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  • ‘Beating a path offshore’: A totally fictional case study in offshore tax planning

    Introduction

    I think many people have observed that lockdown has seemingly given people time to think about their financial plans.

    Almost a year ago, we found ourselves basking in an early heatwave. Lockdown seemed more palatable in the spring sunshine.

    However, Lockdown III has been a far grimmer affair and has probably made people think about jetting off to sunnier claims (albeit the chance would be a fine thing!)

    But could enterprising fellows combine the two?

    Over the years, we have seen investigative journalists claim that one can choose an offshore company in much the same manner as a week in Benidorm. Not only are they based in exotic locations, but it is claimed they are able to reduce a company’s tax bills.

    It might be assumed that such an arrangement is a crafty piece of tax avoidance – sharp practice but perfectly legal.

    However, all those potentially tempted by reduced liabilities and white, sandy beaches should think again… as they could really be into HMRC invested quicksand instead.

    Totally fictional case study: You bend ‘em, we mend ‘em

    For example, let’s say we have a Halifax-based panel-beater. He’s taken action after being seduced by a glossy advert in a certain business publication which explains how it’s possible to avoid tax by setting up a tax-free company in the Seychelles. 

    All he has to do is carry on his work in West Yorkshire while his invoices are issued from the new overseas business.

    After all, it’s what Google do, right?

    Initially, he was under the impression he could buy an off-the-shelf firm and appoint a nominee director to do his bidding. However, he quickly learns that he needs to put more distance between his operations in West Yorkshire and his apparent Indian Ocean idyll if his arrangements are to be okay with the Revenue. 

    The suggestion is that he must have directors that are actually resident in the Seychelles, able to exercise proper management and control.

    Hmmm. He’s not too sure about that. But, after a quick Teams call with the potential offshore directors, he understands they know on ‘which side their bread is buttered’ and are likely to do what he wants.

    His other concern is that, as signatories to the bank account, they might run off with his brass. However, again, the potential fiduciaries convince our metallurgical tycoon that they deal with much bigger fish than him… so they’re hardly going to do a runner, are they?

    That’s a relief… and with all that taken care of, he might be forgiven for thinking that he now has a pukka tax avoidance mechanism in place.

    But wait.

    What the magazine advert didn’t spell out is that, despite shelling out (Dad joke alert – should that be ‘chelling out’?) for his Seychelles company, he’s still classed as trading in the UK. If in this scenario he does not cough up tax to HMRC, he’s not avoiding tax. He is, in fact, probably guilty of evasion.

    What if our friendly but perplexed panel beater now takes himself off (virtually, of course) to an accountant to ask how he can really avoid Corporation Tax? After all, he’s already gone to considerable lengths to do so.

    Well, they explain, it’s not going to be easy.

    Firstly, he’ll have to make sure he isn’t trading in the UK. 

    Secondly, he’ll also have to make sure that he doesn’t have a permanent establishment (or ‘PE’, for short) in the UK. 

    It all sounds so much more complicated than the ad made it appear.

    He’s starting to get hot under the collar… and he hasn’t yet left the West Riding of Yorkshire.

    Leafing through another of his favourite tax publications, he reads about the Transfer of Assets Abroad provisions. Alarmed, he quickly rings up his new accountants – he’s certain they hadn’t mentioned anything about these to him.

    That’s because, his advisers point out, they are personal tax anti-avoidance rules and we’ve only been talking to you about the corporate issues. It’s all set out somewhere in the engagement letter. However, to put his mind at rest, they provide a short, sharp, shocking summary.

    Put simply, it says, if he remains a UK resident shareholder and there is no commercial reason for setting up the Company overseas, then HMRC can effectively ‘look through’ the company and tax him, as the shareholder, on the profits. 

    Blimey.

    It all seemed so easy when he was reading about the Paradise Papers in the Guardian.

    But what if, thinks our friend, one does away with all the overseas nuts and bolts and keeps a low profile.  After all, “how will anybody find out!?” 

    Our panel-beater’s advisers start looking a bit green… and there isn’t a dodgy Zoom background in sight. 

    Shifting uncomfortably in their virtual seats, they begin to tell him about HMRC’s scary new computer that links together many different data sources and whatever useful or incriminating snippets it can find on the internet.

    Our friend gulps and immediately begins to regret his Instagram story documenting his trip to the Seychelles entitled ‘Sticking it to the taxman’. He’d never bothered to tick the privacy settings. 

    Pleading ignorance is not a defence, lectures his adviser [although in tax, sometimes it is!] In fact, with the relatively new strict liability rules for offshore tax evasion, the Prosecution don’t need to prove any intent on the part of the Defendant. Instead, the burden of proof is on the Defence.

    “But that is tantamount to guilty until proven innocent” our friend protests. “Indeed,” says his adviser, now watching the clock as he has a pressing WFH lunchtime appointment with Homes Under the Hammer and really needs to wrap up this Zoom Call.

    He sets out that in addition to the special, significant financial tax penalties, one could be handed a jail term by the local beak. After all, she’s likely to be in a stinker of a mood as this bloody tax case has been stuck right in the middle of her busy caseload of motoring offences. 

    Our imaginary West Yorkshire friend puts his passport away and tips his collection of holiday island avoidance brochures into the bin.

    Perhaps he’ll stick to a trip to Filey this year… at least he won’t need a COVID test.

    Conclusion

    Of course, there are scenarios where an entrepreneur might set up an overseas entity and obtain genuine tax benefits.

    Generally speaking, this will be where an entrepreneur has the opportunity to generate genuine overseas sales. 

    Further, our intrepid entrepreneur will need to ensure that his or her business is managed and controlled from overseas and he will need deal with the transfer of assets point. 

    Of course, both of these concerns might be assuaged if the entrepreneur is moving themselves outside of the UK. They will – unless planning on becoming a so-called ‘tax nomad’ – need to consider the effect of potentially becoming resident in another jurisdiction (‘out of frying pan in to fire’ syndrome).

    Further, we’ve seen new anti-avoidance measures in this space. Bolstering the existing transfer pricing regime, the Diverted Profits Tax (aka the Google Tax) is unlikely to apply to most entrepreneurial companies. However, its younger sibling, the Anti-Profit Fragmentation provisions, may well do so.  

    Still, at least we’ve been spared much of EU directive DAC6, the vast majority of which the UK is no longer implementing following Brexit. 

    Exposes like the Paradise Papers attract a lot of controversy – but you can guarantee that tax advisers phones will ring the next day as individuals like our imaginary friend above ‘want to do a Google’. 

    But, as you will hopefully appreciate, offshore tax planning isn’t as simple as many would let you think.

     

    If you have any queries regarding offshore tax matters or require any tax advice then please do not hesitate to get in touch