Saturday, 24 August 2013

Labour tax dodgers?

I suspect not, rather just another story in this silly, sorry corporation tax "debate":
Charlie Elphicke, a former tax lawyer, has written to HMRC to ask whether it will open an investigation into Labour Party Properties Ltd (LPPL), a property investment firm wholly owned by the party which operates a £6.3m rental portfolio.

Yesterday the Daily Telegraph revealed the firm, whose directors include Iain McNicol, Labour’s General Secretary, received £8.7m in rents between 2004 and 2011 but paid no corporation tax after reporting a string of losses.

In the two years where the company made a profit, carried-over losses meant it paid no tax. It last paid tax in 2003.

The Labour Party insisted the firm had done nothing to intentionally cut its tax bill. Ed Miliband has frequently attacked corporate giants including Starbucks and Google who are accused of failing to pay their full share of tax through artificial structures.

Mr Elphicke, the MP for Dover and Deal, has asked Lin Homer, the chief executive of HRMC, to investigate a series of “administration expenses” that wiped out the company’s profit.
In short then, a Labour Party subsidiary is frequently loss making due to its expenses being greater than income. The contention is what those expenses are and the amounts involved. Of course, the accounts are not going to give us a line-by-line breakdown of their spending but by looking at them in a bit of detail and making some assumptions based on the nature of the business, we can form an opinion as to whether or not they seem reasonable. LPPL is a property management company that not only owns investment properties rented to third parties, but also owns properties for use by the Labour Party.

Expenditure is broken down into the following categories - numbers are the 2011 figures ('000s):

Property maintenance and repairs - £97
Rents, rates and other costs - £1,043

And then the these are administration costs that Elphicke wants investigating, claiming that they are rather high for a business of this nature:

Administration charge - Labour Party - £36
Interest charge - Labour Party - £70
Legal and professional - £100
Audit - £2
Bank charges and interest - £49
Staff costs - £37
Bad debts charge - £11

OK, so the Labour Party have made a loan to LPPL who are paying interest on this. Both are UK entities so this is hardly in the league of loading up companies with debt from a related company in a low tax jurisdiction. As for the administration charge, I can only speculate, but I reckon it was for the use of Labour Party resources, most likely a charge-back for time and expenses spent on LPPL business. These interest and administration charges will go towards the total income for the Labour Party and any surplus may give rise to a corporation tax liability for them.

As for the other expenses, the issue here is that are Labour getting the best value for money or are they forking out inflated prices for legal advice to their mates? This is an internal issue for Labour Party members and not a tax issue at all.

I'm seeing two things here; the first is that the media, pressure/activist groups, think tanks, and the like have got into a strange habit of trawling through company filings looking for a story on corporation tax. These tend to be written in a way to fire up controversy where none exists, and I think that this is exactly what we've got here. Unless entities publish their line by line expense items and supporting documentation, contracts for the supply of goods and services, and tax returns and calculations, such stories will run as this is the way the debate has been framed. Of course this is completely impractical, not least because of costs and commercial sensitivities.

The second is that rather than defend the laws that they make or do anything about them if they don't like the consequences, MPs have taken to attacking the entities for the amount of corporation tax they pay, often from a position of extreme ignorance, e.g. Margaret Hodge. Elphicke doesn't have this excuse though; he's a former tax lawyer so should know his stuff. His letter demanding the HMRC investigate LPPL for making losses because of some fairly normal looking expenses and conflating revenue with tax paid says to me that his motives are party politicking and publicity seeking rather than righting an injustice.

What is truly daft is this; if HMRC were to investigate, invalidate every pound of the £305k expenses as tax deductible and to disallow any losses brought forward, LPPL would owe something in the region of £9,800*. I suspect that the actual and opportunity costs of an investigation would far exceed any tax recoverable.

* The quick and dirty calculation was to start with the £256k loss, take out the £305k expenses to give £49k profit. Corporation tax on this at the small company rate of 20% would be £9.8k.

Sunday, 11 August 2013

Knee-jerk reactions

Fourteen year old Hannah Smith killed herself the other week over alleged online bullying. That's tragic but I was disappointed in the response from the father, the media, and politicians in calling for clamp-downs, bans, and restrictions on social media. I can understand the father's reaction to some extent; he's trying to make sense of what is probably the worst thing that could happen to a parent but this is not the right way to go about things, especially when not of all the facts are out there. This sorry tale has now taken a rather odd, and perhaps sinister twist:
Bosses at, the social network on which hateful comments were posted to Hannah Smith, have controversially claimed that the vast majority of the messages were sent by the teenager herself. 
An internal investigation at the Latvian-based website is understood to have analysed the user profiles from which the messages were sent.

They reportedly now believe the teenager set up a string of anonymous profiles and posted hate messages to herself.

They claim 98 per cent of messages had been sent from a computer with the same IP address as Hannah's with only four posts coming from elsewhere.
Leicestershire police are also said to be investigating a theory that Hannah's profile could have been hacked.
I'm not sure why this is controversial if true. If it is then the girl was deeply disturbed with being the vehicle for her troubled thoughts rather than the catalyst or the cause. However, just because the messages were posted from the same IP address, it doesn't necessarily mean that Hannah posted them, it would just narrow it down to someone from the same household; a family member perhaps? The hacked profile theory is not plausible at all unless someone has not only gained access to it but also known and spoofed the IP address.

But who really posted the "hateful" comments to Hannah's profile won't be known until and the police have completed their investigations. What this case demonstrates well is that judgement should be reserved until all facts can be reviewed in the cold light of day; to have a better idea of the truth and to take away the emotion. This is particularly pertinent to politicians who frequently come up with crass and unworkable laws as a knee-jerk reaction to such tragic cases.