Google Gobbledegook

In 1987 the Editor of the Week End Financial Times was looking for a contributor to write on tax and trust issues, ‘Our journalists like most MPs do not have sufficient background knowledge to know what not to say’. I was reminded of his comments last week reading the commentaries about the ‘sweetheart’ deal HMRC has reached with Google.

The EU, it would appear, has waded in asking whether this ‘sweetheart’ deal is legal. The Independent has retorted to say we should be thankful that an international body supports the taxpayer’s cause in finding that the UK authorities ‘colluded with a vast company’. The Observer joins in to say the Government ‘chastises  companies for not paying enough tax’ while, in Brussel ‘robustly defending the status’ of British-ruled tax havens. What a lot of piffle.

The fundamental basis of taxing profits of a business in the UK is whether the business is trading in the UK, as distinct to trading with the UK. This may seem to be splitting semantic hairs, until you realize that this small point makes the difference between paying no tax in the UK or many thousands of millions.

In the case of ‘Smidth v Greenwood’ it was decided that for profits to be chargeable to tax the ‘operations … from which the profits in substance arise’ need to be in the UK and if not are not chargeable to UK tax. This was a decision in the House of Lords in 1921, long before the Lordships could ever have envisaged operations being generated electronically outside the UK.

For journalists to encourage their readers to think that a country as desperate as the UK to gather tax in some way ‘colluded’ with Google is madness. The tax system operating in the UK is one of the most sophisticated in the world and is not open to negotiation, or power plays.

The ‘sweetheart’ deal between Google and HMRC is not to pay less than is required by law – but more. Even this is not without its legal implications. Under law a company director is under a duty to maximise the profits of the company for its shareholders. It is under a duty therefore to pay as little tax as is legally possible, because to pay more voluntarily than is required is contrary to its duty. The only exception to this is if in the opinion of the directors it is considered to be in the best interests for the reputation of the company to pay more. Presumably Google took the decision that to pay some tax would be seen to improve its reputation rather than paying no tax at all.

Then there is this notion that in some way the Government is sitting on its hands in letting its Crown Dependencies or Offshore Territories continue as tax havens. The fact of the matter is that the UK Government has no right to intervene in the laws passed by these offshore islands which rests with their own legislative assemblies. It is not robustly protecting these islands – it is powerless to do much about them.

I find it astonishing that not more is said to stop this misinformation being published without any word to counterbalance the perception that Google is above the law. The man in the street is led to believe that there is one tax law for people and another for financial institutions. This is simply not true.

The only person who seems to be making any sense in this sea of nonsense is Nigel Lawson. He not only understands the principles which underpin our tax system but also the psychology of acceptable and unacceptable tax policy. He is on record as saying that what is needed is to replace today’s corporation tax on profits with a ‘levy on sales’. Unlike profits, he says sales can’t easily be shifted.

It must also be remembered that under Lawson the top rate of tax was lowered from 60% to 40% and the tax take went up. Under Osborne however, stamp duty has gone up from single figures to 12% and the tax take has gone down 12%. Nigel Lawson was right; bashing the rich does not fill the tax coffers. So why doesn’t Osborne unite the electorate behind a common enemy – making global giants accountable.

If you have any comments, insights or further thoughts, please contact svetlana@garnhamfos.com

Worse than you could ever have thought possible

This morning I gave the key note speech to a packed IBC conference on Family Offices.

The role of a Family Office is to act for an UHNW family in the preservation of their wealth, but should not be restricted to investment.

There are three ways in which family wealth can be eroded

• Poor investment
• Heavy taxes, and
• Family Feuding

Families need independent, neutral and strong advice on tax planning and family governance, as well as on investment. They need a new type of family office; dedicated to serving the tax planning and succession concerns of the family, a family office which is on the same side of the table as the family.

My talk on the second day of this conference will focus on how to prevent the erosion of family wealth through family feuding and the benefit of family governance, but in my Note today I want to pick up on the attitude of HMRC to tax evasion and how it affects all of us.

Over the last two years the UK has led the drive in Europe, in the G20 and through its G8 Presidency to revolutionise international tax transparency. It now has agreement, reached among 94 countries, to exchange information on financial accounts automatically every year. This is called the Common Standard of Reporting, which will start in September 2016 with the country’s Crown Dependencies and Overseas Territories, and will be completed in September 2018.

Under these agreements, HMRC will receive a wide range of information on offshore accounts held by UK tax residents, including names, addresses, account numbers, interest and balances. This will be an unprecedented step change in HMRC’s ability to tackle offshore tax evasion.  Taxpayers and their advisers will have no right to see what HMRC gleans; some of it may be incorrect.

HMRC says it will give evaders one last chance to come forward and put their affairs in order. If they choose not to, ‘it is right and fair that we make sure that the penalties they face, and the penalties for those who help them, reflect the wider harm caused by their actions and act as an effective deterrent to others. Penalties for evasion range from 100% of the tax due to 200% and could also include a prison sentence’.

According to HMRC, it has given people ample opportunity to regularise their affairs. True, but what about those who are not aware that tax is payable. They do not know that they are committing a crime. The taxpayer does not know the intricacies of the law, but the adviser who set up the structure for them does as do the professionals who run them do.

Joshua and Jennifer came to the UK in 1988. In 1995 they set up an excluded property settlement in Jersey with the assistance of their bank which also acts as the trustee and their lawyer. This trust was used to shelter capital gains, accumulate income and provide protection from inheritance tax. The beneficiaries are themselves and their three children. Over the years, trust income has been used to buy art in New York which was has then shipped to the UK. Joshua and Jenny now have an enviable art collection and have recently been making some changes as opportunities present themselves. On the sale of the art in the UK, this is a remittance of the income on which tax is payable. Neither Joshua nor Jennifer had any idea that they had been remitting income on the sale of any piece of art in their collection.

From the attitude of HMRC set out above, it is not just the taxpayer it will be targeting it will go after the advisers; the banks, accountants and lawyers who set up the structures and then fail to warn these families of the dangers of not carrying out a thorough independent review.

Joshua and Jenny need to be advised to carry out an audit to see whether:

• There has there been any inadvertent remittance of income or capital gains to the UK which has not been declared?
• The trust was set up before the seventeen years of residence or after? Had Joshua and Jenny formed the intention to live in the UK in the tax year before they came to live in the UK? Has theseventeen out of the previous twenty year rule for forming excluded property settlements been calculated properly – if not they could be treated as tax evaders and could well have an action for negligence against their advisers.
• There is any information which HMRC could get hold of which could lead to an investigation. At the very least to carry out a thorough review could prove to HMRC that they did not intend to evade tax and could provide some form of defence against an investigation and mitigation of penalties.

My advice to all advisors who have ever advised on creating offshore structures for their clients, are managing offshore structures or administering offshore structures is to contact existing and former clients immediately to inform them of the changes. If advisers do not they may find themselves embroiled in a tax investigation and penalties for assisting to evade.

In addition they may find themselves defending a case for breach of their duty of care to their clients. Advisers are much more knowledgeable than their clients and need to be warned about any inadvertent breach, for which they could face a claim for damages.

What is around the corner needs to be thought about now. If not what is coming could be worse than anyone could ever have imagined and much more costly – both for the UHNW family and their advisors.

Are you committing a crime?

To quote the Government: ‘Tax evasion is a crime which this Government is determined to stamp out because it deprives the country of much needed funds to run our public services, unfairly placing a greater burden on the vast majority of people who pay their fair share of tax. This Government will be relentless in its pursuit of evaders. For too long it has been too easy for people to hide their money overseas to evade tax.’

Everyone agrees with this, but wait a minute.

One of our clients, who is French, has two homes in London which he visits once or twice a year. His wife wants to decorate them before she visits, whereas he doesn’t because he views at as a waste of money considering they come to London rarely and spend most of their time in France. I wrote to him about his liability for ATED and he replied that he didn’t even know he is subject to the tax.

Under French tax law he only has to pay tax if his centres of economic interests are in France. It hadn’t occurred to him that by having a residential property in the UK owned by a company in Jersey, he is now subject to an annual tax. However according to HMRC he is evading tax and committing a crime.

As with Francois, the most vulnerable are the non doms. They have a home in the UK and might be living in London for most of the time, but were not born here, so are not familiar with our laws and ways of doing things. Most will not have formed the intention to evade taxes they do not think to ask or even know who to ask. However, HMRC now has the powers to find out who these people are, whether from exchange of information from other countries, or by working with the land registry.

Is the taxpayer’s charter of any help?

Frankly – no.

HMRC promises to treat taxpayer’s with respect, allow them to be represented and try to keep costs down provided they do not suspect them of evading tax.

In fact one of the rights published in the February 2009 draft was to ‘pursue relentlessly those that break or bend the rules’.

The only redress these unwitting taxpayers have for tax evasion will be against their advisers. The professionals who advised them to set up a structure to avoid tax and then did not subsequently warn them of the change of law.

These professionals may also come under attack from HMRC in being complicit in a taxpayer evading tax; knowing a structure was set up and operated for a client and then failing to contact them to tell them that tax was due may be enough for HMRC to go on the offensive to professionals whether lawyers, accountants or trustees who have set up these structures for their clients.

To give an example; ABC and partners advised Bhavik in 2008 to buy his home through an offshore company XYZ Limited. Chester Bank Ltd has offices in Jersey, London and Singapore and manages XYZ Limited for Bhavik for which Bhavik pays a fee. Bhavik is neither resident nor domiciled in the UK. Although he is liable for ATED since 2013, he rarely comes to London and was not aware of this tax.

Does Bhavik have a claim against ABC and partners for putting him into a structure to avoid tax and failing to notify him that the law had changed? Does he have a right against Chester Bank Ltd which manages XYZ Limited which failed to tell him that the law had changed even though they categorically state that they do not give tax advice? Has HMRC got a right against ABC and partners and or Chester Bank Ltd for failing to report the structure and possible evasion of tax?