Why the Telegraph’s criticism of John Mills donation to Labour wasn’t quite right

June 6, 2013 3:45 pm

The Telegraph released a story earlier accusing Labour donor of Tax Avoidance over his donation to the party (and George Osborne took a break from not fixing the economy to wade in). The “revelations” were clearly designed to distract from Ed Miliband’s speech this morning – but how accurate were the allegations?

Here are a few things to bear in mind:

  • Mills didn’t give the party a gift from income, he gave the party a gift of part of his wealth - and wealth isn’t taxed like income. Therefore  the very premise of the story is a bit flaky. 
  • Mills has forgone the rights to any future gain or income arising from those share – an effective disposal of a capital item - shares.
  • The Labour Party has not received £1.65 in unencumbered cash.  Until Mills decides to sell the company, or approves a buyer of the shares it will only get a dividend stream of x pence per share like any other shareholder, which as Ed Miliband said today, the party will pay the approriate tax on.
  • It may be true that, provided the Labour Party makes a loss, the dividend will be tax free – but that’s a red herring - all income is tax free if you are making a loss. 
  • I don’t think Mills has avoided any tax, as gifts of wealth (cash or shares) are not taxable on the giver for the same reason – he has permanently relinquished all rights to future income from the shares or any proceeds on sale – exactly analogous with giving the party cash – no more interest, no more opportunity to buy something with it. 
  • So yes, it may be tax efficient to Mills in the sense that he would indeed have had to earn income of c£3.2m to give £1.65m in cash (or had a capital gain of c£2m) but instead he has permanently foregone his property rights over accrued wealth of £1.65m. And we don’t know today what is the real cost to Mills of that.  In this sense efficient and avoidance are not the same thing.
  • The only difference between this gift and cash wealth (post tax) is that he created this wealth by building a company – he is a wealth creator – in Tory terminology. If he had bought the shares and given them to the party there would be no issue. Somewhat ironically, the Tories are attacking Mills because he has donated wealth that he himself has created.

 

All a bit muddled? Let me put it this way instead:

—–

Case 1

Claire is a successful corporate lawyer. Recently Claire’s last surviving parent died and as an only child Claire inherited her parents estate.  The main asset was a house and – as it was valued at £350,000 – Claire received the house free of Inheritance Tax.  Since Claire was pretty wealthy in her own right and since she believed in social justice and wanted to protect the country’s public services she decided to give the house to the Labour Party.  She agreed with the Labour Party that it wouldn’t sell the house for 10 years but in the meantime would rent it out at affordable rents to key workers.  The labour Party would get the rent as an income for years before the house was sold.

The Daily Telegraph accused Claire of being a tax avoider (with Labour Party connivance) as she had given the party an asset that she hadn’t paid any tax on rather than using cash that she had accumulated from post-tax earnings.

Case 2

John is a successful businessman. The business he runs is privately owned and John owns the majority of the shares.  After the last valuation of the shares John realised that the shares were now worth a great deal of money. Because John believes in social justice and wants to defend the country’s public services he decided to give some of the shares to the Labour Party.  The Labour Party agreed that it wouldn’t sell the shares  – so as not to destabilise John’s company – until the whole company was sold or with the agreement of John.  In the meantime the Labour Party would get the dividend income from the shares as an income for the years before the shares were sold.

—–

The Daily Telegraph accused John of being a tax avoider (with Labour Party connivance) as he had given the party an asset that he hadn’t paid any tax on rather than using cash he had accumulated from post tax earnings.

Osborne and the Telegraph would never have complained about Case 1, although it’s effectively the same. The whole attack is politically motivated and vexatious, but you knew that already, right?

  • JoeDM

    Oh dear.

    As Denis Healey once said “If you find yourself in a hole, stop digging.”

  • charles.ward

    I thought the Labour Party’s attitude was that unless the law was designed to encourage the behaviour (i.e. you were obeying the “spirit” of the law) then the tax avoidance would be considered immoral.

    Was tax law designed to encourage gifts of shares rather than cash? If not then why do you you approve of this avoidance?

    • trotters1957

      Parliament passed “Gift hold over relief ” which has probably been used in this case, it’s not tax avoidance if it’s the will of Parliament . Stop making mischief.

      • charles.ward

        What you seem to be saying is that the letter of the law determines the spirit of the law. I.e. If the letter of the law allows it then it must be within spirit of the law. This is not what the Labour Party has been argueing with respect to companies like Google and Starbucks.

        Unless you can show that the law was drafted in order to encourge political donations in the form of shares Labour are hoisted by their own “spirit of the law” petard. As I understand it from the Telegraph article this is the first large political donation in shares.

        Ed Miliband is claiming that the gift of shares was to provide a steady income to the Party ignoring the fact that a gift of cash could also provide a steady income (if invested wisely) and Mr Mills explicitly stated that he gave the gift in shares to avoid tax.

  • trotters1957

    I don’t want to get into a long winded discussion about this as we don’t know enough about John Mills tax affairs. But generally on this type of gift CGT is payable on the gain except when gift hold over relief is claimed, which is probably the case here. In other words no CGT has been avoided, it has merely been held over until the Labour Party disposes of the shares.
    In other words, it seems to be a non-story.

  • JoeDM

    If it looks like a duck, swims like a duck, etc …………

    Everyone should manage their financial affairs in a tax efficient manner. I am sure that it is all perfectly legal and above board.

    LOL !!!!!

  • charles.ward

    Compare and contrast:

    “The reason John Mills gave us these shares is because he wanted the Labour
    Party to have a steady stream of income, which we will get from dividends,”

    - Ed Miliband (link)

    “To be honest with you, it is the most tax efficient way of doing this.

    Because, otherwise, you get no tax relief on donations to political parties
    for understandable reasons.

    If you donate to a political party out of a tax paid income, up until April
    it was 50 per cent and now it is 45 [per cent].

    That means if it is £100,000, the Labour party gets £55,000 and the
    Government gets £45,000.”

    - John Mills, when asked by the Telegraph why he made the donation in shares (link).

  • Quiet_Sceptic

    The problem with this is case 3:

    Jo is a PAYE worker, they might work in the public, private or charity sector, no matter, everything they earn gets taxed. Though they may serve the public, or customers, or create wealth, Jo doesn’t have the luxury of taking the wealth they created as capital, they are forced to take it as income and pay tax on every penny. Jo’s employer gave them a £200 bonus this year, the taxman took his chunk of that as well.

    Jo looks on enviously at these individuals for whom tax is optional and wonders why as someone’s wealth increases, paying tax becomes an option rather than the unavoidable obligation that it is for Jo?

  • MonkeyBot5000

    This has nothing to do with big companies avoiding tax and Labour shouldn’t even have to mention them to defend themselves.

    This is about a guy giving away a wealth generating asset so that he no longer receives an income from it. Labour may want to ask why the Tory’s supporters don’t believe in their party enough to do more than just throw a bit of spare cash their way now and then.

    If he’d handed them a portfolio of shares in Google, Starbucks and Amazon, you’d have a point, but I haven’t heard any suggestion that JML isn’t paying enough tax.

    • http://twitter.com/waterwards dave stone

      Fair comment.

      As long as everyone plays by the rules no one has grounds for complaint. And if Labour want Google and others to pay more tax Labour need only include proposals for tougher regulations in their manifesto and implement them if elected.

      Expecting individuals or companies to voluntarily hand money to the government is unrealistic. Does anyone, on unexpectedly finding a £20 note in a pocket, think: “Oh, an extra £20 I didn’t know I had! I’ll send it to the government so they can waste it on a self-defeating, illegal and pointless war.”?

  • markfergusonuk

    I’d hope that I’d have looked into it, as I did in this case, and found that there wasn’t much to it

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