HMRC tools up

HMRC has, along with other agencies such as the National Crime Agency (NCA), now got some serious new toys to play with ‘Unexplained Wealth Orders’ and limited freezing orders.

 

If ever we needed to be reminded how seriously the Government is taking tax evasion and the proceeds of crime, we only need to look at these new powers.

 

As from 31st January 2018, if organisations such as HMRC and the NCA have reasonable grounds to suspect any person as being involved in, or connected to a person involved in serious crime, it can obtain, from the High Court an order demanding they explain the nature and extent of their interest in specific property.

 

So, what’s the problem?

 

All professionals dealing with UHNW families are reminded continuously that if they see anything suspicious it needs to be reported to the person nominated in the firm to make a ‘Suspicious Transaction Report to the NCA. These nominees are trained in determining, whether a transaction adds up commercially or looks unusual for that type of business.

 

We are familiar with this legislation; it has been with us since 2004. We accept that, as professionals acting for UHNW families we are expected to look after the best interests of our clients but only if they are tax paying, law-abiding citizens, and if not, we are expected to ‘shop them’! Our duty is to our fellow citizens first.

 

Why then, given that all professionals dealing with UHNW families, are on the look-out for fishy transactions, does the Government need to take this extra step and give HMRC and the NCA the right to go to the High Court for a highly aggressive ‘Unexplained Wealth Order”?

 

Don’t get me wrong, I am very much in favour of catching traffickers of drugs, humans, arms, and prostitution, but I fear a number of innocent people will suffer as a result of these new provisions. Remember, that as from September 2018, HMRC will have all the information about the offshore assets held by its tax payers under the automatic exchange of information or CRS. And if they unexpectedly see substantial sums of money offshore they can enquire where it came from; the ‘Unexplained Wealth Order’. However, they are unlikely to do so, unless there is UK taxation in question – but this will not stop it passing the information on to the NCA which will then take action.

 

For anyone who is a member of the European Economic Area, they have some protection in that HMRC can only apply to the High Court, if it has reason to suspect serious criminality. However, this suspicion is not required for a person who is not from the European Economic Area and is a politically exposed person.

 

One of my clients who I will call Tom, has a family who is resident in the UK; his children are in school here and his wife Ali lives in the UK, with them, during term time. Tom is not a UK resident, he needs to be in Africa, where his business is based and he has close connections to the Government in his native country. He is therefore a politically exposed person. However, before we took him on as a client we did extensive due diligence and were satisfied that his trust fund did not come from criminal activity. If we did so suspect, we would have made a Suspicious Transaction Report, or refused to take on Tom as a client.

 

Tom’s trust is in Cayman, and is administered in Switzerland, set up about fifteen years ago.

 

Under CRS, the Trustees of his trust offshore will report under the automatic exchange of information the details of the trust, to the UK HMRC, because Ali and his children are residents of the UK. Ali owns a big house in North London, which houses her art collection and she has several bank accounts in both London and Switzerland which are funded by the trust. She has a leading accountant looking after the tax affairs of her and the family and is satisfied that she is fully tax compliant in meeting the financial needs of herself and her children in the UK. It is unlikely that HMRC will come up with serious tax revenue by pursuing Ali, but if the amount in trust is substantial it will not stop HMRC from giving the information to the NCA to apply for an Unexplained Wealth Order to ask Ali where the monies came from?

 

Under the new powers, it could freeze for up to five years, Ali’s house, her art and bank accounts, and continue for five years until it has answers.  

 

I have seen authorities freeze personal assets, purely, because they think the amount is too much for someone to amass without some form of criminal activity. In cases in Australia and the middle east, as part of this exercise, I have seen authorities restrict freedom of movement, to increase the inconvenience to the individual under investigation, by removing passports.

 

I have no problem with HMRC using its extensive powers and even draconian powers to catch criminals and others seeking to evade tax. My concern is when these powers are used capriciously or without reasonable grounds, Citizens of non- European Economic Area, should be allowed to live here in peace if they are not suspected of any criminal activity?

 

This may be a moot point so I would welcome your comments.

 

Contact me on 020 3740 7422 or email me on caroline@garnhamfos.com.

 

I will be on holiday for a few weeks, so my next note will be on 11th September – on Orwell and all that!

 

Wishing you all a very happy Summer and a relaxing and refreshing break.

Karen Millen - tough

On occasions, I get some feedback about my book, ‘When you are Super Rich, who can you Trust?’ Last week, a reader wrote ‘I have really enjoyed reading your book. It’s not as easy as you think to be super rich!’

 

The feedback reminded me of the tragic story of Karen Millen, who this year was forced to sell her home to pay tax owed as part of bankruptcy proceedings brought against her by HMRC.

 

The sorry story of Karen Millen’s financial collapse, is a typical tale of someone who trusted the wrong people, and paid a heavy price.

 

Karen was the daughter of a carpet fitter Anthony Millen, and lived her early life in a council house in Maidstone, Kent. Her father suffered from rheumatoid arthritis, and died too young to see his daughter’s success.

 

After leaving school, she took a fashion course in Kent’s City and Guilds in Medway College of Design. When aged 19, she went on holiday to Morocco and met Kevin Stanford; it was love at first sight and a great partnership.

 

Between them they took £100 loan in 1981, bought some white fabric, and Karen started making shirts for their friends. This was the start of a business empire which encompassed 400 shops in 65 countries. In the 90s, she and Kevin were riding high – and then everything started to go wrong, starting with the end of her twenty years relationship with Kevin.

 

In 2001, with a sale in mind, Karen was advised by her accountants to transfer her shares in Karen Millen to Mauritius trustees in a carefully orchestrated and complex arrangement being promoted by a number of leading accountants, known as ‘Round the World’. It would avoid capital gains tax.

 

Icelandic tycoon, Jon Asgeir Johannesson’s company Bauger then came sniffing, and offered to buy her company for £95 million. Jon was already powerful on the UK high street, and in due course owned stakes in All Saints, House of Fraser, Hamleys, the Icelandic frozen food chain and Woolworths. In 2007, at the height of his success, he was named the third most powerful retailer in Britain, by Retail Week.

 

The sale went ahead in 2004. Baugur the buyer financed the purchase through, Kaupthing, the Icelandic bank. On October 2008, Kaupthing was taken over by the Icelandic Financial Supervisory Authority, it was bust. But 40% of the purchase price for Karen Millen was not settled. In due course, Karen and Kevin were given 8% in Baugur and 4% in Kaupthing, which then collapsed along with other Icelandic financial firms. So, they received only a fraction of the sales price.

 

Karen wanted to start work again now that her business was sold. She wanted to start a homeware firm selling to the US and China, but the administrators of Kaupthing bank would not allow her to use her name ‘Karen’ for the new business. She took the case to the High Court and lost, with an order to pay £2-3 million of costs for both sides.

 

Then in 2010 HMRC came knocking. It claimed that the gain made on the sale of her shares in Karen Millen was not made by a trust based in Mauritius, but in the UK. The scheme was ‘carefully orchestrated from the UK’ and therefore taxable in the UK! This decision was upheld on appeal and in September 2016, Karen was served with a tax notice to pay £6million of capital gains tax.

 

She had been advised every step of the way, but failed to receive full consideration for the sale of her company, had been ordered to pay legal costs of both sides on her failed attempt to start a new business with the name of Karen, and the tax scheme she had entered into on advice from her accountants had collapsed –  she was left with nothing.

 

When Karen was ordered to pay £6million in tax – which she did not have – HMRC proceeded to make her bankrupt and ordered the sale of her beloved Grade II Georgian home in Wateringbury, Kent to pay the tax.

 

Of course, in hindsight it is easy to say she should have steered clear of Baugur, but Johannesson was a powerful British retail tycoon. She should not have trusted her accountants with a risky tax avoidance scheme, but lots of accountants were promoting this arrangement. And, she should not have fought a case against the administrators for the use of her name which she had already sold, but she was advised to do so.

 

It is arguable that Karen had not been brought up with finance and money, and therefore was more gullible than most – I think she simply trusted the wrong people and got it – very wrong.

 

The advice I give in my book to anyone hoping to have the success of Karen and not the failures, is choose your advisers carefully and always remember

 

·      If it looks too good to be true – don’t touch it

·      If you don’t understand it – avoid it, and

·      Never fight, unless the odds of winning are good.

 

If you would like to buy my book, ‘When you are Super Rich Who can you Trust?’ or would like to find out more as to how I could be of assistance to you, simply call 020 3740 7422, or e mail caroline@garnhamfos.com.

Damned Statistics

The BBC invited me on two occasions, to join Nicky Campbell on his Sunday morning show to contribute to the debate on how valuable rich people are to the UK.

 

The first time, as we went live – Nicky turned on me, aggressively. Is it right for some people to live in this country and not pay their fair share of tax? I cannot remember what I said, I was so surprised, but remember being quite robust. If the government tax this valuable community too much they will simply leave!

 

One woman, a strongly opinionated journalist, claimed they would not – we now have the statistics, who is right?

 

The simple answer is that one quarter have either left or given up their privileged status, but the total tax taken has gone up. Sadly, records only began in 2008, when a fee was introduced for the privilege of the beneficial tax regime for non-UK doms living in the UK.

 

In 1986, I was asked by the Weekend FT to write a column on tax and trusts, which I did for twelve years writing about ten articles a year. At that time, very little was written about the taxation of non-UK domiciled persons, so I had no option but to read the legislation and interpret it as best I could.

 

I was shocked to discover, as I wrote my articles, that non-domiciled persons could save vast swathes of tax simply by leaving most of their assets offshore, preferably in trust, and to bring into this country only monies on which they needed to live. And even this tax could, with careful planning, be avoided.

 

Although, I cannot claim to be responsible for the surge in the offshore fiduciary industry and an influx of wealthy people into the UK, in the 80s and 90s, I certainly think I contributed to it.

 

As the years rolled by, it became increasingly clear to me that the Treasury would clamp down on this ‘gravy train’ of tax breaks for the non-doms, which is precisely what it did, although for many, it was great while it lasted.

 

In 2008, the Government introduced a charge of £30,000 for any non-domiciled person who had been resident in the UK for 7 of the previous 9 years and did not want to pay tax on their unremitted offshore income and gains. In 2012, a new band was introduced £50,000 for any such a person who had been resident in the UK for 12 of the previous 14 years (which went up to £60,000 from April 2015). Then, in 2015, a new band was introduced of £90,000 for such a person who had lived in the UK for 17 of the previous 20 years.

 

Finally, from 6 April 2017, the £90,000 band was dropped and all non-UK domiciles who have lived in the UK for 15 of the previous 20 years will now have to pay UK income tax and capital gains tax on their offshore as well as their onshore wealth.

 

We do not know what the outcome of this deemed domiciled rule will be, because the published statistics only go up to 15-16, but we can see, from the statistics published this month the effect of the increase in the remittance charge on the behaviour of the non dom community living in the UK.

 

First, the total number of non-doms who do not want to pay the fee for the privilege of having their unremitted offshore wealth left untaxed, fell by one quarter, down from 120,000 to 91,000. This could either be because they did not want to continue to pay the fee for the privilege, or they have simply left the UK. The split would appear to be 50:50.

 

Second the tax take went up. Non doms last year paid more income tax, capital gains tax and national insurance tax than at any time since records began - 2008.

 

Of the non dom taxpayers only two thirds bring monies into the UK which is taxable, the others may simply leave their monies offshore, because they do not need it in the UK. The amount of tax paid on the remittances was £2,100 million, which is roughly the same as previous years, but the fee for the privilege was up to £285 million which is the highest amount ever paid, largely due to the £90,000 band.

 

The number of people who pay this fee is only 4,300. This means that of the 91,000 who claim non-dom tax privileges, less than 5% stay beyond seven years, or then drop their non-dom status.

 

As from April 2017 of these 4,300 who have been here for fifteen of the previous twenty years, they will be taxed on their worldwide income and capital gains. Ironically, provided they do not need the money to spend personally, it can usually be, legally, mitigated or avoided.

 

Changes were also made as from April 2017 to the rules of non-doms for inheritance tax.  If they have lived in the UK for fifteen, rather than seventeen out of the previous twenty years, they will be subject to inheritance tax on their world-wide wealth at 40%. However, this can also be avoided, provided action is taken before the fifteen-year cut-off date.  Simply set up a trust and transfer all your non UK assets into it. And if you want to know how to do this without losing control of your world-wide wealth, simply contact me.

 

If you would like to find out more or buy Caroline’s book ‘When you are Super Rich Who can you Trust?’, please contact Caroline on 020 3740 7422, or email on caroline@garnhamfos.com

Don't tempt fate

I have acted for Joshua for many years. He is a beneficiary of a trust, which I will call Larchwood Trust, with his sister Marcelle which was set up for him in 1998 by their father. Joshua is resident in the UK, but Marcelle is resident in Argentina.

 

The trust owns a number of active businesses, one of which is an import business to the UK of products from Argentina, based in the UK, which I will call Larchwood Enterprises Limited.

 

The Trustee of his trust ABC Limited, has an excellent track record, and has over the last few years been very acquisitive; buying large and small fiduciary businesses mostly in offshore financial centres and introducing them to their way of doing business and looking after clients.

 

Joshua recently received a letter from ABC Limited to say that it was proud to announce the acquisition of a fiduciary business STU Limited, with offices in Singapore, BVI, Lugano and London. Joshua wrote to me to say how excited he was that he could now have meetings with his Trustees in London and would no longer have to travel to the Channel Islands!

 

I wrote back to him, which I copied to ABC Limited, who I had got to know quite well over the years, to say that it was unlikely that his visits to the Channel Islands would come to an end despite ABC Limited having acquired an office in London.

 

Under Section 69(2D) of the Taxation of Capital Gains Act 1992, and Section 475(6) Income Taxes Act a trustee, ABC Limited will be treated as UK resident and taxable in the UK, in relation to a trust, if it acts in the course of a business which it carries on through a ‘permanent establishment in the UK’.

 

I told Joshua that ABC Limited would no doubt have taken legal advice before acquiring STU Limited and would have put in place rigorous processes, but Joshua was inquisitive, he wanted to know the rules and the dangers.

 

I told Joshua that HMRC and the OECD Tax Model Convention provide helpful guidance on the meaning of permanent establishment which is at the heart of where a trust is resident, if it has a corporate trustee acting as a sole trustee.

 

If ABC Limited employees were to use the offices of STU Limited when they came to London, this would not necessarily mean that Larchwood Trust would become subject to UK capital gains tax or income tax. But it depends what these employees are doing while in the UK which matters, and this is governed by three tests.

 

The first is if ABC Limited employees are doing trust business in the UK. If they are merely coming to the UK to pitch for new business, that is ok, but they should not be doing trust business, while in the UK.

The second test is, are the employees of ABC Limited doing trust business in the offices of STU Limited in London?

 

Third test is, are the employees of ABC Limited carrying out the trust business of Larchwood Trust, in the offices of STU Limited in London?

 

The Guidelines make it very clear what trust business is, namely

 

·      The general administration of the trust

·      The over-arching investment strategy

·      Monitoring the performance of those investments, and

·      Decisions on how trust income will be dealt with and whether distributions should be made.

 

One off meetings are ok. To give an example, if ABC Limited met with Joshua at the offices of STU Limited to discuss the potential release of capital from the Larchwood Trust, this clearly falls within a core activity of the Larchwood Trust.  Prima facie ABC Limited is acting as a trustee of the Larchwood Trust through a permanent establishment, the offices of STU Limited. However, HMRC will not make a decision based on a one-off meeting, it wants to know the whole history.  

 

The trap to avoid, which crops up when a trust has appointed a professional trustee, is where meetings are held by employees of ABC Limited with Joshua in London, which ABC Limited then ratifies in the Channel Islands at a formal meeting of the Directors of ABC Limited.

 

In my opinion, as I told Joshua, he needs a structure, where it is clear who is taking the decisions and where they are taken. Although, in most cases, on balance, it is clear that the real decisions are being taken abroad, no-one wants to tempt fate with HMRC. Fighting HMRC is not like fighting anything or anyone else. It has been told it must go after every penny of potential tax, regardless of the time and expense it takes to go through all the files and papers of Larchwood Trust, since inception.

 

The inconvenience and cost of flying out to the Channel Islands to have real meetings where real decisions are taken is a small price to pay to avoid years of wrangling with HMRC.

 

If you would like to find out more, or buy my book, ‘When you are Super Rich who Can You Trust?’ please contact me on 020 3740 7422, or e mail me on caroline@garnhamfos.com

And still the heat rises

In March 2018, the Law Society published its guidelines as to what it considers to be money laundering and high-risk activities. I quote

 

‘Independent legal professionals are key actors in the business and financial world’ it says, ‘facilitating vital transactions that underpin the UK economy. As such they have a significant role to play ensuring that their services are not used to further a criminal purpose….

 

Money laundering is generally defined as the process by which the proceeds of crime and the true ownership of those proceeds are changed so that the proceeds appear to come from a legitimate source.

 

But it is not restricted to drug running and fraud by criminal gangs, the Proceeds of Crime Act 2002 includes ‘profits and savings from relatively minor crimes, such as regulatory breaches, minor tax evasion or benefit fraud.’

 

There are three classic phases to money laundering: placement, layering and integration; getting the cash into the system, finding a way to obscure its source, and making wealth appear legitimate so that the criminal can enjoy it. We all know and agree that the proceeds of crime need to be identified as a first step to catching criminals, but the heavy guns are out for the ‘minor tax evasion’ as well, which won’t be placed, layered or integrated. More often than not it is simply sitting in a bank account waiting for a rainy day.

 

Schedule 9 of the Proceeds of Crime Act 2002, outlines the practices where vigilance is particularly high, which includes,

 

·      Advice about the tax affairs of another person by a practice or sole practitioner

·      Legal services involving the participation in financial or real property transactions concerning the buying and selling of real property or business entities

·      The managing of client money, securities or other assets

·      The opening or management of client money, securities, or other assets

·      The opening or management of bank, savings or securities accounts

·      The organisation of contributions necessary for the creation, operation or management of companies

·      The creation, operation or management of companies

·      The creation, operation or management of trusts, companies or similar structures

 

 In short, the entire private client industry needs to be on the look-out for the proceeds of crime and the savings from evading tax!

 

The industry is advised to take appropriate steps to identify, assess and understand the money laundering risks businesses faces and apply a risk-based approach to compliance with documented policies, controls and procedures to identify these problems.

 

At greatest risk are those lawyers involved in the sale/purchase of real property, creation of trusts, companies and charities, and management of trusts and companies and therefore anyone involved in this practice area must place additional controls where necessary to minimize the risk of money laundering.

 

In my area of expertise, I need to ask why a client wishes to set up the trust, the appropriateness of the structure, and to understand all aspects of the transaction.

 

But now we need to go even further.

 

Several decades ago I was working in a law firm and down the corridor from me was a lawyer, who I will call John, who kept himself to himself. John was rumoured to have a rich wife – which explained his lavish lifestyle. By chance a trainee, noticed that a lot of John’s clients were using an accountant in an offshore financial centre which was not used by any other partner in the firm, and asked why. It then came to light that John was working a little too closely with some of his clients, introducing them to this accountant, who would not ask too many questions for a fee paid to John, into his offshore bank account. He was, dismissed.

 

But as from 2017 senior management must flush out such rogue elements.

 

For most hard-working diligent tax and trust practitioners, clients are for the long term, we get to know their family, go to their weddings, funerals, religious ceremonies – we know who they are what they want to achieve and we do our best to keep them well within the tramlines of the law and introduce them only to professionals with the same high standards of decency. But in a large organisation not everyone has the same sense of integrity. A rogue worker looks the same as any other diligent practitioner, the only difference is that he/she is more motivated by financial reward than keeping his/her clients the right side of the law.

 

On 1st September 2017, the Government published guidance for companies on failure to prevent criminal facilitation of tax evasion. This now makes senior management in an organisation criminally liable for the failure to prevent an associated person facilitating the evasion by their clients of tax.

 

Up until 2017, prosecutors merely had to show that the senior members of the relevant body were not involved in or aware of such illegal activity. Now if they turn a blind eye, or fail to have a proper procedure in place to flush out such rogue elements they may find themselves in the dock alongside their criminal colleagues.

 

If you would like to find out more, or buy my book When you are Super Rich who can you Trust? simply send me an e mail to caroline@garnhamfos.com.