An anonymous brown envelope helped longtime U.K. politician Margaret Hodge go viral.
Hodge had spent several months in 2011 trying to investigate an alleged £10 million sweetheart tax deal between Goldman Sachs and U.K. tax authorities, but the investigation seemingly wasn’t going anywhere. She had taken an interest in the case because of her role as the chair of Parliament’s influential Public Accounts Committee (PAC), which oversees government expenditures. Hodge and her committee had learned about the purported deal through an exposé in Private Eye magazine and subsequently tried to interview the man allegedly at the center of the deal: Dave Hartnett, the then-head of HM Revenue & Customs. But Hartnett wasn’t talking — he refused to discuss the matter, citing taxpayer confidentiality. At any rate, he didn’t deal with Goldman’s tax affairs, he told lawmakers.
The issue languished until a whistleblower placed the brown envelope in Hodge’s hands, sharing with her transcripts of a confidential HMRC meeting that said Hartnett had actually shaken hands on the deal, Hodge recounted.
“My vice chair at the time said to me: put [HMRC’s] lawyer on oath, we might get more out of him. And I had no idea that we could do that, because I was quite new in the job. So I turned to my clerk and asked, can we put him on oath? And he said yes, you can. I said we’ll do that . . . go and find a Bible. And it took him 20 minutes, but he did.”
The PAC put the lawyer under oath, however the move didn’t elicit much more information. “But it got us fantastic media coverage,” Hodge told Tax Notes in an interview at her office at Parliament’s Portcullis House. “That then led to the civil service changing the protocols for how they decided those deals, so we achieved a lot of change in the way that HMRC operates. And Hartnett retired early. From that, people started coming to see me about corporate tax affairs.”
Vote for Me, I’m a Woman
Hodge’s success as a tax legislator links back to the greatest political battle of her career — a years-long tussle with the far-right British National Party (BNP). Her battle to eject the fascists from her London electoral district primed the Labour politician for perhaps her most famous political role — as chair of the PAC making sure multinationals pay their fair share of tax.
When Hodge was first elected to Parliament in 1994 it was widely understood that her seat, which represents Barking in east London, was probably one of the safest seats for the party. Prior Labour members of Parliament had held the Barking seat until they either died or retired, going back decades.
Although working-class Barking is a stronghold for Labour, the relationship had started to grow cracks over the years as the community’s demographics rapidly became more diverse: Barking’s long-time working-class white constituents felt neglected, and Hodge’s seat suddenly became very insecure. The BNP seized on simmering anti-immigrant sentiment in the community to build inroads and help capture several of Barking’s local council seats in a 2006 election that became a wake-up call to the Labour party and to Hodge. She saw that her Parliamentary seat was the next target, so she embarked on a do-or-die four-year campaign to reconnect her and the Labour party to her Barking constituents.
Four years later, Hodge walloped the BNP’s former leader Nick Griffin in a 2010 challenge for her seat, unforgettably telling him in a post-election message: “Get out and stay out . . . pack your bags and go!”
Victory aside, Hodge couldn’t rest — she suddenly had to figure out her next step within the party. Long before Hodge became a tax crusader she held various ministerial appointments under former Labour Prime Ministers Tony Blair and Gordon Brown, including stints as Minister of State for Work, and Minister of State for Culture and Tourism. Those ministerial opportunities dried up when Labour lost to the Conservative Party in the 2010 general election and David Cameron became prime minister. Hodge was also in a personal state of transition as her husband, former British High Court judge Sir Henry Hodge, had died the previous year.
“I was sort of looking for something to do that would fill my time, and a friend of mine suggested that I should run for the PAC chairmanship,” Hodge said. “And my assistant at the time, she said ‘Margaret, it will be so boring, it will all be figures,’” Hodge laughed. “But I told her: ‘I’m going for it.’”
Hodge went up against several other MPs in the PAC’s first chairmanship election in its nearly 150-year history. All previous chairs had been appointed, and all had been men. Hodge hoped to break that tradition and become the first female chair, but she hadn’t been embedded in daily parliamentary politics for a long time . . . and campaigning initially wasn’t on her radar.
After she submitted her curriculum vitae, she decided to take a week’s holiday to recover from the general election, unaware that her opponents were canvassing in her absence. When she returned, she found she only had a week left to campaign.
“So I said ‘vote for me, I’m a woman’. I was the only woman standing and that got a lot of votes,” she laughed. “I had also just beaten the fascists in the general election and that helped establish my credibility.”
Hodge had no game plan when she became chair, but what she did have was a renewed sense of purpose and drive following her battle with the BNP.
“It was a real, real challenge and it changed the way I do my politics,” she told Tax Notes. “So I very much saw the [PAC] role as reflecting what my constituents wanted. Everyone wants value for their money, and I saw the role as really asking the sort of questions that my constituents would want to ask of people responsible for spending their money. Because it’s our money, it’s not the government’s money.”
Tax Is for Everyone
Hodge didn’t have to wait long for an agenda to reveal itself. Shortly after she took office, Conservative MP David Davis, who helmed the PAC in the late 1990s, approached Hodge and offered to help with whatever she needed.
“Then, he poked his finger at me and he said ‘Tax, Margaret — you have got to look at the tax affairs of Vodafone.’ And I thought, ‘Now what is he talking about? How can the tax affairs of a private company have anything to do with a parliamentary committee that is tasked with overseeing public expenditure?’ But it quickly became clear to me that at the heart of HMRC’s efficiency and effectiveness is the department’s ability to collect money, so I could see why it was relevant. And I kept that in the back of my mind,” Hodge told Tax Notes.
Hodge’s onboarding was rocky at times. “I often get admonished by tax professionals or sneered at a bit: ‘you don’t understand tax,’ they say. Well, I think it’s the job of the professionals to explain it to me, because tax belongs to everyone,” she said. “We all have a right to know how the money we give to the government is spent. One of the things I always say to tax professionals is that hiding behind technical jargon to prevent a public debate on key issues of importance in relation to tax just won’t do.”
Armed with that collectivist spirit, Hodge swiftly built a cross-party understanding within the committee. “I very much tried to build — and I think being a woman in the job helped — I tried to build consensus, so that people left their crude tribal politics at the committee door and had to really focus on the issues.”
She quickly gained a reputation for torching government officials and corporate heads who came before her committee. In areas where other policy makers might have been more circumspect, Hodge didn’t hold back, famously telling Google in one instance, “You are a company that says ‘you do no evil’ but I think you do do evil.” She also blasted the company’s tax activity as “devious, calculated and . . . unethical.” In an investigation into HSBC’s tax practices, she lit into a former bank executive as “incredibly naïve or totally incompetent” and said that the executive, who had then moved on to the BBC, should be sacked by the government. Hodge also had no problem urging taxpayers to boycott multinationals that ran afoul of the committee, much to the chagrin of the corporate world.
In 2012 executives from Starbucks, Google, and Amazon appeared before the committee to discuss their U.K. tax activity after news broke that the companies had allegedly paid little to no corporate tax in the preceding years. The PAC wanted to know why the trio were making hundreds of millions and even billions of pounds in U.K. sales but paying comparatively little tax. When a Starbucks executive explained that the company had not made U.K. profits in several years, Hodge openly asked if Starbucks was lying to investors and challenged its business structure.
“If you have made losses in the U.K. over 15 years, which is what you are filing, why on earth are you doing business here?” she asked.
The public piling-on proved to be too much for Starbucks, which was also dealing with dozens of U.K. protests over its tax activity. Later that year, Starbucks met with HMRC officials and pledged to change its business structure and pay more tax in the country. Two years later, Hodge urged U.K. shoppers to shun Amazon due to reports that the company in 2013 had paid £4.2 million in tax on £4.3 billion in U.K. sales. In 2015 Amazon started to book its sales through the U.K. instead of Luxembourg so that it would pay U.K. tax. Many EU and U.K. developments probably influenced Amazon’s decision, including the introduction of the U.K.’s diverted profits tax.
Many in the tax community were appalled by her approach, but the media ate it up. Hodge made the PAC’s tax hearings a no-nonsense exercise that also unwittingly tapped into a public sense of schadenfreude —the seemingly untouchable corporates were being called on the carpet. Beyond that, she laid bare information that previously wasn’t accessible to the public — she made sure that tax was for everyone.
Hodge vs. the Big 4
In 2013 Hodge’s PAC set its sights on the Big 4 accounting firms — Deloitte, EY, KPMG, and PwC — and on their role in tax avoidance and their influence over government tax policy. All have seconded staff to the government at one point or another to provide technical and policy advice on tax law changes; the committee wanted insight on whether those firms had used insider knowledge to benefit their clients. The PAC invited the heads of tax from all four firms to Westminster that January for what started as a calm hearing but deteriorated into an occasionally chilly exchange. Hodge was unsparing in her assessment, saying the relationship between the Big 4 and the government “look[ed] like cases of poacher, turned gamekeeper, turned poacher again.”
“If we could write clear law that really met the intent of Parliament, we would of course do so, advised by the tax professionals,” Hodge told Tax Notes. “But it is quite honestly impossible to write law that is completely unchallengeable. The professions write the technical law, not politicians, and for as long as that is the case then I think there is a moral dimension to the way in which those professionals behave. They write the law and then exploit the loopholes they themselves have created to benefit big corporations and high net worth individuals.”
Hodge says a classic example involved the drafting of the United Kingdom’s patent box.
“KPMG came in and wrote the technical rules for it. One of their partners was seconded for six months into Treasury to do that and then he went back and wrote a brochure saying, ‘Patent Box: What’s in it for you?’ There’s a revolving door . . . and then for the professions to say, ‘you write the law therefore the onus is on you to get the law right’ is not entirely accurate,” she said.
“There’s some truth in that, and we should be better at drafting laws. But here’s a guy from KPMG who came in, knew what the intention of Parliament was, wrote the technical rules and understood the loopholes that could keep him within the law but [also] allow the tax relief to be abused for no other reasons than to avoid tax,” she said.
During the hearing, KPMG and the other three firms refuted any allegations of wrongdoing. KPMG’s head of tax also denied that its employees write legislation.
In April 2013, in the wake of the hearing, the government changed its procurement policy and now allows departments to disqualify potential contractors that avoid tax and to terminate existing contracts with entities that do the same. The policy, however, does not include firms that provide unscrupulous tax advice, much to the disappointment of the PAC. The committee had wanted the government to apply the rules to unscrupulous tax advice situations and introduce a code of conduct for tax advisers that addresses how firms with seconded staff should manage conflicts of interest. The PAC also urged the government to introduce legislation that would hold tax advisors accountable for advising clients to exploit tax loopholes that are later found to be unlawful.
The government did not expand the policy or introduce the code, but the United Kingdom now has a new law — the Criminal Finances Act — that holds corporations criminally liable for facilitating tax avoidance regardless of their actual knowledge of the activity. The only defense that companies can rely on is proving that they had reasonable procedures in place to prevent their associates from engaging in that activity.
The measure is in its infancy — it just turned 1 in September — and it will take some time for the government to build its cases. Hodge, however, finds the new legislation to be unsatisfactory. “It is an extremely weak first step,” she told Tax Notes. “The preconditions that have to come into play before they can judge that an offense has been committed are pretty onerous.”
A Beneficial Ownership Victory
Hodge’s largest tax triumph dropped right in the middle of 2018, when the United Kingdom passed an amendment she coauthored to implement public beneficial ownership registers in the country’s offshore territories. The idea had been several years in the making.
Shortly after the Panama Papers were released in 2016, Hodge got to thinking. Over half of the entities that appeared in the data leak were incorporated in the British Virgin Islands, and the optics weren’t good. Maintaining money in offshore jurisdictions is not inherently a crime, but the Panama Papers highlighted enough questionable activity that Hodge and the rest of the world couldn’t really ignore it.
“We live in a spectrum that goes from sensible tax planning through to tax avoidance, to evasion, then to money laundering and criminal activities,” Hodge said. “The more and more I’ve worked in this area, the more and more I’ve been forced to the right part of that spectrum, which involves money laundering and financial crime.”
“Sadly, Britain has become for too many people the jurisdiction of choice to hide their money or bring their money into the mainstream. So I think I alighted on beneficial ownership as an important issue when the Panama Papers came out,” Hodge said.
By the time the Papers were released, however, Hodge’s chairmanship had ended and she had left the PAC. She declined to pursue another five-year term. “I’d done this 24/7 for five years, and it was just really hard work,” she told Tax Notes.
She did, however, continue her tax legislative work by setting up an all-party Parliamentary group (APPG) on responsible tax in September 2015 with Davis as her vice chair. Conservative MP Andrew Mitchell later replaced Davis, and together Hodge and Mitchell crafted an ambitious amendment to implement public beneficial ownership registries in the United Kingdom’s overseas territories and tacked it onto Parliament’s 2018 Sanctions and Anti Money Laundering bill. She especially valued Mitchell’s expertise, given his previous role as Secretary of State for International Development in the Cameron government.
“Developing countries lose three times as much in tax avoidance as they get globally from aid. If you want to have proper public investment in these poor countries there’s a real imperative for stopping the abuse and the tax avoidance,” Hodge said. The duo campaigned hard, with Hodge estimating that she personally met one-on-one with at least 40 Conservative MPs in hour-long meetings in the lead up to the amendment’s Parliamentary vote. On May 1, the government said it would back the amendment, and the bill became law later that month.
“I am very proud, really, because we forced the government. The last thing the government wanted to do was this,” she said. “We didn’t know until we were in the chamber that they would cave in. Literally as the Foreign Office minister was standing up and criticizing our proposal I saw that the Chief Whip was talking to Andrew Mitchell. And the minister conceded the argument and gave us our amendment. So it was a real exercise in how Parliament can exercise its power and strength to change the world if you build cross-party consensus.”
Hodge and Mitchell aren’t finished yet. The U.K. Crown Dependencies — Jersey, Guernsey, and the Isle of Man — could not be added to the amendment for technical reasons, but they’re next on the pair’s list because of their outsized role in allegedly facilitating tax avoidance and serving as a conduit for dirty money flowing into London.
“They’re part of the British family, so they should abide by the same rules on transparency. Britain needs to lead the way in all of our jurisdictions,” Hodge said. “I know this is a move for the good, and I know in the long term transparency is absolutely vital in trying to tackle not just avoidance but money laundering and other financial crimes,” she added. “Nobody should be frightened of transparency, and it’s coming.”
In this latest phase of her tax legislative career, Hodge has become a literal foot soldier for transparency, making multiple trips to the three jurisdictions over the past few months to sit down with officials and discuss public registers. Interestingly, the hesitant track record of the United States regarding beneficial ownership legislation has popped up in many of those discussions, Hodge said.
“They all cite America. They say there’s no point in Britain having transparency until America cleans up its act. I very much hope that Congress will take up the battle that we have. They did when we started exposing tax avoidance — there were some very good hearings around Apple — and we’ve had some interest shown through the American embassy into what we achieved here,” Hodge said.
“It’s very important that America likewise should ensure transparency so we can see who owns what and where, and follow the money. We can’t stamp out everything, but it’s a very good tool for stamping out a lot of money laundering and financial crime.”
The APPG is also trying to ensure that the U.K. government follows through on implementing two key pieces of tax transparency legislation that have already passed through Parliament — public country-by-country reporting for multinationals and a public beneficial ownership register of U.K. property. The public CbC reporting provision — which was included in the 2016 Finance Act — essentially allows HM Treasury to introduce public CbC reporting whenever it sees fit. Right now, no other government has implemented public CbC reporting, and the United Kingdom has signaled that it would rather wait for a multilateral consensus before moving forward.
“It’s so irritating that we got an amendment through . . . whereby the government agreed to adopt public country-by-country reporting in principle, but they have completely failed to put it into practice,” Hodge said. “It’s sitting there in the statute book and they’re refusing to implement it. We are looking into ways in which we can speed that up.”
On the issue of property ownership, a lot of dirty money comes into London via the property market, and people buy property in London through shell companies located in tax havens, Hodge explained. But a new public register of overseas companies that own U.K. property is expected to go live in 2021. “Getting that implemented is another crucial task for us,” she said.
Importantly, the APPG also wants to introduce legislation to create a joint Parliamentary committee that would oversee the activities of HMRC and strengthen the department’s accountability, Hodge told Tax Notes.
Unlike many other government departments, HMRC does not have a minister to whom it is accountable, and its processes are not always clear, she said. “You can never tell where the sweetheart deals are entered into and whether people are being treated equally by the tax authorities,” Hodge said. The potential joint committee on tax would mirror a current one that oversees the country’s security services and meets in private but issues public reports.
The United Kingdom and Digital Tax
Right now, U.K. Chancellor of the Exchequer Philip Hammond is persona non grata in certain circles. What is his offense? He angered several power players in Silicon Valley and the U.S. Congress after announcing that the United Kingdom plans to hit some of the world’s largest (that is to say, U.S.) internet companies with a new digital services tax (DST). Soon after, business interests complained that his proposal is discriminatory. Hodge also has a bone to pick with Hammond, but an entirely different one — she thinks the proposal is mostly flash and little substance.
Hammond’s DST, which was released in October as part of the government’s Autumn Budget statement, seeks to levy a 2 percent tax on U.K. revenue earned by certain digital companies that have at least £500 million in global revenue and at least £25 million in U.K. sales. The government is still ironing out the kinks, but right now it wants to apply the DST to social media platforms, online marketplaces, and search engines. It is not looking to tax TV or music subscription services at the moment.
All told, the government hopes to collect £1.5 billion over four years — roughly £400 million per year. Hodge thinks that amount is laughable compared to the billions that companies like Facebook and Google earn annually in the United Kingdom.
At her office, she rattled off a list of figures compiled by Tax Watch UK demonstrating just how little the United Kingdom will pick up in tax compared to the U.K. revenues of digital giants like Google and Facebook. The report, which analyzed the U.K. revenues of Apple, Google, Facebook, Cisco Systems, and Microsoft, found that the five companies earned roughly £23.4 billion in 2017 and should have paid a combined £1.26 billion in taxes.
After the Autumn Budget announcement, Hodge sharply criticized the proposed digital services tax as “gesture politics” and too limited in scope. Her primary concern? Hodge thinks that many digital companies will be able to bypass the provision because of its narrowly drawn contours.
“Hardware companies, like Apple or Microsoft, won’t be covered. Video and audio platforms, like Netflix and Spotify, won’t be caught. Airbnb and Uber will argue that their marketplaces are not online. Even Google and Facebook will be able to exclude some of their profits,” Hodge said during a chamber debate.
Potential deficiencies aside, the United Kingdom has a history of running at the forefront of unilateral measures to tax the digital economy. Ever since the country implemented its diverted profits tax in 2015, the United Kingdom has made it amply clear that it wants to influence the digital taxation debate and help steer the OECD as it considers a multilateral solution. Hodge believes the United Kingdom can maintain that momentum if it takes a better look at the DST.
“I don’t pretend to have an easy answer, but I think it’s intolerable to continue to allow digital companies to dominate our economies without contributing to the public good,” she said.
Brexit and the U.K. Moving Forward
British Prime Minister Theresa May says businesses will enjoy low corporate tax rates in the United Kingdom once it splits from the EU. The current corporate tax rate is 19 percent; it is scheduled to drop to 17 percent by 2020. A two percentage point decrease doesn’t seem like much, but it’s an aggressive move that will undercut all but six of the EU’s 27 other member states. Could the U.K. corporate rate drop even lower? Hodge isn’t so moved. She doubled down on remarks she’d made earlier this fall doubting that the United Kingdom will become a haven in the wake of Brexit.
“I’m in the school that thinks this whole thing about creating a Singapore in the middle of Europe is completely for the birds,” she said. “On one hand, the U.K. government desperately needs resources to maintain the health service and they’re not prepared to raise income tax. And on the other hand, every 1 percent of corporation tax costs £2 billion, so there’s a limit to how much they can do there.”
“At the moment, we don’t tax enough to fund the spending even this [Conservative] government wishes to incur,” Hodge added. “The idea that you can start cutting tax left, right, and center and maintain even this rather fragile infrastructure of public services is just unrealistic.”
Hodge also believes that notions of a low-tax United Kingdom are improbable because EU lawmakers negotiating free trade deals and other agreements with the United Kingdom may have more leverage to ensure that tax isn’t used as a weapon to move business activity and financial services from other European states to the United Kingdom.
“I, as the U.K., will want the free trade deal much more than the low tax,” Hodge said.
Hodge made many of these points before EU lawmakers in September, during a special meeting convened by the European Parliament’s Special Committee on Financial Crimes, Tax Evasion, and Tax Avoidance (TAX3) on the tax impacts of Brexit. Behind the scenes, European lawmakers are already trying to bind the U.K.’s tax rates with those of the EU, according to local U.K. reports. In mid-October, the Daily Telegraph got a hold of a leaked TAX3 proposal showing that the committee wants the U.K. to align its tax standards with the EU and adopt the same tax evasion and avoidance tools.
VAT is another issue that Hodge expects will pose huge challenges post Brexit, but her outlook isn’t as optimistic. “It will be a nightmare,” she said. “You’ll have endless special interest groups saying cut VAT on this, cut VAT on that. And again, VAT is 20 percent of our income. You just can’t play around with it,” Hodge said.
The Optimistic Leader
In 2016 Hodge published a book about her time in the PAC entitled Called to Account: How Corporate Bad Behaviour and Government Waste Combine to Cost Us Millions. She wanted to memorialize the many extraordinary, sometimes funny and sometimes shocking stories she had witnessed over the years in the PAC. She also wanted to provide a resource for budding politicians and shed some light on the inner workings of Parliament.
“I hope the book inspires debate on a fair tax system, and I hope that those responsible for devising public policy and spending taxpayers’ money think a little bit more carefully about how they work and try to get better,” Hodge told Tax Notes. “I am a great optimist.”
The book also sheds light on her political philosophy — one that is focused on fairness and equality and dismantling privilege. For Hodge, it all boils down to one important idea she states in her book: “Democracy cannot just be a game where the winner takes it all.”