Offshore Planning

Offshore planning

I am sometimes amazed where people get their advice from. I was at a seminar this week and was told, over coffee, by one of the businessmen there that he had “gone offshore”. I assume he had bought a holiday home and asked “anywhere nice?”. The chap corrected me and said that he had moved his offshore customers into a company based in one of the free-zone areas in Dubai.

The company was a shell and he merely siphoned sales through it and kept a large profit margin in Dubai. The businessman was based in the UK, as were all his business operations. The huge raft of anti-avoidance legislation in place in the UK to prevent this sort of thing was dismissed as “everyone’s doing it so why shouldn’t I?”.

On digging further it transpired that this chap had set it all up whilst on holiday. He felt he was forced to do this to minimise tax and, it transpired, keep up with a friend and fellow businessman who had done it. No UK advice had been sought. In the trade we call this “tax planning according to a bloke down the pub”. Another name for it is “it will work until they catch you”.

A family member (a distant relative by marriage and step relationship I hasten to add) once sounded me out about his great idea of having a Samoan company held by a Panamanian Trust to avoid UK tax.

Amazingly he had been taking advice from an American lawyer he had met in an internet chat-room. I pointed out that this sounded more like an advance fee fraud to me! I also pointed out to this chap that if he correctly arranged his affairs, then he and his wife could enjoy circa £80,000 of income at less than 20% tax. This must surely be better than no tax, but the serious risk of prosecution!

I suppose it is human nature. We don’t like to see someone doing something cleverer than us and we like to think we are smarter that the average man on the street. As the American billionaire Leona Helmsley once said “only the little people pay taxes”, but then she was convicted of tax evasion and left $12M in her will to a dog, so that proves it – she was just as barking as that bloke down the pub with his tax advice!

Posted by: Graham Wallace

January 28 2010

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By Chris Maquire on February 03 2010

You would think that with all this new tax legislation people would be more cautious about how they managed their accounts. To think that by going off shore they will not get caught or will be taxed less is ridiculous, especially if they are chatting about it in their local pub.

I would much rather pay the 20%, than get fined for paying none at all. Imagine how much such a fine would impact on your credit rating? It would not only destroy your reputation, but your ability to finance your company.

It is also worrying where they are getting this advice from? Surely there is some sort of censore on these websites to prevent such fraudulent advice being given?

I just feel sorry for all the clients whose finances are being treated this way. Their job is to protect your money, not use it to make profits

By Graham Wallace on February 04 2010

Chris,

Thanks for your post. I think that the world divides into two types of people. People either think it’s all very tricky and worry that there may be rules that they don’t yet know or understand, or people happily assume that there must be no rules to worry about (until some spoilsport like me points it out).

Graham

By Tim Rolland on February 26 2010

Its shocking where people are willing to take advice from these days. For example, how could he have been certain that the guy he was chatting to on this chat room was really a lawyer. It is impossible to be certain these days, especially with the technology that is currently available that can enable you to hide your identity.

The savings on your capital taxes too are just not worth the risk of being fined. I’d rather just do my tax return, give it in to the HMRC and get it over with than go through the whole deception of having to hide my money in off-shore accounts.

By Graham Wallace on February 26 2010

Tim,

Thanks for the post. I completely agree that being able to sleep at night, knowing there are no skeletons in the tax cupboard, is a good plan! However, a little bit of foresight can save a lot of money, whilst still allowing a good night’s rest.

For instance, I have two clients who are thinking of selling their business, both for in excess of £2M. Under current rules, a single shareholder selling 100% of their shares will pay 10% tax on the first £1M of gain and 18% on the remainder. One client took our advice to put half the shares in his spouse’s name last March 2009 and the other declined as the sale was not certain enough. With a few key things addressed (such as the spouse being a worker in the business) then from the end of this month an extra £80k of tax will be saved. Both are now in negotiations to sell and this planning is safe.

As a wise man once said to me, plan as if you are going to sell your business, even if you think you may not – this way you get a better quality of life from your business and you can also sell at short notice if you want to.

Regards

Graham

By Edward P on March 09 2010

Fantastic post. So true.

By Samantha Yegge on March 10 2010

Hi Graham,

I liked the post but what irritates me the most is even firms like yours will not take any responsibility if the tax planning advice you give is also technically not right.

For example, I could decide to go down a specific route with you which technically appears correct (I could pay you a lot for this too) but in years to come the HMRC could decide that we have done something incorrectly.

Correct?

By Graham Wallace on March 10 2010

Samantha - thanks for your post. You make a good point and I will meet it head on.

At the boundary of tax advice are grey areas of planning which might not be how HMRC see the rules working – often the rules are unclear. These areas are subject to challenge and it is true that HMRC’s view can sometimes win the day in court. I look after clients for the long term and I would not like clients to take a risk that they do not understand. Therefore I hope that we fully explain the limitations and downsides of any tax planning. Most clients can then assess the risk before going ahead. Fees are not usually contingent on outcome and this is understood by the client from the start. Obviously, completely duff advice makes the advisor liable, but that may be difficult to prove, plus expensive as the advisor’s insurance company will step in. So I do see the point you make. However, let us consider the reasons why tax planning sometimes fails:

1. The client’s ultimate actions move away from the agreed plan
2. The plan had a level of risk of a challenge in any event
3. The plan was a donkey to start with

In all of the above, HMRC get either:
a. An unexpected result in the court which changes the underlying interpretation of the rules, or
b. Back-dated legislation.

As an example, point 1 above is a risk with self-employed staff, where evolution of their role leads them into being effectively staff over a period of time. Point 2 is the adventurous planning mentioned above with grey areas. Point 3 is more common when the plan is sold by a person on commission – we see this often. Point (a) happens when plans are in the grey area, and point (b) is rare, but becoming more common.

I think the only defence I can claim is that we need to be clear to clients what the risk is and they need to understand and not work outside of their comfort zone. What seems a quick buck today can cost a lot down the line.

Thanks again.

By Samantha Yegge on March 21 2010

Hi Graham,

Thank you very much for your reply. I wanted to ask you about point #2, surely this point is your ultimate ‘get out’?

“The plan had a level of risk of a challenge in any event”. From my understanding and experience I have never had an Accounting Firm say that this is a risk free plan - this caveat is always there.

Although I understand why, it is very frustrating to know ‘how risky’ the advice is that your being given. For obvious reasons you want to sell us your product but how do you determine a level 10 risk to a level 1 risk?

I do thank you for your answer. I just find the area of ‘tax planning’ a minefield which ultimately the only person taking the risk is the client and not the accountancy firm.

Samantha

By Graham Wallace on March 21 2010

Well, there indeed is the issue. There is always a risk-free plan - pay the highest amount of tax! HMRC are very unlikely to challenge this!
Some clients do not want to take any risk, so this is a valid option, even though I have stated it in a rather negative way above.
However, as I said there are two types of risk. One is that the plan does not match the eventual facts which were anticipated (point 1 of my answer). Two is that our view of the law is not how HMRC may seek to interpret it, which I suspect is more your point. This comes from the relative complexity of tax legislation in the UK and the history of tax cases, but more often nowadays because new and applicable legislation has been drafted too quickly and often very inadequately.
It is not always possible to deliver a guarantee on some planning and not possible to quantify the risk with new legislation. I do appreciate that this is a bit of a poor answer, but it is undeniable in some circumstances.
The only thing I can recommend (and you may be doing this already) is to have a long-term advisor who understands you and your business. They will be able to give advice about the risk and reflect this into your circumstances. Too often people buy tax advice from intermediaries or one-off tax planning boutiques; that either have little knowledge of the product they are introducing or little knowledge of the business and attitude to risk of the business person. The perfect storm is where a commission driven salesperson (with no knowledge) introduces and overstates a plan from a one-trick tax-planning boutique (who have no alternative solution to offer and may be difficult to pin down when the challenge from HMRC arrives). At which point can the client believe they are getting advice with their long-term interest at the centre of it?
When I have found tax planning offered with an element of the fee being pegged to the success of the plan, this has always been a “super-fee” element, with a basic fee being sufficient to cover the advisor’s needs. I think this might support your augment that the industry as a whole does not really stand alongside the client on risk. However, I can only state for myself that I keenly feel the risk when advising long-term clients as I do not want them to buy something they did not fully understand. It is not my job to sell tax planning beyond the risk profile of my clients. So whilst the fee for any work done is not conditional on the outcome the client has trusted you to explain the risk and believe me that this is not taken lightly.
I hope that you find this honesty appropriate.
Kind regards
Graham

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