Be warned!

In 2016/17 the tax take levied by HMRC on offshore assets was £325 million. However, in 2018/19 this tax rose to £560 million, an increase of 72%. What happened between then and now to cause this dramatic rise?


In 2015 HMRC set up an Offshore, Corporate and Wealth Unit to look into the information revealed by the 11.5 million documents related to offshore entities revealed from a leak orchestrated by the German newspaper Suddeutsche Zeitung – now known as the Panama Papers. This information was then shared with the International Consortium of Investigative Journalists.


The Unit is part of HMRC’s Fraud Investigative Service, which targets rich individuals and businesses with undeclared offshore interests and is staffed by lawyers and accountants. When a rogue employee stole 4.4 GB of sensitive private details of the clients of the Liechtenstein Bank which he then sold to governments around the world, it took between 2-3 years before tax authorities processed this information and the victims started to receive tax claims.


This is about the same time it has taken tax authorities to process the information received from the Panama Papers to raise tax claims on the clients of Mossack Fonseca the law firm in Panama from which the information was leaked. The quantum of information, from the Panama Papers leak is, however  50 times more extensive than the information received from the Liechtenstein Bank. The tax take from the information sold from the Liechtenstein Bank is quoted as being in excess of £100 million (in the UK) while the tax take from the Panama Papers leak is expected to raise $1.2 billion across the world.


Since the Panama Papers leak the two founders of the Panama based law firm have been arrested in Panama, and four former employees arrested in the US; the forty-year old firm has now closed down.


Without doubt, Mossack Fonseca had some dodgy clients; convicted prime minister of Pakistan Nawaz Sharif and his daughter, Ayad Allawi ex-prime minister and former vice president of Iraq, Petro Poroshenko president of Ukraine and Aloa Mubarek, son of Egypt’s prime minister.


But not all its business was dodgy. Mossack Fonseca acted for the father of David Cameron the British Prime Minister. He set up a fund which was fully disclosed to HMRC on which he managed to avoid paying UK tax, due to a ‘small army of Bahamas residents who signed all its paperwork in the Bahamas’.


These headlines paint a picture of a gaggle of unscrupulous politicians and greedy business men eager to use an offshore financial centre to hide ill-gotten gains and avoid tax. But this is not the whole picture. Many innocent entrepreneurs and wealthy international families have also got caught up in the scandal and taxed as if their structuring had not taken place.


I have seen first-hand what tax authorities do with information gleaned from rogue activities. The prima facie assumption of any tax authority is that the main reason to set up a structure, such as a trust and company, offshore is to avoid tax. Many professionals are concerned about the ongoing involvement of the settlor. However, this is not of particular concern to me since the Trustees need to be guided as to when and to whom to make distributions and in what to invest.


A professional trustee has a duty to ‘act in the best interests of the beneficiaries’ and as ‘a prudent man of business’. How can trustees fulfil these duties if they do not stay in regular contact with the settlor who is the best placed person to advise them as to what decisions to take as being in the best interests of the beneficiaries and in what to invest as a prudent man of business?


The real concern to my mind is not the continuing ‘guidance’ given by the Settlor, but what would happen if the Settlor and the Professional Trustees fell out. Tax authorities assume that if the structure has reserved a power to someone other than a trustee to remove and replace the trustees then the ultimate power over the Trustees rests with that person who tax authorities will assume to be the agent of the Settlor.


Many professionals are more optimistic, but the threat of a client faced with a tax claim with interest and penalties which could wipe the majority of this wealth is of sufficient seriousness to warrant a review and stress test. We know that tax authorities have been told to undermine the structures wherever possible and to name and shame – and we have seen them do it before.


Many professionals are of the view for tax authorities to behave in such a manner is an abuse of power and they may eventually be proved right, but there could be a lot of blood on the walls before the line between lawful planning and unlawful evasion has been properly drawn.


In the meantime, if you want to know what you can do to reduce the risk of being investigated call me on 020 3740 37422 or email on