Sunstroke: How heading offshore to side-step HMRC can leave you hot under the collar

How heading offshore to sidestep HMRC can leave you hot under the collar

There are many individuals who have found their foreign summer breaks don’t live up to the marketing which persuaded them to book in the first place.

Likewise, some money managers promote schemes which are too good to be true. According to investigators, they’re presented in a similar fashion to package holidays. Not only are they based in exotic locations but they claim to be 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 steering their business fortunes onto HMRC’s quicksand instead.

For example, let’s say that we have a Halifax-based panel-beater 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 work in West Yorkshire while his invoices are issued from the new overseas business.

Its a plug and play tax avoidance wheeze, right?

However, more than merely buying an off-the-shelf firm and appointing a nominee director as his puppet to do his bidding, he learns how 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 what he must do is have directors actually resident in the Seychelles, able to exercise proper management and control.

With all that taken care of, he might be forgiven for thinking that he now has a pukka avoidance mechanism in place.

Even so, it isn’t.

What the magazine adverts didn’t spell out is that despite the cost of buying his Seychelles front company and the air fares to check arrangements on the ground, 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, guilty of evasion.

What if our friendly but perplexed panel beater now takes himself off 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. 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.

Flummoxed, he thinks that’s the end of the matter but, leafing through another of his favourite investment publications, he reads about the Transfer of Assets Abroad provisions. Alarmed, he quickly rings up his new accountants who he’s certain hadn’t mentioned anything about them 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 company issues. Read the engagement letter. However, to put his mind at rest, they provide a short, sharp, shocking summary.

Put simply, it says, if he set ups a non-resident company and he remains a UK resident shareholder – even where its profits would not be taxed in the UK – and there is no commercial reason for doing so, then HMRC can effectively look through the company and tax the shareholder on the profits. Bad news. It all seemed so easy when he was reading about the Paradise Papers.

But what if, thinks our friend,  one does away with all the overseas nuts and bolts and keeps a low profile.  After all, “nobody will know!?” Our panel-beater’s advisers start looking nervous and 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 ‘blog documenting his trip to the Seychelles entitled ‘Sticking it to the taxman!’  Perhaps, he will delete that, although it’s likely to be too late already.

Pleading ignorance is not a defence. In fact, with the 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 who is watching the clock as he has a lunchtime meeting to attend and he knows he will be missing all the best sandwiches.  He sets out that in addition to the normal and significant tax penalties, one could be handed a jail term by the local magistrate, in between desperately trying to deal with a busy caseload of minor driving offences.

His passport stamped, his brain bamboozled, our imaginary West Yorkshire acquaintance tips his collection of holiday isle avoidance brochures into the bin.

It seems that his foray in to offshore tax structuring has most definitely come to an end.

 

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

About the Author:

Founder & Technical Director, Andy is a practical, creative tax adviser with a very broad tax knowledge. He is regularly quoted in the media as an expert on topical tax issues.

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