Rough Justice

In our previous three articles we have focused on a number of specific offshore related matters. These ranged from the increasing difficulties keeping financial matters confidential, how to protect personal assets using offshore structures without falling foul of the tax authorities, the attempts by the Spanish tax authorities to gain knowledge of the worldwide assets of non domiciled Spanish resident individuals and the problems facing UK expatriates with significant pension funds.

In this, the final article of the series, we consider whether the measures being taken to stamp out tax avoidance are being fuelled further by tax authorities worldwide, with particular attention to UK expatriates and their use of offshore structures to gain a tax advantage.

Tax avoidance or tax evasion?

Tax avoidance, which is legal, is the gaining of a tax advantage using current legislation and in some cases loopholes within it. Tax evasion on the other hand is illegal and involves the deliberate concealment of taxable income and capital gains.

Denis Healey, former Chancellor of the Exchequer, when asked what the difference was between tax avoidance and tax evasion answered:

“the thickness of a prison cell wall”

This continues to be the case. However, there has been a deliberate attempt by a number of tax authorities to remove the boundaries between the two, with tax avoidance becoming the new tax evasion.

The introduction of the Foreign Account Tax Compliance Act (“FATCA”) by the USA, although delayed until 2015, is intended to deter foreign institutions from harbouring untaxed income and gains and to deter citizens of the USA from trying to evade tax. The majority of European countries have also followed suit with their own version of FATCA by threatening fiscal measures against jurisdictions and financial institutions who refuse to sign up. Gibraltar has already signed up to the UK’s version. Even Switzerland has finally succumbed to pressure by removing its veil of secrecy following punitive action by the USA.

But what about “legally” avoiding tax?

Legally in the sense that a “tax scheme” may be effective as a result of badly drafted legislation. These loopholes as they are called offer leading tax barristers, lawyers and tax experts the opportunity to develop structures that confer significant tax advantages to individuals and companies. Whilst we do not consider the ethics of this subject in this article, is it the individual’s or company’s fault if governments get it wrong?

What is the clear is that individuals and companies evade tax at their peril.

Campaigns by tax authorities, and in particular the UK tax authorities, to stamp out all forms of tax avoidance and tax evasion has been fuelled by vitriolic attacks from politicians and the media on those who benefit from legal tax avoidance arrangements. It is clear that information is leaked to the press when it suits.

It has not gone unnoticed that a new sport of “multinational corporate bashing” has been created as a result of politicians and the media publicising the little amount of tax that is paid by the likes of Google and Starbucks in the UK. They fail of course to highlight the number of individuals these multinational companies employ, or the means by which they reduce their liabilities to Corporation Tax by the utilisation of statutory provisions such as group relief.

These are all examples of the “bullyboy” tactics being employed even where statutory provisions confer a legitimate tax benefit.

Some commentators have referred to this as an abuse of power and something that has seen the “Court of Public Opinion” dishing out rough justice.

This heavy handed approach is also prevalent to UK expatriates resident in offshore jurisdictions. During the past couple of years there have been a number of developments that have made expatriate financial security far from certain.

1. UK Statutory Residence Test – introduced from 6 April 2013 and finally laying to rest any uncertainty as to when an individual is resident in the UK. Although tortuous to interpret this is to many a double edged sword. On the one hand it allows no discretion on what constitutes non residence whilst on the other it will affect individuals who to date have regarded themselves as being non resident. We have encountered a number of expatriates who “THOUGHT” they were not resident in the UK which turned out not to be the case for a number of reasons.
2. FATCA – referred to earlier in this article, it represents a serious and real threat to those expatriates, in particular those from the UK and the USA, who have previously regarded themselves as “under the radar”. In our previous article “Is it Secret is it Safe” we encouraged UK expatriates to seek advice on how to make a disclosure to the UK tax authorities using the “Liechtenstein Disclosure Facility”. Approaching the tax authorities first will reduce the impact of them making a challenge and seeking significantly higher penalties, or even prosecution in more serious cases. FATCA will become the rule rather than the exception with financial institutions being forced to disclose information or risk sanctions.
3. Modelo 720 – a more local issue for those individuals who play the “residence game” in Spain. We are aware of individuals receiving visits in the Costa hotspots and being confronted about where they actually live and why they have not paid Spanish tax.
4. Offshore pensions – these have been another target. Admittedly much of the issue with Qualifying Registered Overseas Pensions (“QROPS”) is related to unscrupulous companies who prey on unsuspecting individuals about to retire charging them extortionate fees for transferring their pensions. This said the UK tax authorities have removed QROPS status from a number of jurisdictions with no apparent rhyme or reason. This is exemplified by the recent bloody nose imparted on the UK tax authorities in the “Panthera ROSSIP” case. In court, the UK tax authorities were branded as being overzealous in pursuing the tax assessments with the judge, Justice Charles, demanding a written statement explaining their policy on QROPS. As a consequence, instead of being charged 55% on a pension transfers, a tax amnesty has been offered to investors in QROPS set up before 24 September 2008, the UK tax authorities have pledged not to chase any retirement savers for a 55% tax charge on any QROPS that were suspended before that date, unless of course there is evidence of “dishonesty or artificiality”.

The End Game

Many commentators in the tax industry are of the opinion that the perpetual and vitriolic attempts to allow individuals and companies to legally “arrange there affairs in the most tax efficient manner” is doling out rough justice and needs to be combated. Where individuals have deliberately crossed the boundary between tax avoidance and tax evasion they deserve Rough Justice.

To this end we at TFO Tax pride ourselves on the expert advice we provide to assist UK expatriates understand complexities they face when seeking to establish themselves offshore.

Article by guest author,

Tim Richardson

Managing Director at The Family Office (Europe)

Finally, please remember Tim Richardson will be competing in the Race Across America (“RAAM”) in June 2014 and is raising money for Help for Heroes. For more information visit www.teambrazen.co.uk andwww.raceacrossamerica.org To sponsor Tim please visit www.bmycharity.com/TeamBrazen