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 (12th April). 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.