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  • Escapology & the Exchequer: Will tax scheme reverse mean new Chancellor will be tough on avoidance?

    30 July 2019

    Andy Wood

    It’s not often that a Victorian vaudeville performer finds himself even loosely associated with someone holding one of the highest offices in British politics.

    However, the elevation of Sajid Javid from the position of Home Secretary to Chancellor of the Exchequer following Boris Johnson’s victory in the Conservative leadership campaign has conjured up just such a connection.

    For those unfamiliar with grainy black and white footage, it’s perhaps worth providing a little background.

    Harry Houdini became internationally famous for his astounding ability to free himself from handcuffs, jail cells, straitjackets and water-filled glass tanks.

    In short, he was something of a phenomenon in the early part of the last century.

    Even so, his name was invoked in rather less entertaining – although no less dramatic – circumstances in 2016 when the Supreme Court judge Lord Justice Reed began to deliver the ruling into a tax avoidance case involving two of the world’s big banks.

    In what he and four fellow judges regarded as an “artificial” effort to dodge Income tax and National Insurance (NICs), UBS and Deutsche Bank arranged to pay staff more than £180 million in bonuses in the form of shares rather than cash via offshore companies.

    The scale of the undertaking was vast. More than 400 UBS’ employees were agreed to take part in its scheme, which involved £92 million worth of bonuses and sought to avoid £36.9 million of tax and a further £12.7 million in national insurance.

    Deutsche Bank’s own plan saw £91 million in awards paid as shares through a company called Dark Blue Investments and based in the Cayman Islands.

    It was a ruse creative enough to earn Lord Reed’s description in 2016 as one of “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax” (https://www.supremecourt.uk/cases/docs/uksc-2014-0151-judgment.pdf).

    “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax” Lord Reed, 2016

    As a result of the adverse judgement, HMRC was able to demand an estimated £135 million from both banks as well as pursuing £30 million more from 27 other users of similar schemes.

    At the time that the Deutsche Bank scheme was set up in 2003, Mr Javid was a Senior Managing Director in its London office although, he insisted, that he had not personally derived any tax benefit.

    Nevertheless, given the fact that he faced demands from his Commons’ opponents to “come clean” on how much he knew about the operation of the Deutsche Bank scheme and the degree to which tax avoidance has been something of a political hot potato in recent years for his predecessors George Osborne and Philip Hammond, Mr Javid should not be surprised if the topic rears its head again.

    The most recent annual report published by HMRC this month also made clear that efforts to counteract avoidance may not be succeeding.

    Avoidance, in fact, accounts for a growing share of the widening tax with the difference between the sums due and received growing by £100 million in the last financial year alone.

    It remains to be seen whether the anti-avoidance push will be hampered by the need to find another Revenue CEO, given that the current incumbent, Sir Jonathan Thompson, has announced that he’s to leave later in the year.

    I would argue that Mr Javid is in something of a no-win situation. If he continues the prevailing campaign against avoidance, he’ll be regarded as simply doing what’s expected of him.

    If he slackens off even slightly, though, his critics will be all to eager to remind him of his Deutsche Bank past and, in an administration already beleaguered by a host of other challenges, most notably Brexit, it could be a bind from which Mr Javid – unlike Harry Houdini – is able to escape.

    If you have any queries about this blog then please get in touch.

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