PM’s tax plan easier said than achieved
Friday 17th April 2009, 2:29PM BST.
GORDON Brown’s plans to crack down on tax avoidance will be difficult to achieve, according to Chief Minister Lyndon Trott.
‘It seems to me that the Prime Minister and HM Treasury are attempting to impose a new set of standards in relation to tax avoidance,’ said Deputy Trott (pictured).
‘However, while this has been the goal of many governments or tax administrations, it is difficult to achieve in practice for a variety of reasons.
‘It is not helped by the fact that governments, including the UK’s, have a tendency to complicate their tax systems by introducing reliefs which when used by taxpayers are sometimes perceived as avoidance.’
Historically, Guernsey and Jersey have built their private client business on the ‘remittance’ basis of taxation operated by the UK, said Deputy Trott.
‘The availability of this basis of taxation is now restricted largely to non-domiciled individuals resident in the UK. Tax planning in this area is likely to continue to be regarded as “acceptable” by HM Revenue and Customs,’ he added.
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What is Trott on about?
Does he know what he is talking about at all?
Lyndon – this is what happens.
Person A – lives in the UK, has a couple of million sterling, one of their investments come up for renewal, and they place it in a bank in Guernsey. It attracts lower rates of tax because the earnings on the interest are at a lower rate than the UK – in many instances the reason they place it in Guernsey is because they think that they can get away with avoiding declaring the money to their domicile place of taxation; hence tax avoidance.
Believe me – this is a major problem for Guernsey and Lyndon is dreaming if he thinks the UK will turn a blind eye on the hundreds of millions being hidden here.
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If “they” do not declare the income to their place of domicile isn’t it tax evasion not avoidance?
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Darren:
Doesn’t he do that all the time? dreaming I talk of.
How he ever became CM, must remain one of the many wonders of the world:
Ah well Guernsey people are patient folk, we’ll see next time round.
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Not necessarily Stephen. Its residency rather than domicile which generally dictates where a person is liable to pay tax on income or capital gains. But I think you are correct to point out than in Darren’s posting any attempt to hide any income or capital gains which are taxable constitutes criminal tax evasion, not lawful tax avoidance.
But let’s face it, Darren is not alone in his confusion between evasion and avoidance. After all, Gordim Brown himself seems confused and/or is deliberately trying to blur the distinction.
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David
Agreed re residency and remarks about Pa Broon (G Brown).
I feel that Pa Broon is merely playing the word game when it comes down to tax havens. from a Guernsey viewpoint that is good news. How long he will get away with his pretence is another matter.
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If http://www.telegraph.co.uk/finance/financetopics/budget/5187777/Budget-2009-Rich-will-hide-wealth-to-avoid-tax-hike.html is anything to go by the Insitute of Fiscal studies clearly see business the same on the tax avoidance front.
It will be interesting to see Richard Murphy’s comments on the IFS paper.
Bit of a problem for the tax avoiders is balancing the desire to avoid taxes and at the same time keeping the money in a relatively safe place.
I wonder if David feels that Guernsey can benefit from the IFS conclusions?
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Stephen
Its inevitable that higher tax rates will lead to the consequences as per the Telegraph article. That’s always been the case in the past and its not hard to see that tax rates are only going in one direction for the next 5 years or so. Wealthy individuals are able to choose where they live and work, and its inevitable that they will do so.
I’m not sure about your comment that tax avoiders may have a problem keeping the money in a relatively safe place. Legitimate tax avoiders won’t have any problem on that front because if their structures are legal then they will have nothing to fear from increased transparency. There are many safe banks around. They won’t struggle.
I suspect that Guernsey could indeed benefit enormously from the IFS conclusions. Our open market could see a big surge of wealthy immigrants who want to come and live here and run their businesses from here, which will also create employment. The survivors of the hedge fund sector are likely to be dominant in this. Why stay in London and pay 45% (or even 50%) tax on earned income, plus increased NIC. There is also some speculation that CGT rates will be re-aligned with income tax rates (one to watch out for in Darling’s Budget tomorrow). Over the past couple of years Switzerland has appealed to such individuals but the recent decision of the Canton of Zurich to end the forfait tax regime is quite likely to spread throughout Switzerland, making it unattractive for wealthy immigrants. Not everyone will fancy Monaco or Dubai, and I see Guernsey and Jersey being very well-placed to capitalise.
Leading global tax experts are increasingly saying that wealthy individuals are having to accept that they either accept the new rules in their country of residence or they have to get out and reside somewhere else. They are less likely to be able to continue with the status quo. Levels of emigration are bound to increase and many low-tax jurisdictions are going to be targeting such individuals with attractive tax deals such as our tax cap. What we don’t want or need is another “race to the bottom” otherwise we will end up with people coming here and not actually paying sufficient tax to make it beneficial to Guernsey, but on the other hand we will welcome the extra employment opportunities that they are likely to create.
Guernsey’s quality of life will appeal to such individuals, as will the proximity to London and the option of sending their children either to our excellent local schools or to easily-accessible boarding schools in the South of England. Not easy to do that from Monaco or Dubai.
No easy answers, but Guernsey has to make sure that it retains its current ideal position for wealthy emigrants from the City of London. Its unquestionably a big opportunity.
I’m not sure that Richard Murphy or anyone else can have much to say against people physically relocating themselves and their businesses from the UK. If they are not resident in the UK and not operating in the UK then there is no UK tax liability being avoided. Their businesses and their personal income will only be taxable here, not in the UK. However, one vital caveat is that their Guernsey businesses must be genuinely resident (managed and controlled) here, and the implementation of their business and wealth structures must be carried out 100% correctly. But that’s what Guernsey’s fiduciary businesses are very good at, and its a niche that we must exploit. If corners are cut, then HMRC are very likely to be able to attack such structures and there can be little doubt that they would seek to do so. And rightly so. That’s the new era of highly-scrutinised tax planning that we are now in.
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David
A very comprehensive answer.
My concern about balancing the desire to avoid taxes and at the same time keeping the money in a relatively safeplace, would depend on how near to not acceptable the tax avoidance vehicle would be.
The more acce[table the tax avoidance scheme the more places like Guernsey will benefit.
You concern about a “race to the bottom” concerning personal taxes is well made.
Time will tell whether Richard Murphy’s pal Pa Broon will really btacl=kle the tax havens. I suspect that moment is still some way off.
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Stephen
Sorry, I now understand the point you were making and I agree. Tax avoidance going forward is going to be all about the “degree of acceptability”.
The hedge fund analogy to which I referred is a case in point. Many London-based hedge fund managers have management agreements and carried interest arrangements with BVI or Cayman entities, which enable them to reduce their exposure to UK tax (Gordon Brown made sure that HMRC previously adopted a light-handed approach was taken to such structures, but that’s likely to change). What’s the problem with them ? Very simply, many of them don’t stand up to close scrutiny in terms of evidencing the real location of “management and control”. Guernsey-based or Jersey-based structures are far more commercially practical and so are far more likely to stand up to close scrutiny, particularly if the hedge fund manager and his family reside in the islands and have physical offices here.
Of course what we don’t yet know is whether a centralised regulatory regime for hedge funds will be introduced, and if so, where will it be based ? That might affect this opportunity, but on the other hand the hedge fund could still be regulated elsewhere and the administration based elsewhere, and with the hedge fund manager himself still being resident here, so there is plenty of scope.
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David
“Plenty of scope” is the critical phase.
Those of us who are cynical of the G20 statements see plenty of scope for avoidance of the regulations intended to combat tax avoidance.
Problem for Pa Broon of 10 Downing Street is more and more are waking up to this fact.
The expected increased tax burden on the ordinary man and woman in the street to subsidise those able to, but unwilling to pay a fair amount of tax; might well mean a summer of discontent for Pa Broon and his discredited bunch of incompetents.
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Stephen
One simple fact – no government anywhere (apart from a few exceptional cases) can stop people from leaving the country and becoming resident in another country. People are mobile, wealth is mobile and with modern communications many jobs are mobile. Mr Brown has a huge challenge stopping wealthy individuals voting with their feet, as they inevitably will if Darling hikes taxes tomorrow and clamps down even more on the wealthy and on non-doms. So does he try to keep such people in the UK by retaining some of the existing tax breaks, generating quite a lot of tax, or does he drive them abroad in the attempt to raise even more tax from them and miss out on the lot, leave the rest of the population to pay even more ? Rightly or wrongly, that’s the dilemna.
Until we have global tax harmonisation it is simply impossible for the modern world to put up inpenetrable tax fences. Global tax harmonisation will simply never happen. Yes it can be made harder to mitigate one’s tax liability if the taxpayer wishes to stay residing in the country and enjoy its benefits, but you can’t stop him leaving if he is prepared to make the move and sacrifice those benefits.
Its well known that the days of 98% taxes under Labour in the 1970s drove large numbers of UK taxpayers abroad. I am in no doubt that the top 10% to 15% of current UK taxpayers will all be thinking about going if tax rates keep rising (as they have to in order to balance the books).
Unfair ? Yes for those who don’t have the option, but life isn’t fair and never has been.
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Well David Pa Broon’s wee darling boy has gone further than we thought with the 50% top rate.
I wonder whether the tax rate uplift is more political than real. After all, Pa Broon has an election to face in about a year. Is it a plea to old labour not to desert the darlings?
Hopefully the budget is another nail in the coffin of Pa Broon.
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Stephen
I’m sure that it is indeed more polical than real. I cannot see it collecting much extra cash and I know several London-based tax advisors who even since yesterday have received enquiries from clients now looking to leave the country.
Not sure about it being another nail in Brown’s coffin….I think the cremation has already happened !
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David & co
its because new Labour effectively allowed the UK to become a cross between a hedge fund and an offshore finance centre from 97 that it is in the state it is now, virtually bankrupt. They thought a booming innovative financial services sector with light touch regulation would generate funds for all their social projects. That’s why Brown introduced the obscenity of 10% tax on what was de facto income on capital gains for private equity execs and the like and why they were happy to keep the non dom regime until the Conservatives forced their hand. Do we really want these “financial geniuses” to relocate over here. If they had any morality, they’d stay in the UK and pay those higher taxes as penance for the damage they’ve caused to that economy.
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Paul Revere.
Interesting comments.
Anyone seeing Robert pestons book “Who Runs Brittian” in any bookshop should look at pages 64 to 67 for an excellent example to support Mr Revere’s case.
I just wonder how much the migration of the rich to Guernsey will contribute to the island and not just allow the rich to get richer, without any meaningful effect on the local economy.
Wht do you think David?
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Stephen and Paul
Some very interesting views.
There can be no doubt that the UK financial system was allowed to become too “light touch”. But to what extent should we blame the hedge fund managers themselves ? Obviously we must to an extent, but the hedge funds couldn’t leverage asset 30 times if the banks weren’t willing to supply the leverage, and the whole system from top to bottom was a major contributor.
But its also relevant to point out that many of the more speculative hedge fund managers failed to survive the past 12 months. They are now out of the game. Its those who are still left who will thrive in the post-crash era. Their systems will have been severely stress-tested. They will have made considerable wealth and/or retained their existing wealth over the past 12 months and they will be most hit by the new higher tax rates. They are the ones who will want to leave the country and are the ones that we should be targeting.
Stephen – I am currently reading Peston’s book but haven’t reach that part yet !
In terms of how more rich coming here will benefit the island, we obviously have to ensure that we capture a significant amount of income tax from them, at least up to the tax cap. But its logical that we only benefit if (a) they pay more tax than the average existing open market resident, and/or (b) they create additional jobs to replace some of the jobs lost. Ideally, some of those jobs will be in new non-finance industries, although I suspect that more will be in hedge fund and private equity fund administration. The resulting extra tax revenues would help to fill the reduction of tax revenues which would otherwise result, so the actual measurement of net benefit to the island may be less obvious.
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