Did David Cameron Benefit from Tax Avoidance?

The amount of flim-flam and chaff being thrown about by both supporters and critics of David Cameron over his possible involvements with off-shore tax avoidance activity is quite staggering. Some of the journalists covering it have displayed appalling ignorance. So it might be useful to try and cut through the spin and establish what we do, and don’t, know.

There at least three possible ways Mr. Cameron might have benefitted from tax avoidance that we know of – two indirectly via his father and one directly through his own investment in his father’s off-shore trust.

First lets be clear why anyone would set up a business, trust or any other commercial entity in a ‘tax haven’. The business is there to generate profits, most likely through ownership of other businesses or investments that are not in the tax-haven.

The benefit of being in tax-haven is not to pay taxes, or pay much less taxes, on those profits. People pay money to set up businesses in tax-havens – sometimes a lot of money – so the benefit they get in avoiding business taxes must be greater than the extra cost of setting up in Panama, or British Virgin Islands, rather than London say.

1^st way David Cameron may have benefitted

I’ll try and explain this using a terribly simplified example to show how investing in a tax-haven works. Let’s say you have £30,000 to invest.

You put it into a UK-based business that pays corporation taxes to the UK government. These are taken out before you get any benefit (dividends) from your investment. So let’s say the business makes a before tax profit of 10% but then ‘loses’ 20% of that in corporate taxes – meaning it’s only made an 8% profit. They pay out all the profit as dividends so you make 8% on your £30,000 = £2,400.

Now let’s suppose you invest the same amount in an entity that makes sure it only makes its ‘profits’ in a tax haven where there’s no corporation tax. So instead of getting an 8% return you get 10% = £3,000.

Clearly in the second case you benefit from tax avoidance by the business.

You may declare your profit for UK taxes on your £3,000 and then say you are not avoiding tax. That is strictly speaking true. It is not you who is directly avoiding tax, it’s the business you invested in. But you made an £600 extra income through this device that you wouldn’t have made through a UK investment. Even after you have paid income tax on your £3,000 you are still better off than if you’d paid it on only £2,400.

So if the £30,000 that Mr. and Mrs. Cameron invested in Blairmore made more profit than it would have done invested in a similar UK investment because Blairmore avoided (quite legally) UK taxes they have benefitted.

Let’s be clear I (we) don’t know enough to say how much Blairmore benefitted from being located in a tax haven. But I am guessing it wouldn’t have been there if there were no tax benefits from avoiding the UK or other ‘normal’ country tax regime? The defence it was there to trade in dollars is laughable.

2^nd way Mr. Cameron may have benefitted.

David Cameron was left, reportedly, £300,000 by his father. He now says he doesn’t know where that money ‘came from’ – it was just part of his fathers estate.

It is a fairly safe bet that a considerable chunk of Mr Cameron seniors estate consisted of profits made through Blairmore. So if Blairmore were avoiding UK taxes, to the benefit of Ian Cameron, as has been alleged, then David Cameron has clearly indirectly benefitted.

If (unlikely perhaps) Blairmore were found to have been indulging in what HMRC now calls ‘aggressive tax avoidance’ – i.e. schemes that are technically legal but only exist to avoid taxes – then both Blairmore and Ian Cameron’s estate could be liable to pay the tax owed to HMRC. In such circumstances my understanding is that any disbursement – i.e. the £300,000 David Cameron was left – could be caught in that net. (I think the time limitation is within 7 years).

The point is David Cameron did benefit from Blairmore both through his own (and Samantha Cameron’s) investment and the money left by his father to him.

3^rd way David Cameron might have benefitted

David Cameron grew up in a wealthy family and went to a very expensive private school. Given his fathers wealth was generated through businesses like Blairmore, and again if it was avoiding taxes, then the young David Cameron clearly benefited.

This latter aspect is obviously something David Cameron cannot be held accountable for – he was a child and son. What his father did is not his responsibility. Criticisms of David Cameron for being a “posh boy who doesn’t know the price of a pint of milk” (as one of his Tory colleagues said of him) have largely been ignored by the public. But that may change if it turns out his “posh boy” lifestyle was bought – through no fault of his – on the basis of “immoral” (his word for them) tax avoidance schemes?

The second way he may have benefitted from tax avoidance – the £300,000 inheritance – is more fuzzy. David Cameron now says he has no idea where the money came from. I am sure that’s true. But should he have asked? He’d certainly be liable to repay some or all of it to the estate if it turned out the late Ian Cameron owed lots of dosh to HMRC. I think David Cameron is obviously guilty of no wrong-doing, but he might be guilty of ‘willful ignorance’ – understandable though that may be in the circumstances. Wilful ignorance is not a good trait in a political leader.

The third way David Cameron may have benefitted from tax avoidance is much clearer – he and Samantha chose to invest in Blairmore. His defense that he paid all his UK taxes when he repatriated the profits side-steps the point that the size of those profits depended on Blairmores tax avoidance?

The question therefore hinges on what sort of tax avoidance Blairmore Holdings was engaged in?

If it is the normal, run-of-the-mill sort of tax avoidance some of the rich indulge in it is still politically damaging to Mr Cameron in the context of the “we’re all in it together” rhetoric of his government.

But if it turns out Blairmore Holdings was engaged in much more ‘aggressive tax avoidance’ then this is far more toxic for David Cameron – personally and politically. This story has a long way to go yet.

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PS – Duncan Weldon (Head of Research, Resolution Group @DuncanWeldon) contacted me on twitter to clarify that he doesn’t think Blairmore Holdings did directly benefit from tax avoidance itself – as a ‘collective investment scheme’ (CIS) it doesn’t pay taxes on investments, the individual investors do. Which begs the question what benefit did it get from being in a tax haven(s). It clearly paid quite a lot for the privilege – see this: David Cameron’s father sought legal advice on best tax havens (Guardian) – so there must have been some advantage to either Blairmore or Ian Cameron? This simply reinforces the need for a full and transparent investigation into Blairmore.