Aggressive tax avoidance in paradise – The answer?

Jun 11, 2018

In November 2017, the world’s second largest data leak ever took place. The Paradise Papers came from an offshore law firm, with offices in tax havens around the world – from Jersey to the BVI, Hong Kong to the Isle of Man.

So what did we learn from the Paradise Papers?
Well, various celebrities had their private affairs paraded for the world to see. The Queen got into trouble for holding investments offshore in Bermuda and the Cayman Islands (even if it might seem legitimate to hold funds in a place where you are Head of State). Lewis Hamilton got into trouble for a highly contrived scheme whereby he saved VAT through buying his private Jet via the Isle of Man (yes, he had to go there briefly to facilitate the purchase, but presumably worth it for the tax saving). The press felt able to trawl through the private affairs of Lord Ashcroft, the Duke of Westminster and various celebrities.

What had these people actually done wrong?
Well technically, possibly nothing very much at all in many cases. But perception counts for a lot – there’s no smoke without fire, etc. Take Lewis Hamilton, it seems that his advisers saved him money by cleverly exploiting a VAT loophole within the EU – but he didn’t do terribly well in Sports Personality of the Year, despite becoming the most successful British Motor Racing driver of all time during 2017. Has the story affected the public’s regard for him?

Remember the K2 offshore wealth management scheme from 2012, estimated to have been used by over 1,000 people including well known celebrities, but characterised by Prime Minister Cameron as “morally wrong”. Employees of UK companies would typically resign and start working for related offshore companies which would pay a lower salary, but also loan them money that could be written down as a tax liability, reducing the overall tax payable. The next Finance Bill introduced a General Anti-Abuse Rule to deter such schemes – and other avoidance.

In the autumn of 2017, a group of over 120 investors including 45 Premier League footballers began suing professional advisers over a faulty film investment scheme, which left them with huge tax bills when it was successfully challenged by HMRC.

The common thread, it seems, is that when people are seen to be participating in ‘aggressive tax avoidance’, it often doesn’t turn out well. You won’t see many taxpayers (any?) defending their arrangements morally when schemes are made public. Even those who get away with that type of planning must spend considerable amounts of time and effort looking over their shoulder and trying to fend off HMRC.

In a nutshell, contrived tax planning schemes may look clever in the short term, but in the long run, with the full picture and particularly the benefit of hindsight, they’re not always all they’re cracked up to be.

And governments worldwide have been going to considerable lengths in recent years to clamp down on aggressive tax avoidance and to increase tax transparency. There are wide-ranging schemes for exchanging tax information between jurisdictions, various tax amnesties on offer, proposals for various public registers of true beneficial ownership, new taxes against properties held by corporate entities, that new general anti-avoidance rule in the UK, obligations to notify HMRC of ‘schemes’, and a general public mood that any rich people caught “tax planning” are up to no good. Even Private Eye publish information on UK land owned by overseas companies (http://private-eye.co.uk/registry). Previously legitimate tax planning is also undermined by new tax rules, as with Pilot Trusts, for example. In other words, the best laid plans can unravel, while the scope for keeping clever schemes under wraps are shrinking as time passes and more and more data leaks.

What’s the answer?
Well, the answer, it seems, is to engage in sensible, tried and tested, “vanilla” tax planning instead. That means getting people who deal with these matters regularly to review your affairs in the round and to provide the most appropriate tax saving advice for you, taking account of the full picture and not just one headline-grabbing upside. It might require a change to your Will, a gift here, a trust there perhaps, or simply knowledge of an intended tax allowance or relief (to be distinguished from a contrived tax avoidance ruse). You might use a reputable firm with offices in London, but charging provincial rates – a firm such as Herrington Carmichael, for instance. It may not save quite as much tax as a scheme on offer in the British Virgin Islands – but at least you’ll be able to sleep in your bed at night! You might even end up better off.

 

…Oh, and that largest ever data leak – from another large international law firm based in a tax haven, in 2016 this time? “The Panama Papers”!

For further information or to discuss the issues raised by this article, please contact Herrington Carmichael on 0118 977 4045 or email paul.denza@herrington-carmichael.com