by Atul Hatwal
The hand to hand combat of a mayoral campaign is hardly the ideal environment for sober reflection, but for the Labour party, it’s time to have a long hard think.
After yesterday’s partial release of the mayoral contenders’ tax and earnings details, there is now a threat that Ken Livingstone will not just lose the London election, but will seriously damage the national party in the process.
The full nature of this danger is not quite apparent yet. The media focus over the last 24hours has been on examining the total tax paid by each of the candidates, looking at who paid the most. This is understandable but misses the point.
The issue is not about the absolute amounts handed over to HMRC, but whether these figures demonstrate that the candidates have, or have not, lived up to their rhetoric.
It’s about trust, not finance and for one of Labour’s most high profile figures, who has volubly railed against tax avoidance, the figures are damning.
In 2010/11, setting aside pension contributions, Ken Livingstone received 92% of his income – £63,333 – through dividends and just 8% or £5,700 through a normal salary where tax was deducted on a pay as you earn (PAYE) basis.
This approach is a standard and perfectly legal way of drawing down money from a company and is used by hundreds of thousands of people for one simple reason: it avoids national insurance contributions (NICs).
Dividends are not liable for NICs, so being paid principally through dividends reduces or completely removes NICs payments.
In 2010/11 the threshold to start paying NICs was £5,720 per year and as if by magic, Ken Livingstone’s PAYE income for the year was £20 below the level where any NICs would have to be paid.
The only reason £5,700 was paid as PAYE income at all is that that there needs to be a level of PAYE earnings each year above a minimum threshold (£5,044 in 2010/11) to build eligibility for certain benefits. For example, the state pension, for which Ken Livingstone qualified, during 2010/11.
Again, to be clear, this is not tax evasion, and it’s certainly not illegal, but avoiding NICs is tax avoidance for most voters.
If the contradiction between Ken Livingstone’s historic positions on tax avoidance, and his private practice were not bad enough, events over the last week have made the situation much worse.
Three egregious statements particularly stand out: – one from the LBC debate and two from the Newsnight debate.
First, on LBC, when questioned about whether he had avoided personal tax by funneling funds through his private company, Silveta, Livingstone said, “the fact is, Boris and I are in exactly the same situation… We both had media earnings. We both put them through a company. You have to pay tax on the money you take out.”
When he made this statement, Ken Livingstone was fully aware that he received the majority of his income through dividends, just as he knew that Johnson’s tax status as self-employed meant he took his remuneration via a normal PAYE salary, fully liable for NICs.
The two situations are very clearly different. Livingstone knew it. But still he made the claim. No wonder Johnson was angry.
Second, in the Newsnight debate, Livingstone gave what seemed to be an unequivocal statement that he had not avoided any tax, “On every penny I’ve been paid, I’ve paid the normal full rate of tax”.
The key words here are “normal full rate of tax”.
Once again, Ken Livingstone will have known that to most Londoners, the distinction between national insurance contributions and income tax is a semantic one. For people on typical salaries, it’s all deducted at source, and goes into the same government pot.
To this audience, avoiding NICs would hardly constitute paying the “normal full rate of tax”. Livingstone would have understood this, but as earlier in the week, he went ahead and made the claim.
Third, later on Newsnight, Livingstone adopted a different tack to the LBC debate to justify why he used Silveta. This time it wasn’t because he and Boris were doing the same thing, instead he explained it was because he is an employer, “I do not pay income tax on the money I use to employ other people. No business in Britain does.”
On this occasion, credit is due to Brian Paddick for picking him up. He pointed out that a limited company was not needed to employ staff and Livingstone could have achieved his professed objective by simply setting himself up as a sole trader, as Paddick had.
The two questions of how to employ people and how to draw down income without avoiding tax are completely different and unrelated. Livingstone will have known this, but as per the pattern of the week, he ploughed on wilfully despite the facts.
The potential damage from yesterday’s figures could be devastating for Ken Livingstone’s political career. Not only do they provide clear evidence that he avoided national insurance contributions, they critically undermine and in some cases contradict his statements throughout the week.
More broadly, there is a real danger to the Labour party nationally. If Labour’s candidate for mayor immolates himself over this issue, what does it say about the judgement of the party’s leaders who have backed him so strongly?
And what does it mean for the image of the Labour party if one of its most senior figures becomes a walking talking model of “do as I say, not as I do”?
At a time when George Osborne has just delivered the worst received budget in living memory, David Cameron is losing his reputation for competence and every government policy initiative seems to go wrong within minutes of being announced, how is it possible that Labour can find itself in this situation?
Atul Hatwal is associate editor at Uncut