Offshore: Tax, Morality & The Future

By David Petit

Posted: 23rd October 2012 09:06

The media had a field day over Jimmy Carr’s use of a tax scheme using an offshore jurisdiction and once again politicians have been quick to tap into the concern of the general public, this time linking tax avoidance, or should I should say tax mitigation, to issues regarding morality.
 
This is dangerous ground of course; some may question the morality of using tax revenue in pursuing conflicts in the Middle East and Afghanistan, although those opposed to such policies are unlikely to be staunch supporters of offshore jurisdictions.  However, the example illustrates that tax is not a question of morality.
 
The general public has little idea of the benefits that are provided to the UK economy by Jersey, Guernsey, Isle of Man and elsewhere and indeed such jurisdictions are actively encouraged to promote investment in the UK.  It is unfortunate that the “K2” scheme used by Jimmy Carr has produced such potentially damaging publicity.
 
Some independent financial advisors appear to have been discouraged from any planning which has an offshore element by recent developments working to clients’ disadvantage.  So let us look impartially at the reality of the position. 
 
It is often overlooked that offshore jurisdictions are neutral in the development of tax avoidance or mitigation planning.  They are almost always the inventions of UK tax advisors and other UK based professionals.  The offshore role is to hold assets either in trusts or companies or other structures.  It is the UK based advisors who are seeking to mitigate the effect of or to defeat UK tax legislation.
 
In turn it is for HM Government to introduce legislation to restrict the effectiveness of such schemes, or to approve them as it sees fit.  This is and has always been the position and the constantly developing and highly complex UK tax legislation demonstrates this to be the case.  Take a look at the provisions of Part 7A of the Income Tax (Earnings and Pensions) Act 2003 introduced on 6 April 2011 aimed principally at employee benefits trusts.
 
On the other hand some legislation introduces tax incentives.  For example the Finance Bill 2012 introduces provisions enabling non-doms to remit income to the UK tax free, under certain conditions.  Offshore centres will facilitate that remittance.
 
The next step HM Government proposes is to introduce the general anti-avoidance rule (GAAR) which will no doubt impact upon future planning.  I am not aware of any offshore practitioner who considers HM Government’s approach to be in any way unfair. 
 
So we should view tax legislation for what it is, simply a tool of government to raise revenue or to achieve a government policy.  Tax is nothing to do with morality.
 
Does the hostile approach of the media and politicians (publicly at least) and the introduction of GAAR mean that the days of offshore centres are coming to an end? 
 
Certainly not.  Here are some reasons.
 
1. The so called “K2” scheme, operated out of Jersey, was described by the Prime Minister no less, as “legal”.   It is not a scheme that I particularly like, for reasons which space does not allow me to elaborate, but HM Government’s position is that the scheme cannot be challenged on the grounds of illegality.
 
2. GAAR will not render all planning ineffective.  In particular, it has already been noted that some legislation provides tax incentives and these particular provisions are often best utilised using an offshore structure.
 
3. Offshore centres continue to be used by major companies.  Out of an infinite number of examples I would refer to the recent sale of 10% of the shares in Manchester United on the New York Stock Exchange.  The shares have been issued by a Cayman Islands company. 
 
It is not possible to challenge the international aspect of business.  Offshore centres will always play a significant role in international planning.
 
4. The NewBuy home loan scheme introduced earlier this year not only has HM Government approval but relies upon a HM Government guarantee.  Insurance to the lending institutions is provided by a Guernsey protected cell company which is managed by a Guernsey insurance management company.  HM Government therefore approves of the use of Guernsey!
 
5. A tax neutral base for an investment vehicle is necessary if it is to invest in the UK (or     elsewhere).  Western economies function only with investment and much of that comes          from offshore structures.
 
Some schemes – K2 perhaps - may not have a long term future but this does not mean that all aspects of offshore work should be avoided; after all it is acceptable for HM Government to be connected to a Guernsey based scheme.
 
If you are concerned about a piece of planning which involves an offshore jurisdiction then I would suggest that you look closely at the proposal to see if it is the planning itself which gives rise to the problem, it is rarely the fact that an offshore centre is being used which gives rise to an issue.
 
A carte blanche rejection of any work with an offshore involvement is really missing the point.
 

David Petit, a Jersey advocate and a member of STEP, is the Chairman of Apex Trust Company Ltd.  In private practice he  specialised in commercial law with particular focus on trust and company law.
 
David can be contacted by phone on +44 (0)1534 883605 or alternatively via email at david.petit@apextrustco.com


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