Can you remember what came first, was it the chicken or the egg? Did you seek advice on your domicile first and then on how to use your status to avoid tax or did you go to your adviser to see how you could save tax? This distinction could make the difference between keeping your trust fund or paying the bulk of it over to HMRC!
This is the example given in Case 9 of the HMRC guidelines on how, where and when it will impose the new penalties.
Bernard has been a client of mine for many years, he was told by a friend that if he set up a trust offshore he could provide not only for his heirs in unequal shares, but could also save tax. His friend introduced him to a specialist firm in Switzerland, to which he went to set up his trust ten years ago. His first conversation with them which was recorded on their files, was how could he get the benefits which his friend was currently enjoying with his trust; succession and tax avoidance. The firm also told him how to complete his tax return.
Since the trust was set up Bernard has used the monies in trust to build his business empire, trading between Africa and Europe. The trust has served him well, apart from Bernard’s irritation about the time it takes for his professional trustees to agree to invest or disinvest, and his concern about what the trustee would do if faced with a third-party dispute, which was always of concern to him knowing how expensive such a trust dispute could be.
He wanted to put in place good governance, which was why he came to see me; which would address his irritation with his trustees. I explained to him how this could be done, and we set about putting it in place.
During our work together, Bernard asked whether we could do anything to stop HMRC investigating him and his trust. The simple answer was no, but he could stop a disaster turning into a catastrophe, first, by setting up good governance measures, which we were in the process of doing, but second by engaging an accountant to review his structure.
The Failure to Correct legislation introduced in the Finance Act 2017, is stated to coincide with the first information to be received by HMRC under the ‘Automatic Exchange of Information’ legislation. If as a result of information being disclosed under these new rules, HMRC discovers that an offshore structure is subject to taxation which has not been declared it can charge up to 200% penalty under the Failure to Correct legislation.
This may not seem unfair, until you factor in that a settlor, like Bernard could be liable for this penalty even if, as far as he was concerned, he had taken good advice and followed it to the letter. In short, the penalties can be imposed without the taxpayer having had the intention to evade tax, he was simply acting on advice on how best to plan for succession in the most tax efficient manner.
But, I hear you think, if Bernard has followed the rules, and taken good advice, he is tax compliant and HMRC will go away empty handed? Not necessarily. Let’s assume that HMRC once in possession of all the facts decides to investigate Bernard’s trust.
It will first go knocking on the door of his trustees in Switzerland. If it finds out from the files that Bernard went to the specialist firm in Switzerland for the benefits he was told would be available by a friend, this advice, regardless of how accurate and correct it is, will be ‘disqualified’ in protecting Bernard from 200% penalties, provided HMRC can find something to tax.
How could this happen? Let’s assume that HMRC finds in the setup correspondence and marketing material of the trustees, that ‘a trust is an ideal vehicle for succession and saving tax, but don’t worry about losing control, we are obliged to look after the best interests of our clients – which unless you are acting unreasonably, means we will do what you request’.
In the Pugachev case, it was decided that where a settlor retains too much control and the trustee does what is requested of him, the trust can be treated as a nominee arrangement which means that the assets can be taxed as if the assets remained owned by Bernard. This could be a serious outcome, but when added to this are the penalties of Failure to Correct, at 200% it could wipe out Bernard’s entire trust fund. Given that the trust fund consists of Bernard’s business this would probably mean that Bernard would be made bankrupt.
In Case 10A of the Guidance Notes, HMRC makes it clear that if Bernard, provides full details of the set up and trust structure to an accountant after setup and asks the accountant to advise how to fill in his tax return, he will be protected from the Failure to Correct penalties, provided Bernard engages the accountant before the investigation begins.
My advice therefore to anyone who has a trust structure offshore, regardless of how tax compliant you may think you are, if you have not already done so, take advantage of the ‘get out of jail free card’ and get an independent review by a UK based accountant as well the best possible governance you can afford for your trust structure. The stakes are simply too high not to!
If you would like to find out more simply call me on 020 3740 7422 or e mail me at email@example.com