Defending the indefensible!

Many of you will have heard my defence of the offshore financial centres on the Today programme on Radio 4 on Tuesday. Robert Barrington of Transparency International said, live on air, that my proposition was ‘a good defence of the indefensible’!

Since the abolition of exchange controls in 1979, money can move anywhere in the world. It is hardly surprising therefore that it finds its way to places where it is taxed the least – offshore financial centres – which attract funds to their country by reducing taxation to zero.

Companies with surplus cash and an exposure to risk; health and safety, litigation or natural disaster set up companies in Bermuda for emergencies known as captive insurance, and for the payment of their employees on retirement in Jersey known as pension funds. The UK Government could charge these funds to UK taxation, but does not.

When it comes to private wealth however, the UK government has a different attitude. UK resident and dom UHNW families are charged to tax on all income, gains and capital held in offshore companies and trusts through sophisticated anti avoidance legislation.

This attitude has recently been extended to tax private homes in the UK held by offshore companies.

The Common Reporting Standard is an OECD initiative pioneered by the UK and due to become fully operational in 2017. Through the automatic exchange of information between countries it aims to flush out those people who are evading tax by not declaring income and gains in offshore structures.

This does not mean that all offshore structures to which UK residents can benefit are taxable. The UK offers specific exemptions from tax for offshore trust structures set up by non doms before becoming long term residents in the UK. These are called ‘Excluded Property Settlements’.  Residents of Switzerland who have a forfeit arrangement are not subject to tax on their offshore structures either and residents of Dubai are similarly not taxed on their offshore financial structures.

UHNW people are therefore attracted to live in such places, because their wealth is not being depleted by tax, either during their lifetime or on death.

Other countries in which wealthy individuals live may not have specific exemptions from tax for wealth held in offshore financial structures, but their legislation is not sufficiently sophisticated to charge the income and gains made by these structures to tax. To set up offshore structures by residents of these countries is not evasion of tax – because there is no charging legislation which makes it subject to tax – this was traditionally known as the avoidance of tax – the lack of legislation to tax it.

Lord Clyde summed up the principle behind tax avoidance in the Ayrshire Pullman case when he opined: “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”

In recent years however, the UK Government has overridden this opinion by introducing the General Anti Abuse Regulations with the glorious sentence ‘Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability’.

The automatic exchange of information under the Common Reporting Standard will catch many wealthy families with offshore structures who are intentionally or otherwise evading tax. If these families have acted on advice and their evasion is unwitting then the professional is likely to be fined or even prosecuted as assisting in the evasion of tax. This will inevitably lead to an explosion of professional negligence cases by families who find they face the harsh and uncompromising steel of HMRC when dealing with suspected evasion.

If you would like to comment or book an appointment with Caroline please contact Svetlana on 020 3740 7423 or email svetlana@garnhamfos.com

Next week I will address non tax reasons and why families set up structures in one offshore jurisdiction rather than another.

Are you committing a crime?

To quote the Government: ‘Tax evasion is a crime which this Government is determined to stamp out because it deprives the country of much needed funds to run our public services, unfairly placing a greater burden on the vast majority of people who pay their fair share of tax. This Government will be relentless in its pursuit of evaders. For too long it has been too easy for people to hide their money overseas to evade tax.’

Everyone agrees with this, but wait a minute.

One of our clients, who is French, has two homes in London which he visits once or twice a year. His wife wants to decorate them before she visits, whereas he doesn’t because he views at as a waste of money considering they come to London rarely and spend most of their time in France. I wrote to him about his liability for ATED and he replied that he didn’t even know he is subject to the tax.

Under French tax law he only has to pay tax if his centres of economic interests are in France. It hadn’t occurred to him that by having a residential property in the UK owned by a company in Jersey, he is now subject to an annual tax. However according to HMRC he is evading tax and committing a crime.

As with Francois, the most vulnerable are the non doms. They have a home in the UK and might be living in London for most of the time, but were not born here, so are not familiar with our laws and ways of doing things. Most will not have formed the intention to evade taxes they do not think to ask or even know who to ask. However, HMRC now has the powers to find out who these people are, whether from exchange of information from other countries, or by working with the land registry.

Is the taxpayer’s charter of any help?

Frankly – no.

HMRC promises to treat taxpayer’s with respect, allow them to be represented and try to keep costs down provided they do not suspect them of evading tax.

In fact one of the rights published in the February 2009 draft was to ‘pursue relentlessly those that break or bend the rules’.

The only redress these unwitting taxpayers have for tax evasion will be against their advisers. The professionals who advised them to set up a structure to avoid tax and then did not subsequently warn them of the change of law.

These professionals may also come under attack from HMRC in being complicit in a taxpayer evading tax; knowing a structure was set up and operated for a client and then failing to contact them to tell them that tax was due may be enough for HMRC to go on the offensive to professionals whether lawyers, accountants or trustees who have set up these structures for their clients.

To give an example; ABC and partners advised Bhavik in 2008 to buy his home through an offshore company XYZ Limited. Chester Bank Ltd has offices in Jersey, London and Singapore and manages XYZ Limited for Bhavik for which Bhavik pays a fee. Bhavik is neither resident nor domiciled in the UK. Although he is liable for ATED since 2013, he rarely comes to London and was not aware of this tax.

Does Bhavik have a claim against ABC and partners for putting him into a structure to avoid tax and failing to notify him that the law had changed? Does he have a right against Chester Bank Ltd which manages XYZ Limited which failed to tell him that the law had changed even though they categorically state that they do not give tax advice? Has HMRC got a right against ABC and partners and or Chester Bank Ltd for failing to report the structure and possible evasion of tax?