Paradise uncovered? Corporate tax avoidance revisited

21 November 2017

It appears that on 26 October, when I last offered my thoughts on this subject, a storm was already brewing just over the horizon. Documents leaked (more accurately ‘stolen’) from a law firm named Appleby over a year ago had been handed to a German newspaper Suddeutche Zeitung, and thence indirectly to the Guardian, the BBC and others. Having concluded their investigations the BBC presented the results in two editions of Panorama earlier this month under the title ‘Paradise Papers’ a reference both to earlier revelations known as ‘Panama Papers’ and the French for Tax Haven, ‘Paradis Fiscal’. Several major newspapers also published their findings. Among those implicated and subjected to trial by journalism were the Queen, Bono, Glencore, Facebook, Nike and Apple Corp.

As an aside, the employee of Appleby who (let’s face it) dishonestly obtained and released more than 13 million documents relating to the firm’s clients was the kind of person none of us would wish to employ. The reputational damage to the firm, even if all of its dealings were beyond reproach, is unimaginable. This is a lesson to all of us in business that you can’t be too careful in checking job applicants’ CVs and references.

The paradises under scrutiny included British Overseas Territories such as Bermuda, the Cayman Islands and the British Virgin Islands, as well as Crown Dependencies not known for their palm-fringed beaches or turquoise lagoons such as the Isle of Man and Jersey.

If you didn’t see the Panorama programme, allegations included that:

  • Geoffrey Ashcroft, a significant donor to the Conservative Party, kept most of his assets in Bermuda and avoided tax on the income they generated by claiming domicile in Belize.
  • The Duchy of Lancaster, the Royal Family’s investment vehicle, held shares in companies incorporated in low-tax overseas territories.
  • Wilbur L Ross, a close associate of Donald Trump, had complex and dubious business dealings with Russian businessmen close to Vladimir Putin.
  • Lewis Hamilton, a Formula 1 racing driver, had set up an artificial scheme enabling him to reclaim VAT totalling £3.3m from the Isle of Man government on the purchase of a private jet.
  • Three actors in Mrs Brown’s Boys, a TV sitcom produced by BBC Scotland, had had their fees paid into a company incorporated in Mauritius (and owned by them), which then made ‘loans’ to the actors exactly equivalent to the fees paid, thus avoiding tax and national insurance.
  • Apple Corporation, a technology company (whose tax affairs were discussed in previous blogs), finding itself under pressure to end its special low-tax agreement with the Irish Government, sought to relocate substantial parts of its activities in zero-tax jurisdictions. It eventually settled on Jersey but in the meantime had explored with its advisers, Appleby, the possibility of establishing in the Isle of Man. The questionnaire it submitted to Appleby concerning the IOM included enquiries seeking assurances on that island’s zero rate of Corporation Tax now and in the future.
  • A Russian investor in British football had financial interests (some secretly through offshore agencies) in more than one Premier League Club in contravention of Football Association Regulations.

To deal briefly with some of these, alleged interference by Russia in Donald Trump’s election is outside the scope of my blog, and so are football matters. I am tempted to say the same about the Queen’s investments but cannot resist speculating on that particular discovery. Tax avoidance cannot have been a reason, since constitutionally the Queen is not liable to tax so she pays it voluntarily as she is advised. So it seems that this might have been an ill-advised investment, certainly from a PR point of view.

The Geoffrey Ashcroft allegation raises the question of the scope and reach of UK tax law. Anyone resident and domiciled in the UK is obliged to pay UK tax on all his or her income wherever in the world it arises. [‘Resident’ and ‘domicile’ are not interchangeable terms but this is not the place to embark on the technicalities]. Is Mr Ashcroft genuinely domiciled outside the UK? No doubt HMRC will be looking into this.

The Lewis Hamilton private jet matter, although there is insufficient space here to explain the mechanism, was clearly artificial, ie. a scheme for which there was no underlying commercial purpose, and ipso facto, one that existed primarily for the avoidance of tax.

The Mrs Brown’s Boys affair affords some intriguing insights into the workings of the BBC. You may remember that in 2016 it was reported that HMRC were investigating the affairs of more than 400 current and former presenters who had been paid by the BBC as freelancers but who appeared to have some or all the attributes of employees. Against this background surely the contracts team or accounts department must have noticed the unusual nature of the fees paid to a company in Mauritius! Was this reported under the BBC’s money laundering procedures?

As for Apple it seems to ride serenely above all the accusations and makes statements which are only technically true such as: “Apple believes every company has a responsibility to pay its taxes, and as the largest taxpayer in the world, Apple pays every dollar it owes in every country around the world.”

Programmes such as Panorama serve their purpose, but it would be too easy to get swept away in the hype. There are inferences that the word ‘offshore’ is synonymous with ‘tax fraud’, that HMRC are inefficient at tackling avoidance, and that accountants and lawyers are all involved in assisting rich clients to avoid their responsibilities to society. In reality there are many legitimate reasons for which you may wish to invest offshore (in fact the BBC’s own pension fund does so); in September 2016 HMRC launched their Worldwide Disclosure Facility to remind UK domiciled taxpayers of their obligations to report income earned elsewhere and to make it easier to declare it. [If you have any such undisclosed income you have until 30 September 2018 to correct your returns and minimise the penalties. Contact me straight away if this applies to you].

A far as concerns the reputation of the accountancy profession, the vast majority do not have clients who are involved in tax havens. Moreover, qualified accountants are bound by the regulations relating to Professional Conduct in Relation to taxation (PCRT).

The latest standard for tax planning states:

‘Members must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are:

  • contrary to the clear intention of parliament in enacting relevant legislation;
  • and/or are highly artificial or highly contrived;
  • and seek to exploit shortcomings within the relevant legislation.’

Perhaps I was naïve to use the word ‘reality’ above. As we all have come to realise, the only reality that counts is that of perception, and perception is liable to be created, enhanced and manipulated by journalists and social media. The messages that the average member of the British Public takes from all this are that our rulers and politicians are salting money away overseas to avoid paying their share; that some of our most cherished institutions such as the BBC and the Royal Family regard the tax legislation as not applicable to them; that our most popular sports stars and entertainers use their wealth to cheat the system, all ably abetted and assisted by clever but unscrupulous accountants and lawyers; and that the result means penury for another cherished institution, the NHS, so that the standard currency for expressing the total tax lost is in terms of the number of new NHS hospitals it might finance. I think we see in these perceptions, oversimplified as they may be, the underlying causes of the unrest that is shaking up politics across the western democracies.

If we are to restore the political and economic equilibrium that has for many decades been the bedrock on which we have built our success in business and technology, the governments of our largest economies will need to take action to deal with the worst abuses and convince the populace that the wealthy are making a fair contribution.

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