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6 November 2017
The Paradise Papers: A pertinent health warning
“There are legitimate uses for offshore companies and trusts. We do not intend to suggest or imply that any people, companies or other entities included… have broken the law or otherwise acted improperly”
This is not the statement of Appleby, or any other offshore tax adviser, but is the ‘terms’ that one must accept when attempting to use the International Consortium of Investigative Journalists (“ICIJ”) database. As you will now know, the ICIJ brought us the Panama Papers and, now, the Paradise Papers. [I wonder if the Panama Tourism Board will take umbrage at being skipped for the ‘Paradise’ element of the title?]
This disclaimer is a very wise statement. However, unfortunately, there is little acknowledgement in the uninformed coverage offered by Panorama, the BBC, other media and also from the opposition politicians.
Despite having a more limited platform, I feel behoved to offer some sort of a response. This is that response.
Paradise Papers: You say ‘leak’ and I say ‘breach’
The Panorama programme starts with Richard Bilton working in a dark room sifting through filing cabinets. However, in reality, the information has been obtained through a criminal breach of confidential information.
Whether this was through a sophisticated hack by sinister forces or a more basic disgruntled employee with a USB stick is unknown.
There seems to be little in the Paradise Papers of serious interest from a UK tax perspective (as I will set out). However, I wonder if HMRC were hacked and taxpayer’s information was leaked online whether people’s views would be quite the same?
My view is that the only direct action as a result of this will be that Appleby will be sanctioned for its serious data breach.
Last week I found myself defending the Tories and Theresa May, I now find myself defending the Queen. Neither of which are natural political or constitutional causes of mine.
In case you hadn’t noticed, the Queen has outraged the BBC and the Guardian by secretly investing £10m in an offshore tax haven. Outrageous.
Well what she (sorry, the Duchy of Lancaster) has actually done is invest £10m of the assets of the trust which it manages in to a Private Equity Fund called Dover Street VI which is managed by an investment firm called HarbourVest. They are a firm that has been in existence for 35 years, and judging by its website, is not too furtive about its activities.
It is a US based manager and, as such, will generally use a (apologies to the advisers) cookie cutter structure. There will be a master fund. If the fund is going to take in money from US investors then usually the investors will invest via a Limited Partnership which will then invest in the master fund. The effect is that the returns in this fund will be attributed to the investors directly as the structure will be ‘look through’ for those participants.
However, generally speaking, a non-UK investor will be offered entry in to the fund via a Limited Company. This is likely to be because this provides the best tax result for a non-UK investor. Generally speaking, this ‘offshore feeder’ will be a Cayman based Company. This is no secret. It is not a blueprint guarded by the ‘armies of lawyers and accountants. One can merely ‘google’ this and you will get any number of guides to setting up your structure from accountants and lawyers alike.
Even where there is no tax on the investments within the fund, if a UK resident person receives a distribution from it, or they withdraw their investment, they will be taxed on the return. Simple as that.
What point am I trying to make? Good question. Well, the Queen’s advisers have not actually set up anything. They have decided that they want to invest the funds. They have picked a fund which anyone with enough to invest can take part in. The details of the fund and the manager are easily available on line.
The fund reportedly has USD 621m which is about £475m in today’s money. If the Duchy invested £10m then this represents about 2.1% of the fund. This is not a significant stake and the Duchy would be in a ‘like it or lump it’ scenario. They would have no say.
At best, there is a tax deferral on the underlying profits until the return is withdrawn. However, one can achieve this through a simple life insurance bond. Shock horror, this might have to be offshore but then most of them are, aren’t they? Just like Private Equity funds.
In short this is not a scheme.
It is not tax avoidance.
The Duchy has not broadcast the precise details of all its investments. I personally do not see why any private investor should. Perhaps MPs should have to do so as clearly there could be conflicts of interests based on investments held.
Bearing in mind the special status of the Duchy, perhaps it might disclosure the detail of all its investments. However, I don’t care if it doesn’t and this certainly seems more mole hill than mountain territory.
[Your Majesty, I will assume the MBE is in the post?]
The BBC states the following:
“Lord Ashcroft remained a non-dom and continued to avoid tax….”
Let’s be clear, any statements regarding his membership of the House of Lords aside, benefitting from one’s non-domicile status is not tax avoidance. So, quite simply, the BBC’s statement is wrong.
This is not my view but is the law as per IRC v Willoughby where it was found that it would be ‘absurd to describes as “tax avoidance” the acceptance of an offer of freedom from tax which Parliament has deliberately made.”
Domicile is a concept of general international law. No matter how politically expedient to do so, Lord Ashcroft could not simply volunteer to give it up. He would need to form an intention to stay in the UK permanently or indefinitely.
Clearly, assurances he has made to the House of Lords may be mean other actions are taken against him. Furthermore, it might also present further damage to his political ambitions. But that is not a tax matter, and beyond my pay grade.
The bigger, and most worrying issue for Lord Ashcroft, will be the comments that were put forward as belonging to the Trustees. We are told that these show that the Trustees are worried that Lord Ashcroft is calling the shots and usurping this role
We are told that this is evidence of an “abusive” structure. More accurately, it might suggest that Lord Ashcroft is potentially acting as a Trustee in regard to the structure. This ‘error’ might, depending on how far Lord Ashcroft has gone in usurping the Trustees, have the implication of bringing the trust in to the net of UK taxation.
The most abiding memory of this structure will be Richard Bilton chasing Lord Ashcroft around the Manchester conference centre. Bilton levelling accusations to Lord Ashcroft with the latter just muttering “dear, dear, dear” over and over again until Lord Ashcroft answered a convenient call of nature. I can only assume that Lord Ashcroft was talking about the price of the advice he received.
Mr Bilton wisely declined to pursue Lord Ashcroft in to the toilets, perhaps with a previous incident in mind!
McDonnell, Tom Watson and Co
The shadow Chancellor and deputy leader of the opposition have stated in almost identical tweets overnight (certainly it would keep the university plagiarism tool interested!) that (unspecified) action must be taken. I quote the Tom Watson tweet regarding the Paradise Papers here, though, as I say, the content was materially the same:
The government says it is dealing with the tax avoidance of the super rich but the #ParadisePapers prove it’s just bluster. @UKLabour demands the Chancellor tells our country how he is going to tackle industrial scale tax avoidance once and for all.
It is interesting to see which example the opposition believes to be ‘tax avoidance’. As far as I can see, none of the cases highlighted in this instalment of the Panorama Paradise Papers satisfies that accusation.
The Duchy of Lancaster has invested in sophisticated investor (but essentially retail) funds which are offshore like most similar funds. At a 2% holding, there would have been no tailoring of the structure and the Cayman feeder would have been on the terms of ‘take it or leave it’. This could not be tax avoidance.
Secondly, Lord Ashcroft is at worst taking advantage of the non-dom rules on the basis that he is a non-domiciled individual. From a tax perspective, using laws explicitly set out to deal with non-doms and their trusts is simply not tax avoidance.
It is clearly a matter of public record that a former chair of the Public Accounts Committee benefitted from a non-UK trust set up by a non-domiciled relative to hold shares in the family business. This is no different to Mr Ashcroft. Neither are tax avoidance. The rules might be complex, but they are there and specifically laid out to deal with this type of situation (and I refer back to Willoughby above).
It seems to me that neither Trump nor Everton FC, the other two cases discussed, involve any tax avoidance allegations at all and were about ‘shady deals’ and ‘furtive investments’. I will leave the dissection of these to those better placed to deal with.
So who in the Labour party will be drafting the indictments first?
Incidentally, the Dover Street VI fund closed in 2006. At this time, there would have been a Labour Chancellor of the Duchy of Lancaster. Interesting, Ed Miliband was since held this position and he seems not to have been too vocal about any issues either.
Conclusion: Paradise Papers
In my view, the contents of the Panorama Paradise Papers revelations were pretty feeble. In terms of the UK tax issues there was absolutely no expert input – and Margaret Hodge and the author of ‘Treasure Islands’, with respect, hardly provide balance.
There will be more allegations in tonight’s programme and I understand that a certain Switzerland dwelling British motor racing star will be included.
I can already hear the accusations, howling and gnashing of teeth!
If you have any queries or any comments on the Paradise Papers or any tax matter in general please get in touch. We love a good debate!
 I wonder precisely when the collective noun for ‘accountants and lawyers’ became ‘army’.