tax breaches the EU’s most favoured nation (MFN) obligations under GATS, because it applies to listed companies but exempts unlisted companies, even where the companies are in essence carrying on precisely the same business.

    These are complicated issues, and I won’t go into them further here – other than to note these points are political as much as technical/legal.

    3. The design problem with snapshot taxes

    As a general principle, there are problems with “snapshot” taxes, applying to a taxpayer’s position at a particular moment in time. The results can be arbitrary; they can also be easily manipulated.

    If we pre-announce an excess profits tax that applies to the end 2022 market capitalisation, then I don’t think it’s impossibly cynical of me to expect depressed revenue projections, profit warnings, takeover offers, and other events before year end which just happen to mean that shares in energy companies take a mysterious and temporary dip at the end of 2022. To put it more neutrally: people respond to incentives, and energy companies will have a very large incentive to depress their share price by year-end.

    We could prevent manipulation/avoidance by keeping schtum for now as to the precise details of the tax, waiting until the current crisis passes, and then applying the snapshot date (and other mechanics) retrospectively. This is one of the reasons why I said in my windfall tax blueprint that the best windfall taxes are retrospective.

    That still leaves the problem of arbitrariness. That is inevitable when, on a day-to-day level, share prices are famously random. What if market cap falls just before the snapshot date, and then recovers just afterwards? What if, conversely, market cap peaks just beforehand, and then falls back to 2021 levels afterwards (very possible, if more gas supplies come online than expected)? Do companies get refunds? What if the delta between the price on the snapshot date, and the price when the tax falls due, is so great that raising enough capital to pay the tax is impossible?

    The snapshot problem would be less serious if we were taxing something that companies “had” – like profits or property. The result would still be arbitrary, but a company could always afford to pay the tax. Here we would be taxing something that is, for the company, mostly notional, and so we risk the company not “having” it when the tax falls due.

    So I would say it’s preferable from a tax design perspective for windfall taxes to be retrospective, and to tax things that have economic reality for the taxpayer – like actual cash money/profits.

    3. Legal conflict with double tax treaties

    The double taxation treaty between France and the UK prevents France from taxing UK companies on their capital gains (save in certain circumstances, not relevant here). So would it stop France taxing BP/Shell under this proposed excess profits tax?

    The definition of taxes covered by the treaty is wide, and I would say clearly covers the proposed excess profits tax:

    The capital gains article looks like this:

    Article 14(5) would prevent France from taxing BP/Shell, because their gains are taxable only in the UK, provided they are gains “from the alienation of any property”. Are they? On its face you’d say “no” – nothing is being sold/alienated. However, the OECD Commentary to the Article specifically envisages taxes on unrealised capital appreciation. Logically it probably has to, as if tax treaties only covered realised gains, then a country could sidestep treaty restrictions by taxing unrealised gains.

    So in my view it’s likely the treaty would prevent France taxing BP or Shell. This is not beyond doubt – one could argue that this is not a capital gain *of* the company in question; however, I would say that is not a requirement of the treaty.

    Similar issues would arise with the French treaty with the US, Norway, Saudi, etc; and the German treaties, and so on – although the argument is particularly strong for the treaties which refer explicitly to “capital appreciation” – many do not.

    Applying the proposed tax to non-EU businesses is therefore going to be legally challenging.

    4. Potential legal conflict with the Capital Duties Directive

    The Capital Duties Directive prohibits indirect taxes on a variety of transactions relating to companies’ capital. It used to be an obscure, sleepy little Directive, until it was applied to nullify UK stamp duty/SDRT on issuances into clearance services and depositary receipts, and cost the UK perhaps £5bn. So the Capital Duties Directive is now a famously terrifying Directive, which the CJEU interprets exceptionally broadly:

    It is therefore in my view probable (but far from certain) that the CJEU would prohibit the proposed tax (on the basis that the tax is an indirect tax on the capital of companies admitted to a stock exchange).

    Conclusion

    This is not a complete list – there are potentially other difficulties with the tax, for example EU law discrimination arguments (of the type discussed by Ruth Mason and others), and the potential incentive for EU energy companies to migrate to outside the EU, so they become taxed at a lower rate.

    However my conclusion is simple: the more important a tax, and the more money you seek to raise, the more important it is for the design of the tax to be as conventional as possible.

    Image by DALL-E – “a picture of an oil rig paying tax, digital art”

    Footnotes

    1. which it almost certainly won’t ↩︎

    2. Which is an aid to interpretation, and isn’t quite binding, but comes very close to that in practice ↩︎

    3. because the CJEU is a very inconsistent, and highly political, court ↩︎

  • Did the world’s biggest meat firm avoid millions in tax?

    Did the world’s biggest meat firm avoid millions in tax?

    The Guardian says ABP avoided millions in UK tax – that’s probably wrong.

    One of the frustrating things about the media is their unwillingness to accurately call out very aggressive tax avoidance by individuals, contrasting with a completely slapdash approach to accusing companies of tax avoidance.

    Exhibit A, courtesy of the Guardian:

    The ABP Food Group are accused of tax avoidance by having a £63m 5% loan into a UK company, ABP UK, from a Dutch company, Trojaan. But Trojaan is funded by 0% loans from other companies (including in Jersey). So, says the Guardian and their experts, this is “aggressive tax avoidance” to reduce ABP UK’s tax bill.

    Does it smell like avoidance?

    We can run a quick sense check. What’s the value of this “aggressive tax avoidance”? £63m x 5% x 19% (tax rate) = £600k. ABP is a €4bn global company. Why would it avoid £600k of tax? That’s a drop in the ocean of its UK profits. So on its face, the story doesn’t really make sense. You don’t need any tax expertise to work that out, just basic math.

    Would the avoidance actually work?

    It’s not obvious it would. The UK has had rules for over a decade now which prevent a business magicking debt into the UK if the group doesn’t actually have external debt. The current iteration of this is the “corporate interest restriction“. This (very broadly) caps interest deductibility at the lower of (1) 30% of UK EBITDA, and (2) the amount of external debt the group has worldwide.

    So if all that’s going on is the stuff in the Guardian article – the group has no external debt, but lends £63m into the UK at 5% interest, then the corporate interest restriction will kibosh any relief on that interest.

    Of course, the Guardian may be missing the full picture, and the group may have plenty of external debt, in which case this rule may not apply (but the 30% EBITDA cap still would). But that’s okay – if the group as a whole has external debt, then passing some of that debt to ABP UK via a series of intra-group loans is perfectly natural, and not tax avoidance at all. (And I’m guessing that’s what’s actually happening)

    What about the ABP Dutch company that has €118m profit but pays only €1.1m in tax? Could be Dutch tax avoidance, but more likely this is a transfer pricing adjustment, and reflects another adjustment being made elsewhere (e.g. Ireland) – so the group is “flat” overall. Again – sense check – we shouldn’t expect large taxable profits in a Dutch company that’s just man-in-the-middle of a bunch of intra-group lending.

    So there is no particular reason to think UK tax avoidance is going on – the numbers are too small, and the “scheme” is one that’s countered by legislation.

    Why did the Guardian think otherwise?

    Because they didn’t speak to anyone with knowledge of UK tax avoidance – they quote a US tax professor and a UK campaigner with no tax expertise. That’s disappointing – there are literally thousands of people who know about this stuff.

    Are you sure there’s no avoidance going on?

    No, which is why I say the story is “probably” wrong.

    A smart person on Twitter suggested a possible “double dip” structure, with ABP getting a tax deduction on its bank loan and also on the on-lending into the UK. For obscure technical reasons I think that wouldn’t work, but I’m aware some people take the contrary view… however I very much doubt anyone would go to that trouble for a measly £600k tax benefit.

    There is a wider point here – ABP UK is (probably for historic reasons) an unlimited company, and unlimited companies aren’t required to file accounts, which limits our ability to see what it’s up to. That’s now an anachronism, and should change.

    But – call me old-fashioned – I prefer not to accuse someone of “aggressive tax avoidance” when I don’t actually have the evidence.

    Footnotes

    1. No, nobody in particular comes to mind ↩︎

    2. insert tired joke about arts graduates working at the Guardian ↩︎

    3. really I can’t stress enough how complicated these rules are, and how over-simplified a summary that is ↩︎

  • The non-dom rules: how to raise £2bn more tax, and make the UK more competitive

    The non-dom rules: how to raise £2bn more tax, and make the UK more competitive

    Thanks to a new paper, we can put numbers on the non-dom regime – the assets it covers, and the income/gains they generate, and taxpayer responses to losing non-dom status. So, armed with this data, how should we reform the non-dom regime?

    I’ve written before about the UK non-dom regime. We realistically need some kind of simplified tax regime for new arrivals, but the non-dom regime is of little practical use to normal people arriving in the UK (even highly paid ones), but of huge value to the exceedingly wealthy.

    There is a new paper from Arun Advani, David Burgherr and Andy Summers which lets us put some numbers on all this. They estimate abolishing the non-dom rules would raise at least £3.2bn of income tax and capital gains tax revenue. That would be reduced by £210m if we keep the rules for the first year after someone arrives in the UK, and £860m if we keep the rules for the first three years.

    So, informed by this, how would I reform the non-dom rules?

    I’d burn the whole thing to the ground:

    • End the “domicile” concept, which is complex and uncertain – and with all things complex and uncertain, that makes life harder for honest taxpayers and easier for tax avoiders and tax evaders. Replace it with a simple statutory test. For example: if you’ve never been resident in the UK before, then we have a new temporary non-resident scheme which applies for your first few years.
    • End the over-generous 15 year timespan. Three years is plenty. We want to give people time to land on their feet and adapt. We don’t need a semi-permanent class of UK residents with a raft of generous tax exemptions.
    • End the complexity of the remittance basis. Simply exempt temporary non-residents from all UK tax on their worldwide income and gains, subject to a lifetime cap of say £2m (to prevent the UK becoming a stepping stone in ultra-high net worth tax planning).
    • Inheritance tax should follow that. Exempt temporary non-residents from inheritance tax on their foreign assets. Everyone else fully subject to inheritance tax. And only fair we rationalise the treatment of those leaving the UK – perhaps taper down inheritance tax over seven years for those who cease to be resident.

    So this potentially raises £2bn more in income tax and capital gains tax, plus probably at least £500m in inheritance tax. It gives us a very generous treatment for new arrivals, giving them time to land on their feet. And it’s actually available and useful to all, not just the very advised.

    However, we need to go further:

    • If all we do is end the non-dom rules, then the very wealthy, and very well-advised, will be surprisingly unaffected. Why? Because they’ll have put their offshore assets into offshore trusts. How do we achieve this? I’m open-minded. We could push people to close the trusts, e.g. by taxing them say 5% of a trust’s asset value each year. Or we could tax the trusts just as if the settlor still owned the trust property. Plenty of other options. The important thing is that there’s no point reforming the non-dom rules if we don’t also close down excluded property trusts.
    • There are thousands of non-doms who have offshore property/assets which they can’t bring into the UK without a remittance charge. We could keep the old remittance rules for these assets – but that would just pile complexity on top of complexity. Instead, I’d say to them: okay, we’re going to tax all of your offshore income and gains going forward. But all your historic assets, income and gains? You’re now free to bring it into the UK without remittance tax. That may strike many non-doms as a good deal.

    Obviously this is a high level road map and not a detailed proposal. There is a lot of complexity here, particularly around trusts, which is why it’s important that reforms are the subject of detailed thought. By which I don’t mean consultation – there should be consultation on the precise mechanics, but the principles, once decided upon, should be set in stone. All the endless complexity shouldn’t distract us from the basic point: the non-dom rules are broken, unfair, and should go.

    Passport image by Caspar Rae on Unsplash

    Footnotes

    1. We can do a back-of-the-napkin calculation to estimate the order of magnitude as follows: the paper estimates non-doms have £10.9bn in foreign income and gains, implying assets of well over £100bn. It should be reasonably straightforward to apply an actuarial model to age cohorts and estimate how much of the £100bn+ will be owned by people dying whilst resident in the UK in any given year, but for the moment let’s assume it’s 5%. Then apply the rate of IHT to that – not 40% but 10%, the actual effective rate for the very wealthy. So the napkin says: £100bn of assets x 5% x 10% = £500m. The assets will be much more than this (meaning a bigger number), dynamic effects very considerable (meaning a smaller one), but this should give us the right number of zeroes ↩︎

    2. These are (very broadly) excluded from UK tax if the settlor (the person creating the trust) was a non-dom at the time it was created. ↩︎

  • Impact on Scotland of the abolition of the 45p additional income tax rate

    Impact on Scotland of the abolition of the 45p additional income tax rate

    If the Scottish Government doesn’t follow the Tories’ abolition of the 45p additional rate, I expect its revenues from Scotland’s own 46p rate will fall by half. Here’s why.

    In 2017, the Scottish Government raised the additional rate from 45p to 46p. They called this the “top rate”. On paper, the differences between Scottish and rest of UK (rUK) rates should have raised £378m. A year later, HMRC estimated the actual figure was £239m. The top rate alone would naively have raised £27m – the actual figure was £5m.

    Why? “Behavioural response”. That could mean a variety of things:

    • Taxpayers “avoiding” tax in the broadest sense of the word, for example by making additional pension contributions, investing in venture capital trusts, or taking other entirely uncontroversial steps to reduce their taxable income.
    • Taxpayers actually moving house (their place of residence) to escape the Scottish rates. It doesn’t seem very likely that high earners would go to that trouble just to save 1%, but at the margin it may affect choices, particularly if taxpayers expect more Scottish tax increases in the future.
    • Another marginal effect will be people taking the reasonable position that they’re resident in England, not Scotland, when the facts support that, but they wouldn’t have bothered before.
    • People slightly adjusting their behaviour so they’re resident in England, not Scotland; in many cases this may just amount to spending a few more days outside Scotland.. You might call this “avoidance“. But if it’s real, not not fictitious, it can’t be challenged.
    • People lying that they’re resident in England when they’re actually resident in Scotland. Tax evasion – but probably hard for HMRC to detect.
    • Simple tax evasion as people fail to declare revenue. Again doesn’t seem very likely to me that such small rate differences would make anyone tip into criminality. Most high income tax payers are employees, who can’t realistically evade tax.

    Whatever the reason – these are pretty impressive behavioural responses to a small change. Much more than I would have guessed – and it surprised HMRC too (the table above shows they anticipated a 20% response). The response to the top rate is extraordinary – 80% of the income you’d expect, on paper, to arise, simply disappeared.

    So we can expect at least a 40% behavioural response to the new gap of 5p between the UK and Scottish rates on high incomes. Possibly 80% or more if the previous history of the top rate is any guide. And we may start seeing a real response (people moving house, rather than just changing where they claim residence). A prudent ballpark estimate would be that Scottish revenues from its 46p top rate will fall by about half; they may disappear entirely (or even become negative).

    Of course this doesn’t mean the Scottish Government will simply fall in line with the rest of the UK, and abolish its top rate. They may well take the view that half the revenues are better than none (particularly if it doesn’t expect a real response, i.e. an actual economic cost to Scotland of people moving). And the political signalling of the additional/top rate has always been much more important than the (modest) revenues it collects. £2bn across the whole UK is chicken feed, in the context of about £200bn from income tax as a whole. £5m across Scotland is less than chicken feed.

    The moral of the story – the interdependence of the Scottish and rUK economies means that differential tax rates are a Really Bad Idea. An independent Scotland would find its tax policy in practice heavily constrained by the tax policy of rUK.

    Inevitable caveat: I haven’t covered the effect of the rate changes on the Barnett formula, because I know nothing about it…

    Photo thanks to chris robert on Unsplash

    Footnotes

    1. Spoiler: if they did, they were correct. ↩︎

    2. The rules around allocating taxpayers to Scotland or rUK are here ↩︎

    3. With the usual exception for stuff that can’t move, e.g. land. ↩︎

  • The mini-Budget – is it true that the UK taxed high income more than other countries?

    The mini-Budget – is it true that the UK taxed high income more than other countries?

    In his Budget speech, the Chancellor said that the UK had a higher rate of tax on high incomes than Norway. Is that true? How does the UK compare to others; and how was that changed by the Budget?

    How does the UK tax on high incomes compare with other countries? It’s a simple question – but not straightforward to answer.

    One way is to look at the highest marginal rate of tax on high incomes. That looks something like this:

    But the rates alone are misleading. The biggest missing element is: when do the rates apply? The 37% top rate of Federal income tax in the US kicks in at $523,600. The top UK rate – now 40% – applies from £50k. So saying the UK rate is just a bit higher than the US rate misses the most important question: how much tax do people actually pay? What is the effective tax rate on any given income?

    We can answer this given data for rates (taken from the wonderful OECD tax database), updated for the Budget changes, and calculate the overall effective rate of tax. on an employee – or the “tax wedge” for different multiples of average income in each country. See my previous post introducing this approach for more detail and a complete list of caveats and limitations. The updated code is here.

    Here’s the chart comparing UK tax (before and after the mini budget) with the rest of the OECD, looking at incomes going up to 20 x average income. You can click on it for an interactive version that lets you select/deselect different countries:

    It turns out the Chancellor was correct – the UK did have a higher rate of effective tax on someone earning 20x the average income (£500k), but (from April 2023) no longer will.

    All in all, the UK has a rather average level of tax on high earners, compared with the rest of the OECD. By contrast, the UK taxes average income significantly less than the average. That’s something almost nobody believes – but it is nevertheless true. If you don’t believe my chart, here’s the OECD comparison for the average income:

    It shouldn’t be a surprise that the countries with more extensive welfare states than the UK have higher rates of tax on the average worker. By contrast, some of them tax higher earners more; some don’t. The thing is, whilst the level of tax on the rich is of huge political significance, it is not very significant to the public finances. The 45p rate which the Tories just abolished raised £2bn. Income tax as a whole raises £228bn. NHS spending is £136bn.

    If we want a Scandinavian level of public services, then most people have to pay similar levels of tax to most people in Scandinavia. Sorry about that.

    Footnotes

    1. The calculation realistically has to include employer national insurance and social security. Yes, it’s paid by the employer, and isn’t visible on our wage slip, but evidence suggests it 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). ↩︎

    2. i.e. because realistically you don’t compare taxes on £100k in the UK with £100k in Costa Rica; you should compare taxes on three times the average income in the UK with three times the average income in Costa Rica ↩︎

  • Nadhim Zahawi – why did he say he didn’t benefit from an offshore trust, when we know he did?

    Nadhim Zahawi – why did he say he didn’t benefit from an offshore trust, when we know he did?

    I’ve told Zahawi’s lawyers I’m going to accuse him of lying to Kay Burley in his Sky News interview back in July. Amazingly, he’s refusing to respond – no explanation, no defence, nothing. It’s the behaviour of someone with something to hide.

    The backstory: Zahawi founded YouGov. But the 42.5% founder stake in the company (that you’d expect him to have) was held by a Gibraltar company – Balshore Investments – held by an offshore trust owned by his parents. More on that here.

    Why would anyone do anything so weird? The obvious answer: he put the shares in Balshore to avoid UK tax, but has arrangements behind the scenes to get cash from Balshore.

    In his Sky News interview, Zahawi denied that he benefited from Balshore:

    But this document shows a £99k gift from Balshore to Zahawi:

    My expectation is that this wasn’t a one-off – the only thing special about the £99k is that Zahawi got sloppy, and so it ended up being publicly disclosed. My bet is that there’s more out there. Possibly £26m more.

    So why on earth did Zahawi deny receiving any benefit from the trust? I put this to his lawyers, Osborne Clarke:

    They – amazingly – refused to defend or explain Zahawi’s false denial:

    Zahawi’s assertions that he’s paid all his tax, hasn’t avoided tax etc etc… they all fall flat when we know his central claim that he hasn’t benefited from the trust is false.

    At this point it doesn’t look like an accidental omission – in my opinion, it looks like deliberate deception… a lie. If Zahawi told the same lie to HMRC, then this wouldn’t be tax avoidance – in my view it would be tax evasion. Astonishing for a senior cabinet minister.

    At this point, I just couldn’t believe that Zahawi and his lawyers were so not-bothered that he’d been caught out in a lie. I put the point to them again… and still they refused to comment:

    If Zahawi doesn’t want me to infer things from his failure to explain what looks very much like a lie, then I’m afraid he’s going to be disappointed. Having structures that make no sense, making false statements about your tax affairs, and refusing to explain or defend those statements, is consistent with tax avoidance… but, in my experience and opinion, it’s also consistent with tax evasion.

    And so is the Balshore arrangement. The more I think about the structure, the less it looks like tax avoidance. The problem is, there are lots of rules that stop you simply giving your shares to an offshore trust, and then taking money from the trust. HMRC aren’t that dumb. You’ll end up paying the tax. The structure only saves tax if you keep everything hidden from HMRC. But if Zahawi did that, then he wasn’t avoiding tax at all… it was simple tax evasion.

    It seems incredible that someone who is now a senior cabinet minister would have acted dishonestly. But there is a longstanding allegation of criminal behaviour by Zahawi – reported in 1999 but only denied in 2020 (and never the subject of a libel claim).

    Zahawi is probably hoping everyone has forgotten about his tax affairs, and it will all go away. I haven’t, and it won’t.

    More to follow soon.

    Footnotes

    1. And it is super-weird. I’ve spoken to dozens of QCsKCs, tax lawyers, accountants, entrepreneurs and others about this. Everyone has the same reaction: that’s really weird. Zahawi’s explanation – that his father was instrumental in the establishment of YouGov, and so it was only natural he got the shares – is bizarre on several levels. ↩︎

    2. See page 36 here ↩︎

    3. Zahawi denies that the £26m profit Balshore made from YouGov was used to fund his £26m of loans. But he also denied receiving any benefit from the trust, and we know what that denial was worth. ↩︎

    4. There are a large number of different views out there on how precisely the structure would get taxed, but literally everyone I’ve spoken to thinks that it would have been taxed; whether under the settlement rules, the usual trust rules, transfer of assets abroad, remuneration rules/loan charge, purposive disregard of Balshore entirely… take your pick ↩︎

  • The myth of the corporate tax “race to the bottom”

    The myth of the corporate tax “race to the bottom”

    It’s often said there’s been a race to the bottom in corporate tax, with tax competition resulting in corporations paying less and less over the last few decades. The most recent claim was by the IPPR, which I commented on here.

    These claims are wrong, at least when it comes to the UK: the UK corporate tax rate plummeted over the last 20 years, but the actual tax collected, as a percentage of GDP, stayed broadly the same. See the chart above or the OBR piece here.

    Why? Because a company’s corporate tax liability is the tax rate multiplied by its taxable profit. The UK definition of “taxable profit” – often termed the “tax base” – has expanded over the same period that the rate fell. Either by accident or design, the two effects broadly countered each other. This means that the average effective tax rate (i.e. tax paid divided by profits) is largely unchanged:

    Unfortunately, the ONS doesn’t publish that chart going back further than 2010 – but we can calculate a reasonable proxy for effective tax rate using the ONS data for corporate gross operating surplus. That results in this chart, which needs to be read with many many caveats, but nevertheless is a good indication that the long-term trend is indeed that the headline rate (purple) plummets, but the effective tax rate (yellow) does nothing much at all.

    So the stories people tell of [brave tax-cutting Chancellors][evil tax-cutting Tories] are all wrong, and are because people are looking at the (mostly irrelevant) purple line. The yellow line – reflecting the tax actually paid – tells us that corporate tax wasn’t cut at all – it just changed in lots of very complicated and opaque ways. Great.

    What about other countries?

    I’ve quickly pulled together some data from the OECD’s fantastic corporate tax database, and have made an interactive chart that lets us compare corporate tax rates and revenue across the OECD. Click this image:

    The OECD sadly only has tax rate data going back to 2000 – I added the earlier UK tax rate data myself. But you can zoom and focus on 2000-2020, then click on the right hand side to select/deselect individual countries.

    The code and underlying spreadsheet is here..

    Unfortunately, I can’t find useful international gross operating surplus data, so can’t compare effective tax rates across the OECD. If anyone can find that data, please let me know.

    So what?

    I can play with the interactive chart all day but – fun as it is – it’s just cherry-picking.

    The question we really want to answer is: is there evidence across the OECD that falling rates drove falling revenues over the period 2000-2018?

    I’ll post more on this soon.

    Footnotes

    1. With some noise from “incorporation” – sole traders establishing companies to save tax, which tends to reduce income tax/national insurance and boost corporation tax – but not enough to make a difference to this analysis. ↩︎

    2. This comes from the excellent OBR piece. Well worth a read ↩︎

    3. The two big ones: (1) GOS is not the same as accounting profit, and in particular excludes depreciation (so the chart understates ETR), (2) the tax stats are for cash collected by HMRC in a tax year, which used to lag profits by around a year, and now mainly doesn’t – neither factor should affect the overall trend, but both will create/mask considerable noise. With some work they could be corrected. ↩︎

    4. If anyone can point me towards pre-2000 tax rate data I’d be most obliged. ↩︎

    5. If you have feedback on the quality of my incredibly amateurish coding then please do add comments on our official code feedback page here ↩︎

    6. The OECD data only goes back to 2008 ↩︎

    7. Just promise me you won’t look at the US chart, because pass-through taxation (company profits taxed in the hands of owners/shareholders) means US corporate tax statistics can’t easily be compared with other countries’. ↩︎

  • How to design a £30bn windfall tax on the energy sector

    How to design a £30bn windfall tax on the energy sector

    If we wanted to raise significantly more than the Government’s £5bn Energy Profits Levy, how would we do it?

    This is a further explanation and expansion of points I make in Panorama’s programme on the energy crisis, broadcast on 5 September, and follows my previous post discussing two serious flaws in the Energy Profits Levy – the relatively modest “windfall tax” the Government introduced in May.

    The politics

    I’m not going to get into the rights/wrongs of windfall taxes, other than to note that the political case for a more ambitious tax may be hard to resist if energy companies make £170bn of “excess profits” over the next two years, when at the same time it seems increasingly likely that the Government is going to spend £18bn or even £29bn keeping energy prices down for consumers.

    The design challenges

    The big problem is: how do we define an “excess profit”? The apparent Treasury leak of the £170bn figure didn’t bother to say.

    It was relatively easy for the last two big UK windfall taxes.

    • In the late 70s and early 80s there was a perception that the banks had made a windfall profit from low or zero interest deposit accounts, at a time when interest rates were at historic highs. So in the second Budget of the new Conservative Government, on 10 March 1981, the Chancellor introduced what was the “Special Tax on Banking Deposits”. This was a very simple tax, with the principal charging provisions fitting on one page. It simply took the average balance of zero-interest bank deposits held by banks during the last three months of 1980, and taxed that at 25% – so directly taxing the windfall, and raising approximately £400m.

    Note the important common features: one-off taxes, applying to clearly identified windfalls, and doing so retrospectively. These are good design features which we should seek to copy. The retrospective element is counter-intuitive – normally we’d say retrospective taxation is undesirable, even wrong, but in this case retrospection is essential both to enable the windfall to be clearly identified, and prevent avoidance/distortions.

    The difficult question in this case is: how do we identify the windfall?

    Three sophisticated approaches that won’t work

    Here is the heart of the windfall, the European gas futures price:

    It’s this that feeds into electricity prices generally, because the marginal price of electricity is set by gas. There is an excellent explanation of this here.

    In principle, we could calculate what energy company profits would have been in a parallel universe where energy prices hadn’t changed since January 2022. Then deduct that from the actual profits, and tax the difference. Fantastic, but for the minor detail that this is impossible – no complex business has systems/accounts that enable a calculation of this type to be made (i.e. because energy prices don’t go straight to the bottom line as revenue – energy prices are also a cost for most energy companies, and both costs and revenues are often hedged, energy is often sold on the basis of fixed prices, etc etc etc). If you ignore these complexities and just tax the immediate revenue impact of the increase in prices, then you end up with the Spanish windfall tax, which was something of a disaster.

    That suggests we need to look at profits, not prices, and apply some kind of revenue trend approach, for example saying that 2021 is the baseline profit, and any increase in 2022 is excess profit which we’ll tax. But that’s extremely random, and really just punishes companies who had a poor 2021. If Shell and BP go on to make identical profits in 2022, it can’t be right that we tax BP more, just because in 2021 Shell’s profit was higher.

    Alternatively, we could follow the approach adopted by the various wartime excess profit taxes which looked at the average profit during a prior period. This was proposed as a way of taxing excess profits resulting from the pandemic, but to my mind is a bad fit for the energy sector, given the cyclical nature of energy company profits (exacerbated by their very poor performance in the 2020 pandemic):

    I wouldn’t altogether discount this approach, particularly if we look across a very long period (say 20 years), but even then the result would be highly contingent on the precise period chosen (and where it cuts across the economic cycle), and therefore somewhat arbitrary. The extensive caselaw on the UK’s wartime excess profits duty (which shaped a surprising amount of modern tax law) is testament to quite how arbitrary and uncertain such taxes can be.

    Other more sophisticated excess profit tax approaches have been proposed, e.g. categorising individual sources of profit, but they don’t seem very applicable to the problem we’re trying to solve.

    A lovely idea that can’t work

    Most of the large profits from the current crisis are being made elsewhere in the world – particularly in Gazprom, Saudi Aramco, and a plethora of US energy companies. Some people (okay, the Lib Dems) have suggested we tax those companies’ UK subsidiaries.

    The difficulty with this is that in most cases all, or almost all, the profit is made outside the UK – so we have nothing to tax. Gazprom is an interesting exception – it has a UK trading arm with a reasonably significant market presence – and that’s probably why the Lib Dems name-check it specifically. The minor problem is that the company isn’t doing so well these days.

    More radical ideas that are legally complex

    Another suggestion has been to tax listed energy companies on their capital appreciation. This has a number of difficult legal issues, and in particular potential conflicts with tax treaties and EU law. I discuss this further here.

    A simple approach that should work

    So the best solution may be the simple one of imposing a special top-up tax on the profits of energy companies from 26 February 2022 to whenever it is that market prices settle down. I’d tentatively set out the following design features:

    • The tax should be on the consolidated accounting profit of all UK-headquartered energy production/generation/trading companies, and the profit of UK subsidiaries of foreign-headquartered energy companies. Certainly not limited to the big two listed giants – Shell and BP – but to all large businesses in the sector – including nuclear, wind and solar generation.
    • A properly fair and sophisticated tax would separate out the profits of energy generation companies in the group from other companies, and only tax the former. This leads to endless complexity and unfairnesses, so this should be a rough and unsophisticated tax that simply applies to the entire consolidated group profit of groups that make a majority of their profit from energy generation or trading, or oil/gas extraction.
    • The tax should be retrospective, introduced only after prices return to normal. The basic form of the tax (a tax on global accounting profit) would be announced now, together with an indication of the target revenue yield, but little more in the way of details. That minimises avoidance and other distortions, and enables the final form of the tax to fit with the windfalls that have actually been made.
    • There would need to be large penalties for any company or individual seeking to evade paying the tax by extracting profits in advance of the windfall tax, leaving no cash for HMRC to collect.
    • We should consider taxing companies global profits, not just UK profits. We don’t normally do this – but that’s not because it’s a high point of principle… it’s because foreign profits are normally taxed in other countries. If other countries aren’t taxing excess profits, we shouldn’t feel shy about taxing them ourselves. And if other countries do introduce similar taxes to tax excess profits, those taxes should be creditable against the tax of UK-headquartered companies.
    • Why consider taxing foreign profits in this case? Because I fear that the UK profit would not be a large enough tax base to raise the necessary sums. If that is wrong, that is excellent – it is problematic to tax foreign profits, and preferable not to do so. The great thing about a retrospective windfall tax is that we should know with reasonable certainty what the tax base looks like at the point that the tax is drawn up, and it is at this point that such decisions should be taken.
    • The other pragmatic reason not to tax UK companies on their foreign profits is that it incentivises businesses to relocate. Relocation risk would be reduced if other countries introduced similar taxes (as seems likely). However, the critical element is for the Government to make a credible promise that there would be no repeat of the tax (just as there was in 1981 and 1998; these promises were kept).

    If the actual windfall profit ends up being around the supposed leaked Treasury figures, then it’s not unrealistic to think such a tax could potentially raise £30bn over two years.

    However, it’s important to stress that we shouldn’t start taxing a windfall before a windfall has actually been made. Right now, BP and Shell had a very good Q2, and a decent Q1 (ignoring BP’s huge loss from the forced sale of its Russian business). Let’s see what happens next. When it comes to windfall taxes, there’s no time like the past.

    Footnotes

    1. Which is one reason to be suspicious of the leak, and of the figure ↩︎

    2. Thanks to R for their help with this – the chart is from here ↩︎

    3. And its profits were a fairly modest £300m even before it started running into trouble ↩︎

    4. Amended to clarify that I am not just focussed on oil/gas ↩︎

    5. See: the bank levy – not a model anyone should adopt ↩︎

    6. That means, for example, that the usual tax rules that exclude gains/losses on sales of subsidiaries wouldn’t apply, which I think is the correct result here. Imposing a windfall tax on BP that ignores its very real Rosneft losses would be unfair ↩︎

    7. I think I do mean “evade” here and not “avoid” ↩︎

    8. I would allow such losses to be deductible in the proposed windfall tax, as they’re part of the IAS consolidated accounting profit – but I can see a case for excluding them, given that companies could control the timing of disposals to avoid tax. One option would be to tax/relief gains/losses from 26 Februrary 2022 up to the date the tax is announced, but not afterwards ↩︎

  • The £5bn flaws in the UK oil and gas windfall tax

    The £5bn flaws in the UK oil and gas windfall tax

    In May, the Government announced the Energy Profits Levy – a windfall tax on UK oil and gas companies. It has two significant flaws, which together mean the tax will raise almost £5bn less than it could have done.

    This post is an explanation and expansion of points I make in Panorama’s programme on the energy crisis, broadcast on 5 September (and reflects further thinking since I recorded the interview a few weeks ago). I’ve another post looking at how a more ambitious windfall tax could raise £30bn.

    Flaw 1 – this windfall tax misses some of the windfall

    The Energy Profits Levy was announced on 26 May 2022 and applies from 26 May 2022. For most taxes that wouldn’t be surprising. But for a windfall tax it’s odd, because windfall taxes are usually retrospective – i.e. taxing a windfall that’s already been made.

    This chart at the top of this post shows the oil price over the last five years – the shaded red section shows the oil price breaking $100/barrel, at the point of Putin’s invasion of Ukraine. The red line shows the point at which the windfall tax starts to apply… it’s clear that this windfall tax misses a large chunk of the actual windfall.

    If the tax had applied from 24 February it would have raised an additional sum of approximately £1.5bn..

    Flaw 2 – the investment allowance is pure deadweight cost

    The windfall tax is charged at 25% of oil and gas profits. So a company with £100m of windfall tax profits would pay £25m tax.

    But the government was sensitive to claims that a windfall tax would deter investment, and so introduced an 80% allowance for capital expenditure and, in addition, a 100% first year allowance.

    Many tax reliefs are introduced to encourage more of a Good Thing. Those reliefs always have a “deadweight cost” – the cost of giving relief to something that would have happened anyway, as well as a benefit (the Good Things that we will now get more of).

    What are the benefits and deadweight costs of the investment allowance?

    Calculating the benefit

    The investment allowance works like this: if a company has oil and gas profits of £100m, and invests £50m in qualifying capital expenditure, it gets a deduction against its windfall tax profits of up to £90m (i.e. 180% of £50). So its windfall tax profits are reduced to £10m, and its tax only 25% of this – £2.5m.[/mfn]Needless to say, these are all highly simplified examples.[/mfn] That £50m investment has cost the company only £27.5m

    First thought: wow, what a fantastic incentive that is sure to generate lots of new investment!

    Second thought: hang on, the windfall tax isn’t around for very long – it ends 31 December 2025. So for any oil and gas investment to be incentivised by the investment allowance, the project needs to move from drawing-board to breaking ground in 30 months. My understanding from industry contacts is that very few, if any projects will do this.

    It’s even worse than that – 31 December 2025 is the “sunset date” – the tax will be phased out earlier if oil and gas prices return to “historically more normal levels”. A tax relief that lasts for an unpredictable amount of time is not a tax relief many people will be banking on.

    These points suggest there will be little or no upside from the investment allowance – the only projects that will materially benefit from the investment allowance will be those that were already planned.

    A more general point: giving 100% investment relief (aka “full expensing”) is a good idea, even an excellent idea, but it absolutely can’t be part of a temporary tax regime. And another important point: there is evidence that investment reliefs are ineffective in times of economic uncertainty.

    Calculating the deadweight cost

    The deadweight cost is the cost of giving the investment allowance to investments that are already in the pipeline. We have a good idea of what the pipeline looks like, thanks to the ONS’s projections for North Sea capital expenditure (made prior to May 2022). We can pick out the qualifying items from this, and calculate the cost of giving them the 25% allowance:

    Click to download the spreadsheet

    This gives an estimate of the deadweight cost of £3.2bn. That will be a low-end estimate, because it ignores a number of factors, each of which would increase the actual deadweight cost:

    • The calculation completely ignores the 100% first-year relief, as I have no data on the proportion of the capital expenditure which is first-year expenditure; any suggestions would be appreciated (although I expect the proportion will be small, given the long life of most oil/gas equipment).
    • I ignore leasing expenditure, and this is not separately shown in the ONS forecast – will be an element of operating expenditure. This is likely a bigger effect. There is also an obvious avoidance route of recycling existing assets into leases to claim the allowance (although in principle HMRC out to be able to counter that).
    • I’m not taking account of deferral effects – i.e. where investment planned for early 2022 was pushed back into late 2022 to benefit from the investment allowance. These are likely limited, as industry had little warning of the tax.
    • Similarly, I don’t take account of acceleration effects, e.g. investment already planned for 2026 being moved up into 2025 to claim the relief – that will likely be more significant.
    • Finally, there is now a large incentive to reclassify items so they benefit from the relief.

    So, overall, it’s fair to say that the two flaws result in a loss of around £5bn of tax revenue.

    Footnotes

    1. Data from Yahoo Finance. A more serious analysis would probably be looking at natural gas futures pricing, but that’s way outside my expertise… this chart suffices for the basic point that the windfall tax kicks in well after the windfall starts ↩︎

    2. I estimate this by taking the £5bn yield the Government expects in its first ten months, and then pro-rating that across an additional three months ↩︎

    3. i.e. because it is out of pocket £50m plus £2.5m tax; if it hadn’t invested at all it would have had £25m tax; hence the investment actually cost £52.5m minus £25m. It’s actually less than this once we take into account all the many, many, other reliefs against ringfenced oil/gas corporation tax, but I want to focus solely on the design of the windfall tax. ↩︎

    4. See here, and go to Supplementary fiscal tables – receipts and others, tab 2.14 ↩︎

  • The end of secret libel letters?

    The end of secret libel letters?

    Last month, the Chancellor of the Exchequer instructed lawyers to write to me, accusing me of libel and requiring me to withdraw my allegation that he had lied. They claimed their letters were confidential, and warned me of “serious consequences” if I published them. This was tosh. I did not retract, and I published the letters.

    I’d been aware of SLAPPs – “Strategic Lawsuits against Public Participation” – where a wealthy and/or famous person uses the threat of libel proceedings to shut down debate. I hadn’t been aware of what turns out to be the widespread practice of libel lawyers claiming their letters were confidential and/or “without prejudice” and couldn’t be published. In most cases this is not true.

    It may come as a surprise to many people, but solicitors are not allowed to tell fibs. The Solicitors Regulatory Authority requires solicitors to behave in accordance with the SRA Principles: to act with honesty, integrity, independence, and to uphold the rule of law. Intimidating people into not publishing letters they are perfectly entitled to publish is the very opposite of these Principles.

    So I wrote to the Solicitors’ Regulatory Authority, asking them to end the practice of solicitors making phoney claims of confidentiality in libel letters.

    I’ve now received a response. It is excellent:

    As part of our work, we are currently developing further specific guidance to the profession on the topic of SLAPPs, highlighting the issues arising from our casework. Further to your letter, we plan (amongst other things) specifically to address the practice of labelling correspondence as “private and confidential” and / or “without prejudice”, and to address the conditions under which doing so may be a breach of our requirements. We think that this approach will help solicitors to comply with our existing standards and regulations and to use those labels only when appropriate. We can update you as and when we publish this guidance. 

    We are also to carry out a thematic review of a targeted sample of firms, looking at the steps taken by firms to address the issues raised in our Conduct in Disputes guidance. The outcomes of this review, as well as our enforcement work and the work currently being done by the government on reform of the law relating to SLAPPs, may in due course inform further updates to our guidance. 

    Silence is integral to the SLAPP strategy. A small-time blogger says something you don’t like. You get your lawyers to write them a letter warning them off. The blogger deletes their blog, and nobody has any idea what happened. The SRA now has a fantastic opportunity to end this, and to force libel lawyers and their clients to step into the light. If you want to threaten someone with libel: fine. But you’ll have to face the consequences of everyone knowing what you’re up to.

    Footnotes

    1. This is not a theoretical example; after my experience I was inundated with messages from bloggers who had been at the receiving end of SLAPP letters ↩︎

    2. Actually not fine; I tend to think libel law should only apply to the most serious of deliberate lies ↩︎

  • Nine questions the Chancellor is ducking

    Nine questions the Chancellor is ducking

    I’m going to keep this as a running list of the key questions Nadhim Zahawi is ducking.

    Any one of the questions could be enough to justify an HMRC investigation. All of them together? And linked to the Chancellor of the Exchequer? Words fail me.

    And bland statements from Zahawi that he’s paid all his taxes don’t count, particularly when previous bland statements have been clearly false.

    Here’s the list:

    1. Why were Zahawi’s founder shares in YouGov issued to Balshore, a Gibraltar company held by a trust controlled by Zahawi’s father?

    Significance: the obvious answer is: tax avoidance. In which case, we can expect gains/income of the trust to have been taxable (one way or another). See here.

    Zahawi answer 1: because his father/Balshore provided startup capital. Untrue. My analysis of how we know this here. Zahawi’s lawyer’s attempt to defend his position here – they say £7,000 was startup capital, which is nonsense. We’re not even sure the £7,000 was provided in 2000 – it could have been two years later.

    Zahawi answer 2: because Zahawi had no experience of running a business at the time, he relied heavily on the support and guidance of his father, who was an experienced entrepreneur, and helped him with living expenses. This may well be true to some degree, but seems very doubtful it is true enough to justify all the founder shares going to Zahawi’s father, not least that it contradicts the known history of YouGov. I set out all the problems with this here.

    Of course Zahawi vociferously denies that the shareholding was motivated by tax avoidance, but without a convincing answer to why the shareholding looks so weird, tax avoidance is the explanation most people (experts and laypeople alike) will jump to.

    Status: unresolved.

    2. If Zahawi’s story is true, and his father did provide valuable services to YouGov in exchange for the shares, wasn’t there VAT on those services?

    Significance: this means YouGov would have had to account for about £140k of VAT. I very much doubt they did. So, if Zahawi is telling the truth, his company unlawfully failed to file correct VAT accounts.

    A persuasive answer to this would be “of course there wasn’t VAT, because Zahawi’s father didn’t provide valuable services to YouGov”. But of course that completely undercuts Zahawi’s answer to question 1.

    Status: I and others have asked Zahawi’s team this question – there’s been no response. More here.

    3. Why did Zahawi deny that he benefited from his parents’ trust, when we know that he received at least one gift from it?

    Significance: Zahawi gave clear answers to Sky News, and those answers were false – he did receive a gift in 2005 (and I expect on other occasions too). Why isn’t this a resigning issue?

    More here.

    Status: no further explanation has been forthcoming.

    4. Did Zahawi unlawfully fail to pay tax on the gift from the trust?

    Significance: When a company owned by a foreign trust makes a gift (a “capital payment”) to a UK resident, it’s taxable for the UK resident. Even if everything Zahawi says is true, this tax was due. I doubt very much it was paid. If that’s right, then the Chancellor of the Exchequer has unlawfully failed to pay his taxes. This feels significant.

    The reason why I expect the tax wasn’t paid is that a rational tax avoider anticipating tax on the gift would have structured the arrangement differently, so there was no tax. The most obvious solution would be a direct gift by Zahawi’s father to Zahawi, not involving the trust. The various amateur features of the structure suggest that in fact they didn’t anticipate the tax – in which case it probably wouldn’t have been paid.

    This isn’t avoidance – it’s just an unlawful failure to pay tax that was due. It’s not evasion unless the failure to pay tax was deliberate – but much more likely it’s just down to incompetence.

    Status: no response from Zahawi other than a bland statement he’s paid all his taxes. That’s unacceptable – this is a simple question: “did you pay tax on the gift?”

    5. What other gifts/loans did Zahawi and his companies receive, funded by the YouGov shares, from the trust and its subsidiaries?

    Significance: the more Zahawi benefited from the YouGov shares, the more the structure looks like tax avoidance.

    Status: all we have is Zahawi’s denial that he ever received a benefit from the trust. But we know that is false.

    6. Did Zahawi unlawfully fail to pay tax on his interest payments to Gibraltar?

    Significance: a UK person paying interest to Gibraltar has to pay a 20% UK tax on each interest payment (“withholding tax”). Has Zahawi paid this tax on the interest he’s paid to Berkford since 2011? If not, the Chancellor of the Exchequer has unlawfully failed to pay his taxes.

    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, which I believe to be owned by the same trust as Balshore. Zahawi has said this was a commercial loan, bearing interest at 8%. These interest payments should have been subject to a 20% UK tax (“withholding tax”).

    Again, a rational tax avoider would not have structured the arrangement in this way. Common approaches would be to use a Jersey company, rather than Gibraltar, or alternatively to create a Luxembourg or Ireland subsidiary under the Gibraltar company. Gibraltar companies are rarely, if ever, used in tax planning because of (amongst other things) the withholding tax issue. So my expectation is that Zahawi and his family didn’t anticipate this issue, and therefore didn’t pay the tax.

    Again, this isn’t avoidance – it’s just an unlawful failure to pay tax that was due. And it’s not evasion unless the failure to pay tax was deliberate – more likely it’s just down to incompetence.

    Status: no response from Zahawi other than a bland statement he’s paid all his taxes. Again, this is unacceptable. It’s a simple question: “did you pay 20% UK withholding tax on all your interest payments to Berkford?”

    7. Why is the Oakland Stables loan not visible in Berkford’s accounts?

    Significance: this is very odd, and begs the question as to whether there is something unusual about the loan. Or it could just be a massive accounting failure in Berkford.

    Status: no response from Zahawi.

    8. Was Zahawi’s mother running the offshore company Berkford whilst in the UK, making it UK tax resident?

    Significance: If an offshore company is “centrally managed and controlled” in the UK then that company will be tax resident in the UK, and so taxed on all its worldwide income and gains. On its Land Registry documents, Berkford provided a UK address – the flat where Zahawi’s mother lived at the time. 

    Since Zahawi’s mother was a controller of the trust holding Berkford, was she in fact running Berkford making it UK resident and fully subject to UK tax? If so, that probably wouldn’t create liability for her, but the company could have a large tax bill.

    Status: newly identified by Marcus Leroux.

    9. How can we have a Chancellor of the Exchequer who appears to have avoided tax, may have unlawfully failed to pay tax, and refuses to answer questions?

    I’ve no answer to this one.

    Footnotes

    1. Note that it may be no cash VAT would have been due, because YouGov could have recovered the VAT ↩︎

  • The many holes in inheritance tax, and how to fix them

    The many holes in inheritance tax, and how to fix them

    Bob

    Bob is a 70-year-old with £5m of investments which he wants his children to inherit. But he’d like to avoid the £2m of inheritance tax.

    He asks his tax adviser for advice on how to avoid the tax, and is expecting a long complicated memo, proposing a tax avoidance scheme involving seventeen companies, three tax havens, two trusts, and large fees.

    What he actually gets is written on a postcard:

    • Step 1: Sell your existing investments and replace them with shares listed on the Alternative Investment Market. Either assembling a diversified selection yourself, or paying someone else to do it.
    • Step 2: Make sure to live at least two years.
    • Step 3: Drop dead, happy in the knowledge you’ve avoided inheritance tax.
    • There is no Step 4.

    Jane

    Jane is a 70-year-old who owns a £5bn vacuum cleaner company, which she wants her children to inherit. But she’d like to avoid the £2bn of inheritance tax.

    She asks her tax adviser how to avoid the tax. The answer she gets is surprising: nothing. Her estate will have no inheritance tax liability whatsoever on the £5bn business.

    Why does this work?

    There is a complete exemption from inheritance tax – business property relief – where (broadly) you own a business, and have held it for at least two years. So Jane is straightforwardly exempt from inheritance tax.

    Surprisingly, the exemption extends to most AIM shares, which qualify for complete exemption from inheritance tax after two years. Given AIM companies are small/mid-cap, the obvious downside is that your portfolio suddenly becomes more volatile (although not as much as you might think). But Bob probably sees that as a small price to pay for avoiding a 40% tax hit.

    Does this actually happen?

    Oh yes. Here’s the HMRC analysis of the effective rate paid by different value estates. The effective rate for the wealthy is 10%:

    Why are these exemptions so generous?

    The road to tax hell is paved with good intentions (and also flapjack).

    Inheritance tax can be unfair for small family businesses. Imagine a small shop, making a profit of £50,000/year. That business is plausibly worth £500k. So when the owners die, their children – who expect to inherit the business – have a £200k bill. A larger business could deal with this by borrowing, or bringing in outside investors – but for a small business that’s much more difficult.

    So most countries with inheritance/estate taxes have exemptions for private businesses.

    The UK does that with business property relief. But BPR goes much further than it needs to:

    • First, the exemption has no limit. What makes sense for the cornershop doesn’t really make sense for a £1bn business – but the exemption covers it just the same.
    • Second, the exemption doesn’t apply to shares in listed/quoted companies, for the very good reason that you can easily fund the tax by selling the shares in the market. But shares in alternative markets like AIM aren’t considered “quoted” for this purpose, even though you can easily fund the tax in precisely the same way.

    Inheritance tax is just full of this sort of thing, which is why it’s so broken – see my previous blog.

    How to fix it

    That’s easy. Exemptions and reliefs should do what they’re supposed to do, and no more. If we are trying to protect small private businesses then business property relief should only cover small private businesses. Cap the relief at a generous but sensible level (£1m?). Exclude all forms of listed security. Job done.

    Given the high cost of BPR, this could raise a serious amount of money, and could fund a reduction in what is (by international standards) quite a high tax rate. The same should be done with agricultural property relief.

    And by reducing both the rate of IHT, and the perception the rich don’t pay it, we might make the tax less unpopular, and therefore preserve its long term future.

    Cemetary photo by John Thomas on Unsplash

    Footnotes

    1. This is an updated version of my previous piece – ‘how to avoid inheritance tax’ ↩︎

    2. Won’t there be CGT on the sale? Probably not much. £1m of the investments are in an ISA. As for the rest, like any tax-obsessed investor, you’ve been managing CGT as you go, crystallising gains to use your annual allowance, and using your wife’s annual allowance (i.e. total gain sheltered = £25k * years invested). You’ll have a bit of gain, but it’s a price worth paying. ↩︎

    3. probably with the £1m capped relief still available to the original owner of the business, before it was listed, if they continue to hold the listed shares ↩︎

  • Ending secret libel letters

    Ending secret libel letters

    This morning I wrote to the Solicitors’ Regulatory Authority, asking them to end the practice of solicitors sending libel letters demanding that allegations of wrongdoing are retracted, but insisting that the letters are confidential and cannot be published, or even mentioned.

    This follows the letters I received from Osborne Clarke, acting for the Chancellor of the Exchequer. More context here, and legal background to the bogus “confidentiality” claims here.

    My letter is below – if you click on the thumbnails they should expand. Alternatively, there’s a PDF here.

    Footnotes

    1. Embarrassing “without privilege” typo corrected, courtesy of Heather Self ↩︎

  • Why publish “without prejudice” and “confidential” correspondence?

    Why publish “without prejudice” and “confidential” correspondence?

    This is a slightly wordy explanation that I’ve written primarily for lawyers who are curious why an experienced lawyer would publish “without prejudice” correspondence. The main post is here.

    The short answer is: because it wasn’t really “without prejudice” or “confidential”. If I write you a letter, and say the letter is an elephant, that doesn’t make it an elephant.

    Without prejudice?

    We generally want lawyers to negotiate to reach settlements, rather than taking everything to a time-consuming and expensive court hearing. “Without prejudice” is a longstanding rule designed to facilitate that. The Civil Procedure Rules summarise it as:

    In other words, if I’m suing someone for £100m, and offer in a “without prejudice” letter to settle for £1 then, if we later get to court, the defendant can’t point to my £1 offer and say it suggests I don’t believe in my own case. The court will generally refuse to accept my letter as evidence. It is probably also improper for the defendant’s lawyer to publish my letter – it’s certainly bad manners.

    The Osborne Clarke email goes further than “bad manners”, and says:

    “It is up to you whether you respond to this email but you are not entitled to publish it or refer to it other than for the purposes of seeking legal advice. That would be a serious matter as you know.”

    This is poppycock – indeed it’s more than poppycock, it’s an improper attempt to intimidate someone without the rest of the world finding out about it.

    But you can’t just slap “without prejudice” on any old letter – there has to be a genuine attempt to settle a dispute. As Lord Griffiths said in Rush & Tomkins v. GLC:

    The “without prejudice” rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish … The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence.

    That’s the key: there must be a dispute, and the correspondence must be – “genuinely aimed at settlement”. So actually my £1 offer above might not be “without prejudice”, because the recipient could well claim it wasn’t “genuine”.

    There are several reasons we can be confident the “without prejudice” doctrine doesn’t apply to this letter:

    • This wasn’t a genuine attempt to settle a dispute. The way a normal settlement offer works is that, if the settlement isn’t accepted, you proceed to litigation. In fact here, when I rejected Zahawi’s “offer” (that I retract my claim about Zahawi), their next letter said they’re not suing me. So there was no dispute, and this wasn’t a genuine attempt to settle it. It was a bluff, aimed at getting me to retract.
    • There wasn’t even a dispute. The “without prejudice” letter claims that I said Zahawi “was lying about the extent of involvement of [Zahawi’s] father in the very early days of YouGov when it was set up in 2000.”. That is not correct – I said no such thing. Osborne Clarke’s second letter correctly identifies what I actually said – that Zahawi’s first explanation – that his father contributed startup capital – was a lie. So the “without prejudice” letter relates to a matter that was never under dispute.
    • I said explicitly I would not accept without prejudice correspondence.

    I am therefore confident that the first letter was not in fact a “without prejudice” letter, it is not improper for me to publish it, and it could be adduced as evidence in court (in the laughably unlikely event this matter ever goes to trial).

    Confidential?

    Here’s the second Osborne Clarke letter.

    They really, really, don’t want me to publish it:

    “You have said that you will not accept without prejudice correspondence and therefore we are writing to you on an open, but confidential basis. If your request for open correspondence is motivated by a desire to publish whatever you receive then that would be improper. Please note that this letter is headed as both private and confidential and not for publication. We therefore request that you do not make the letter, the fact of the letter or its contents public.”

    Slapping “confidential” on a letter doesn’t stop the recipient publishing it. You need two things: contents that are actually confidential, and then a duty of confidence must be agreed or implied.

    We can dispose of the second point immediately. Obviously I hadn’t agreed to treat their correspondence as confidential, and there’s no reason to imply that I had; in fact they imply the opposite (that I may publish the letter). So no duty of confidence exists.

    The first is more subtle, but here’s the problem: there is nothing confidential in the letter. Imagine they’d written “Look, Zahawi’s first explanation was wrong, and we admit that. But his press secretary had just been eaten by a rhinoceros, and the intern was so traumatised they put out any old nonsense. We still haven’t tracked down his family, so please treat this as confidential.”

    Now that could have been confidential information. But nothing in the actual letter is confidential. They say nothing that the world doesn’t know already about Zahawi’s unconvincing explanations for his tax affairs.

    Oh, and there’s a further problem. Even if the letter was confidential, and a duty of confidence could be established, there is a defence if I can establish a public interest in publishing. Here I would say that publishing the fact the Chancellor is seeking to silence an allegation of dishonesty against him is absolutely in the public interest.

    Wider implications

    I believe the tactics Osborne Clarke used here are fairly common in the libel world – abusing “without prejudice” and confidentiality to ensure that libel threats are not reported. These aren’t real libel claims – they’re strategic lawsuits against public participation (SLAPP).

    The Solicitors’ Regulatory Authority already warns lawyers about the potential for SLAPP misconduct. I will be writing them to ask that they expand their guidance to make clear that only in rare cases will a libel letter before claim be without prejudice and/or confidential. More generally, lawyers should not make assertions that their letters cannot be published unless they have a very clear and stated basis for doing so.

    I should add that I am not making an SRA complaint against Osborne Clarke – my sole aim is for the SRA to ensure that SLAPP defendants are not misled into thinking that they cannot mention the purported claim against them to third parties.

    I’m leaving comments on this post open for now, but will police them more than usual, for which my apologies.

    Footnotes

    1. This is a very smart point that I’d missed, but was picked up by a litigator – thank you Chris! ↩︎

  • The Chancellor’s secret libel letters

    The Chancellor’s secret libel letters

    The Chancellor of the Exchequer, Nadhim Zahawi, has been sending threatening letters, drafted by expensive lawyers, to people investigating his tax affairs. The letters are designed to intimidate, and say they are confidential and can’t be published. One was sent to me. I am publishing it.

    Update: The Times has the story here. For those who prefer PDFs, I’ve uploaded the first Zahawi letter here, my response here, and the second here.

    The letters

    The public have a right to know if the Chancellor of the Exchequer – the person responsible for HMRC and tax – created a tax avoidance scheme to avoid £4m of his personal tax. At this moment I expect HMRC is considering whether to launch an investigation… it’s hard to imagine a worse conflict of interest than the Chancellor being investigated by tax inspectors whose conduct he can influence.

    And the public definitely have a right to know if the Chancellor sends letters to prevent the media and others from writing about his tax avoidance.

    I believe in transparency. I think it’s improper for lawyers acting in the shadows to curtail legitimate public debate about important public figures, particularly when there are allegations they’ve been dishonest. So I told the Chancellor’s lawyers I’d only accept open correspondence. They persisted in sending me letters that claim to be confidential. They aren’t. They contain no confidential information, and I never accepted a duty of confidence – indeed I explicitly rejected it. I don’t believe the Chancellor ever really intended to pursue a claim. The public interest is so obvious, and so strong, any libel claim would be farcical.

    The letter they sent me says, rather artfully, that it’s not actually a threat to sue for libel. But it comes from a libel lawyer, and tries to prevent me publishing it. Similar letters have been sent to others in recent weeks, and I understand Zahawi has done this before – using lawyers to silence people writing about his tax affairs.

    I’ve considered very carefully whether I should publish the correspondence. I’ve considered the matter with others and spoken to several legal ethics experts. All support my view that in the circumstances of this case there is no legal or ethical reason not to publish the letters, and a powerful public interest in publishing. So that is what I’m doing. And I will be writing to the Solicitors Regulatory Authority to ask them to make clear that lawyers should never assert that letters of this kind are confidential unless there is a proper and reasoned basis for such an assertion (which is is clearly absent here). More here on why I am confident this is both lawful and proper.

    The background

    For the last couple of weeks, I’ve been writing about how, when Nadhim Zahawi co-founded YouGov, his 42.5% founder shareholding ended up with a Gibraltar company, Balshore, owned by a secret offshore trust controlled by his parents. I said it looked like tax avoidance. I am a tax expert. And every other tax expert I’ve spoken to agrees – accountants, solicitors, QCs, and retired HMRC inspectors.

    Zahawi provided an explanation for this: that his father had provided “startup capital”. But he hadn’t. He may have provided £7k for some of the 42.5% but (according to documents filed by YouGov) another investor paid £285,000 for 15% of the shares at the same time. Clearly £7k didn’t justify 42.5%. I published my conclusion – there were three possibilities: I’d made a mistake; YouGov had filed a series of wrong documents; or Zahawi was lying. I invited Zahawi to respond. He didn’t – instead he switched to a new explanation – that his father had provided so much assistance, and Zahawi was so inexperienced, that it was only fair for YouGov to give his company (Balshore) the shares.

    I couldn’t understand why he provided that first explanation, and then dumped it and alighted on a new one (itself not very credible). I couldn’t think of any explanation except deliberate deception – so I called it what I thought it was: a lie. It’s this that has Zahawi so unhappy. The latest defence piles on more of what look like falsehoods. They suggest the false explanation was given only once, when I know it was given to at least three people. Zahawi’s lawyers confuse the words “capital contribution” and “startup capital” (they surely know the difference). They muddle Zahawi’s first explanation with his second. I think they know they have no real argument, and no serious libel claim. Which is why, instead, they have focused on silencing me – with bullying letters from the shadows. But I’m not going to play that game.

    This is not the only false statement from Zahawi.  On 11 July he told Sky News he didn’t benefit from an offshore trust and wasn’t a beneficiary of it. In fact he was – in 2005 Zahawi absolutely received a gift from Balshore. This was a benefit and he was a beneficiary – in both everyday English and technical tax law. I have not called this a “lie” because Zahawi may just have been confused. But for him not to correct his past statement is unacceptable.

    And Zahawi’s tax avoidance may have triggered a raft of further taxes: value added tax in 2000; trust taxation on gifts and capital gains in subsequent years; and withholding tax on his many interest payments to Gibraltar. I’ve asked Zahawi’s lawyers if he paid these taxes. Their response – he doesn’t want to get into a debate when he has an important job to do. But a large part of that job is being in charge of the tax system. And it’s not a debate, it’s a simple question: did the Chancellor fail to pay tax that was due? The public has a right to know.

    The documents

    Here’s the initial Twitter DM I received from Zahawi’s lawyers, Osborne Clarke. Note my reply that I won’t accept “without prejudice” letters (a “without prejudice letter” is often sent by lawyers negotiating a settlement; it can’t subsequently be put before a court, because that would dissuade people from trying to settle disputes). The opposite is an “open” letter.

    Their response was to send me a (supposedly) without prejudice letter – the very thing I’d said I wouldn’t accept:

    I responded as follows:

    I then received this response:

    I hope it’s clear from the above why I believe publishing the letters is the right thing to do. I explain in more detail here why Osborne Clarke’s assertion that I can’t publish these letters is wrong in law.

    I’m leaving comments on this post open for now, but will police them more than usual, for the predictable tedious legal reasons – sorry.

  • 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 ↩︎