Whilst away I exchanged emails with an accountant friend who told me of a recent conversation he’d had at a party or some such event, he’d attended. I think he was shocked at what he’d been told, which he related as follows:
I heard an Entrepreneur proudly explaining that he made his money through property investment. He has since spent the last 5 years developing an internet based business. The company that will run it - world-wide - is located in the Seychelles to avoid UK tax.
"How does that work?" I asked him. He said there are independent shareholders and directors all based in the Seychelles. The shares are held on beneficial trust for him but no one knows that apparently. His further explanations suggested a degree of understanding as to what is required to avoid creating a liability to UK tax. Whether all of the paperwork and future transactions all accord with the plans that have been put in place remains to be seen.
The entrepreneur claims that the nominal shareholders have granted him a power of attorney to act on their behalf in the UK. He will be paid for such work - which includes all liaison with the UK accountants (a top ten firm). To all intents and purposes (on paper at least) he is simply providing consultancy services to an offshore company. he will declare and pay tax on these earnings. In practice he is helping to build value in a company the shares in which, when sold, are expected to realise a fortune that he will eventually receive after he has ceased to be resident in the UK. He plans to emigrate in 3 or 4 years time.
He says that his accountants, sorry, the company's UK accountants are a top ten firm. Does the contact partner know or suspect that the entrepreneur is in reality the beneficial owner of the shares of this supposed offshore company? How common is it for a UK resident to be given such wide discretionary powers and authority to act on behalf of third party offshore directors and shareholders? To what extent should the accountants make more enquiries before accepting appointments to act for such clients?
I confess to not sharing my friend’s shock at this tale — every single element of which I suspect to be entirely true (although I do not know the identity of any of those involved). What has been related is a classic tale of the abuse secrecy jurisdictions promote. I stress, this is not an accidental outcome of the structure that these places permit — it is the structure they intend should be created. That is because secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction. They do in addition create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.
This does not happen by chance. This happens because all along the way the accountants, lawyers and bankers who create these structures deliberately let “their eyes glaze over” when it comes to asking appropriate questions about the use of secrecy jurisdiction structures. If, like the UK firm of accountants referred to in the story, you choose to ask a narrow and deliberately circumspect set of questions about the true nature of your client and the relationships into which they enter you can ignore the obvious implausibility of the arrangements they claim exist. This is normal secrecy jurisdiction behaviour — as I recently explained with regard to Jersey. It is also, unfortunately too commonplace onshore.
This is why radical reform of corporate and trust registration structures is essential for the benefit of all honest people in society. I explained that reform recently, here. Expect it to be opposed by large firms of accountants and lawyers though — precisely because so many are so heavily invested in secrecy jurisdictions — which is to their discredit.
We have a long way to go before we eliminate corruption onshore and offshore — and there’s no doubt they complement each other. But where’s source of the cancer? Offshore, I’m afraid to say: the wholly corrupt structure my friend recounted is based there. And it’s precisely why I don’t believe a word written by those who claim, often, on this site that offshore has cleaned up its act. It hasn’t. It’s just turned the other blind eye.
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I don’t see a problem from HMRC’s point of view. Argue that the company is being controlled and managed from the UK thus making it a UK resident company. Alternatively, as the beneficial ownership lies with a UK resident, attribute the gains arising in the offshore company under s13 TCGA 1992.
@Lester Piggott
the problem is the secrecy
HMRC could challenge this if they knew about it but the secrecy jurisdiction ensures they don’t – and does do deliberately – so facilitating fraud
And that is a problem
If you can’t see that I despair
Are we not barking at the wrong tree here?
Maybe if the UK’s tax regime were not punitive, the entrepreneur would not need to engage in all these structuring manoeuvres. He would not consider emigrating after a few years. He might even consider building the company onshore, thereby creating jobs and eventually contributing tax revenues.
There must be something terribly wrong with the UK system for someone to go such length to manage down a hypothetical future tax liability ((and incur upfront the expenses to hire these lawyers and accountants).
You can scream as much as you want at the going-ons in offshore financial and business centers, but it seems to me that these are attacks on the symptoms, not the causes of a wider problem.
@Jason
Complete nonsense
The Uk tax burden is modest, democratically approved, and desirable (as attempts to cut services will prove)
All you’re seeking to do is to condone theft
Richard, do you really believe a 50% tax rate is modest? Especially when coupled with high levels of National Insurance? I’m not sure i think that is modest!
@Greg
Of course I do
At the level of income where that rate of tax is paid all material needs can be wholly met
To pay a marginal contribution of half of income at that point is, therefore, no hardship
Thank you for your answer Richard. Personally I wouldn’t describe 50% of something as “modest”. I think a tax rate of 20% fits the decription a bit better!
The Isle of Man, Guernsey and Jersey are not part of the United Kingdom or members of the European Union and although their status as “Crown Dependencies” is obscure, the British (tax payer funded) armed forces are obliged to come to their aid if they were to be invaded.
This and other benefits-in-kind provides these self-appointed “governments” with a win-win situation as they sit having their cakes and eating them.
Regardless of cost there is a global obligation to enforce all laws and regulations and if anarchic, offshore tax havens consider themselves exempt from enacting those relating to tax fraud, theft and other dishonest practices then they should be outlawed and vilified by the international community.
Tomorrow would not be too soon.
@ Premier Shareholder Group, I think you’ll find the last time the Channel Islands were invaded that the British armed forces didn’t come to the aid of the islands.
Premier Shareholder Group
Please explain to what extent the Crown Dependencies “consider themselves exempt from enacting (laws) relating to tax law, theft and other dishonest practices”. I think you will find, after even very basic research, that the Crown Dependencies have enacted a plethora of such laws over the past decade, as requested by the UK and the EU (of which as you correctly state) they are not actually a part.
Please get your facts right before making such inaccurate statements.
@Richard Murphy
I agree that the secrecy is the problem. As Lester quite rightly says, the Entrepreneur has achieved precisely nothing in tax terms by locating everything offshore – he should still be taxed on it all (unless of course he’s non-UK domiciled, in which case there appears to be nothing wrong unless they’ve mucked up on management and control issues).
I’d be really surprised though if a top 10 firm of accountants would prepare the Entrepreneur’s personal tax return without including the offshore income and gains or, if they don’t prepare the return, they should be reporting any suspicion of fraud to NCIS – essentially the accountants would be in breach of moneylaundering regs and looking at jail time (R v Dimsey and R v Allen being a past case of a dodgy accountant getting clobbered).
@Greg
Why?
Apart from greed?
And let me assure you – tax does not stop entrepreneurs – about 99.9% of whom will never pay tax in the Uk at 50%
So why?
And who else will provide public services of tax is cut to 30% at a cost of about £60 billion a year in the UK?
@Greg
Quite right too
In 1940 defending the UK was more important
Just as liberation without bloodshed justified the wait until 1945
@Rupert
You’re very good at creating laws – abusive and supposedly compliant
We know the abusive ones are used
We have no evidence the compliant ones are – none at all
Your regulation is a charade – and so far only the charade has been tested
@Adam
But I am quite sure they do turn a blind eye
After all – their associates in the Seychelles using the same name may also have set the whole thing up
Why esle are their associates using the same name there?
Richard, I was merely pointing out that “modest” does not mean “half”.
Personally I wouldn’t to be giving away half my wages to be spend on Trident, MP’s expenses, a poor health service etc. But seeing as I don’t live in the UK, it doesn’t really matter!
And you are quite right with your view of what happened during WW2. I was merely pointing out the huge inaccuracy of the Premier Shareholding Group’s comment.
Obviously paragraph 2 should read…
Personally I wouldn’t want to be giving away half my wages to be spent on Trident, MP’s expenses, a poor health service etc. But seeing as I don’t live in the UK, it doesn’t really matter!
@Greg
It shows you don’t live in the UK
We have a staggeringly good health service
It’snot perfect, but when I consider the care so many of my relatives have enjoyed (I have had the good fortune to never in 52 years spend a night in hospital excepting the nights my children were born) from the NHS I am staggered that so much care is provided
It makes paying tax so worthwhile
And so much cheaper, more reliable, admin free and therefore so much nor effective than insurance
Richard
Where is your evidence that the so-called “abusive” ones are used?
Where is your evidence that the so-called “compliant” ones are not used?
I think can safely predict your answer – “I don’t know because of your secrecy laws”. Yet again, you naively demand that we prove a negative. Precisely what will have been achieved if we opened our books, proved that we were clean, and are able to say “told you so”? We would have no clients left as a result of proving our case. Brilliant – not.
@Rupert
Secrecy is an abuse of the principles of free trade
Secrecy results in the misallocation of economic resources
Secrecy results in the facilitation of crime
As you acknowledge, your whole trade is built on secrecy
That secrecy is deliberate. It is created by your law. It is what you sell
By definition those laws are used – without them you would not have your trade
I think you can’t dispute that
Re the compliant laws, tell me this:
a) How many prosecutions for money laundering?
b) How many prosecutions for facilitating tax evasion?
c) How many items of information exchanged under TIEAs?
d) How many trusts?
e) How many bank accounts – including trust and limited companies -on which no information exchange takes place?
f) How many companies recorded as having local, clearly nominee, owners and directors and for which therefore no clue as to real ownership exists?
Answer and we’ll have a basis for discussion of the ways in which you abuse
If you can’t then my point about your secrecy is proven and you have no defence to my accusations
@Richard Murphy
Your original blog said that he was receiving self-employed consultancy income – presumably this was declared on the UK Tax Return. HMRC could easily enquire as to the nature of this income and therefore be alerted to any offshore structures.
Richard, maybe you’re lucky but i’m sure even you’ve posted about how the GP system in the UK doesn’t work properly.
@Lester Piggott
How likely is that enquiry?
@Greg
Tell me why it doesn’t work when GPs are the professional with the highest approval rating in the UK?
Richard, most of my UK friends tell me it’s not possible to phone your GP and get an appointment that day or even the next.
@Greg
Wholly untrue
All GPs offer emergency access
But not with a named GP and only for emergencies
there’s good reason for that – named GPs can’t be on duty 24 hours a day
They are human
And the good ones are popular – so yes it is hard to see them, but people do
Richard
I’ve added my responses in capitals below.
Secrecy is an abuse of the principles of free trade
YES IT COULD BE, IF IT IS ABUSED
Secrecy results in the misallocation of economic resources
DITTO
Secrecy results in the facilitation of crime
DITTO
As you acknowledge, your whole trade is built on secrecy
I PREFER TO USE THE TERM “LAWFUL PRIVACY”, WHICH IS MERELY A COMPONENT PART OF PROPER TAX PLANNING.
That secrecy is deliberate. It is created by your law. It is what you sell
DITTO. IT’S NOT ALL WE SELL. WE PRIMARILY SELL LEGITIMATE AND FULLY TAX-COMPLIANT STRUCTURES.
By definition those laws are used – without them you would not have your trade
THEY ARE USED BUT THE PLANNING DOES NOT BY ANY MEANS RELY SOLELY ON THE PRIVACY OF THE STRUCTURES. THE REALITY IS THAT IF SOME JURISDICTIONS OFFER LAWFUL TAX PLANNING WITHOUT PRIVACY AND OTHERS OFFER LAWFUL TAX PLANNING WITH PRIVACY, THEN THE FORMER WILL NEVER GET THE BUSINESS AS IT CANNOT COMPETE IN A HIGHLY-COMPETITIVE MARKETPLACE.
I think you can’t dispute that
I CAN AND I AM.
Re the compliant laws, tell me this:
a) How many prosecutions for money laundering?
SOME ARE PENDING. BUT HOW MUCH MONEY LAUNDERING HAS ACTUALLY TAKEN PLACE? I’M SURE YOU REALISE THAT PROSECUTIONS CAN ONLY ARISE IF A CRIME HAS ACTUALLY BEEN COMMITTED IN THE FIRST PLACE.
b) How many prosecutions for facilitating tax evasion?
DITTO.
c) How many items of information exchanged under TIEAs?
THE OFFICIAL STATISTICS ARE OUT THERE. HOW MANY HAVE BEEN REQUESTED? HOW MANY OT THOSE HAVE BEEN DECLINED ?
d) How many trusts?
THE REGULATORS IN THE CROWN DEPENDENCIES KNOW EXACTLY HOW MANY TRUSTS ARE ADMINISTERED IN THE ISLANDS. WHY DO YOU NEED TO KNOW ? HOW MANY ARE THERE IN THE UK AND THE US?
e) How many bank accounts – including trust and limited companies -on which no information exchange takes place?
THERE IS CURRENTLY NO AUTOMATIC EXCHANGE OF INFORMATION REQUIREMENT SO CLEARLY THE NUMBER IS VERY HIGH. BUT THAT’S IRRELEVANT AS ITS NOT REQUIRED. NOBODY IS IN DEFAULT OF ANY REPORTING REQUIREMENT.
f) How many companies recorded as having local, clearly nominee, owners and directors and for which therefore no clue as to real ownership exists?
THERE IS NO SUCH THING AS A NOMINEE DIRECTOR. YOU ARE EITHER A DIRECTOR OF A COMPANY OR YOU ARE NOT, BUT IF YOU ARE THEN YOU ARE FULLY LIABLE FOR THE AFFAIRS OF THE COMPANY. IN THAT RESPECT THE ANSWER MUST BE NIL.
EVERY REGULATED PROVIDER WILL KNOW WHO THE ULTIMATE BENEFICIAL OWNERS ARE OF THE COMPANIES IT ADMINISTERS. THE REGULATORS VERIFY THAT THIS INFORMATION IS KNOWN AS PART OF THEIR REGULAR VISITS TO REGULATED PROVIDERS. IF THE LATTER ARE IN BREACH OF IDENTIFYING THE ULTIMATE BENEFICIAL OWNERS THEN THEY RISK BEING CLOSED DOWN. THERE IS NO REQUIREMENT FOR ULTIMATE BENEFICIAL OWNERSHIP TO BE DISCLOSED ON PUBLIC RECORD. ONLY THE PUBLIC “HAVE NO CLUE” AS TO THE ULTIMATE BENEFICIAL OWNERSHIP, BUT THEY HAVE NO REASON OR NEED TO KNOW THAT INFORMATION.
Answer and we’ll have a basis for discussion of the ways in which you abuse
I HAVE ANSWERED
If you can’t then my point about your secrecy is proven and you have no defence to my accusations
I HAVE ANSWERED
Hello Rupert
You say “Please explain to what extent the Crown Dependencies “consider themselves exempt from enacting (laws) relating to tax law, theft and other dishonest practices”. I think you will find, after even very basic research, that the Crown Dependencies have enacted a plethora of such laws over the past decade, as requested by the UK and the EU (of which as you correctly state) they are not actually a part.”
This question would be best addressed to your Chief Minister, Office of Fair Trading and Financial Supervision Commission who have repeatedly allowed an Isle of Man based Fund to obtain bank transfers, by misrepresentation, deception and misleading advice.
Failing this the PSG will supply you with a 50-page dossier of prima facie evidence in support of all allegations discussed above.
You live on a very dishonest Island. Get used to it.
Premier Shareholder Group
Firstly, do you even know which island I live on? It certainly isnt the Isle of Man so your last sentence is an odd one.
Secondly, since when do “allegations” equal fact? Richard Murphy makes “allegations” all the time and then simply says “prove me wrong”, well knowing that proving a negative is impossible.
Thirdly, please confirm your relationship (if any) with Richard Murphy.
@Rupert
a) You make it clear you are from Guernsey
b) Allegations based on fact for which there is no rational alternative explanation look like facts to all reasonable people – because all “fact” is just allegation without current counter evidence in the real world
c) None at all
Richard
(a) To you perhaps, but maybe not to Premier Shareholder Group, with which of course you have no connection.
(b) Ridiculous. You obviously don’t share the belief of “innocent until proved guilty”.
(c) Hmm…
@Rupert
a) I only know because of what you write here
b) That’s basic philosophy. It was alleged the world was flat once – and then counter evidence was found. What I explain is the basis of all knowledge. Ridiculous of course to someone like you – but that’s the problem of being a big fish in a small bowl – you get a very distorted world view
c) Trust me, I’m a chartered accountant :-). You can report me to the ICAEW if I’m proven wrong – I don’t even know who writes the Premier Group comments! Any more than I know who you are and what your real name is.
Richard
a) Noted – I can accept that, but I felt (and still feel) that the PSG comment was a blanket one.
b) Not at all. I see things for what they are, not what I would like to be in order to fulfil my ideological objectives.
c) I haven’t trusted chartered accountants for years. In fact, after what you write about the ICAEW I’m amazed that you haven’t resigned from membership out of protest. I still find it hard to believe though that you wouldn’t know who the PSG are…even out of curiosity I would expect you to have looked into them. But then again, life’s a bummer when you can’t find out who’s behind an organisation, isn’t it ? 🙂
@Rupert
I’ve never investigated you
So why them?
At least they seem honourable in intent
Richard
I didn’t suggest that you should investigate PSG. I merely stated that I would be surprised that you wouldn’t have found out more about them out of curiosity, seeing as they seem to share your views.
“Honourable in intent” depends entirely on where one sits.
Richard, this looks like a simple case of tax fraud – the individual concerned is failing to disclose his beneficial ownership of the shares, and therefore HMRC won’t be able to apply s13 TCGA, launch a residence challenge etc. If the accountants know the truth then they risk Dimsey/Allen-style proceedings themselves. If they haven’t attempted to determine the beneficial owner they are potentially in breach of the money laundering rules.
The more difficult question is how this kind of fraud can be prevented. It’s not really anything to do with the tax haven jurisdiction in question – most (all?) jurisdictions have no requirement to register beneficial ownership.
I’ve read your post suggesting a general requirement to disclose beneficial ownership, but with respect I’m not sure you’ve thought this through. Clearing systems, investment funds, pension funds… there are quite serious practical difficulties in requiring general disclosure of beneficial ownership, quite aside from the privacy implications.
Would a better approach be more aggressive policing of advisers by HMRC? The recent consultation on tax agents looked like a move in this direction, although query whether the Coalition will pursue this.
Marc
@Marc Daniels
I think the issue above is more complex than that. Why does the accountant prima facie need to ask the client for details of the beneficial ownership of their client? If the accountant’s client says there is no link what else are they meant to do? Not act?
Re beneficial ownership disclosure – yes of course it will change some practices – including all nominee arrangements – so what if they need reform?
What’s the problem in that?
And note – I do allow some holdings to be institutional – pension funds, if no one person had control or potential benefit of more than say 10% of the fund (taking associated parties into account) could come into that category
What’s the problem? The point is better regulation of accountants will not solve this – public data is needed – and I don’t trust accountants as a whole with any regulation
Accountants certainly have to ask about beneficial ownership of their client and other entities involved in the transaction – the money laundering regulations (following the 3rd EU directive on the subject) require this. (The definition of beneficial ownership for money laundering purposes is not necessarily the same as the legal/tax definition, but it would be the same in this case).
The difficulty with clearance systems is complexity. There would need to be some kind of central cross-border system tracing ownership through the entire payment chain – brokers, custodians, depositaries, banks. You would need a unified concept of beneficial ownership in each relevant jurisdiction. This doesn’t strike me as terribly realistic.
The difficulty with an exception for institutions is defining an institution. You risk creating a loophole, which an offshore trustee with 10 clients could sail through. I believe something similar is currently done to circumvent the close company rules.
The deeper problem is enforceability – if you don’t trust accountants with regulation, why do you trust them to disclose beneficial ownership at all?
Let me make an alternative, and much more practical, suggestion, that would instantly undo the tax advantage in this case. Subject all owners of UK real estate to capital gains tax, regardless of their jurisdiction of residence. Enforcement would be straightforward via the land registry. Most jurisdictions do this – the UK position is anomalous, encourages tax avoidance and arguably contributes to real estate inflation.
That is probably where my approach would differ from yours. I would prefer to concentrate on structuring the basics of the tax system to remove the incentives for tax avoidance.
@Marc Daniels
I am well able to agree no system will be perfect
But there are easy ways to enforce this: is beneficial ownership is not proven an asset cannot be sold. Much as you say for the use of the land registry to enforce tax on UK property – with which I wholeheartedly agree and which I have written about for the TUC
I’m not at all sure our goals are very different – I just add public accountability on top
The Isle of Man government relies almost exclusively on revenue snared from corporate institutions lured to the Island by laissez-faire fiscal rules and regulations and hopelessly inadequate, malfunctioning regulatory and consumer protection agencies.
It is laughable to see how many people, comatosed by PR fantasies squeal indignantly to the defence of the Island’s financial services industry and its position as a (not now so) major offshore financial centre.
Who is the PSG?
A group of defenceless pensioners who after spending a lifetime accumulating a small amount of capital to care for themselves in old age have seen these savings embezzled by deception, misrepresentation and misleading advice courtesy of a government that boasts integrity, transparency and effective regulation.
The world should take note.
Treat all Isle of Man government PR hype, including their fictitious websites, with a large pinch of salt and never invest or bank on the Island.
Has the PSG any connection with Richard Murphy?
None
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Off topic, but sums up the state of mind who relocate for tax reasons.:
http://dilbert.com/strips/comic/2010-08-19
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