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Panama Papers – 10 reasons people use a tax haven

Panama Papers – 10 reasons people use a tax haven

Panama Papers – 10 reasons people use a tax haven

This week’s big financial and political story is the 11 million documents obtained from a law firm in a tax haven – Panama – known as The Panama Papers.  These documents are ticking time-bombs for many of the people named.  They are wealthy people, heads of state, politicians and people in business.  Many have good reason for not wanting their offshore affairs plastered all over the media.  These range from embarrassment to risk of prosecution and imprisonment.

It is only right to point out that there is nothing illegal for most people to set up accounts, companies or business structures in somewhere they do not live. The legality can vary according to which country you live in or pay your taxes in.

Since there is so much interest in what motivates such actions, I will list 10 of the main reasons below.

1. Tax evasion (the illegal one)

This used to be the main reason people put money abroad – to hide it from their tax-man. These days such people find it hard to spend the money hiding abroad – ie to spend it without leaving a trace.2

2. Hiding the proceeds of crime

This could be bribes, robbery, drug-dealing or other illicit activities.  Tax havens often allow you to put your money into companies there with little checking on how you came by the money.

3. Tax avoidance (within the law)

Individuals and large international businesses have the legal right to arrange their affairs to reduce their tax bills.  As we know from Google and Starbucks, this is often done by routing transactions and the associated costs via low-tax countries.  These activities are within the laws of the countries involved, but have become the subject of public ridicule.

4. Spouse/partner issues

Either before marriage or once a marriage is on the rocks, a spouse may try to get some money off-side.  This is so they don’t have to share it in future divorce proceedings. Putting it into a foreign country, or maybe a foreign company with nominee directors can disguise whose money it is. See this story.

5. Currency restrictions

Many countries limit the amount of money you can transfer out of the country.  Money may be smuggled out and then lodged in a tax-haven to keep it hidden.  Or if your business has income Worldwide, then you might send some of your money straight to the tax haven rather than sending it home.

6. Bribes and commissions

I think we will see from the Panama Papers that a number of the people with money controlled via Panama were receiving money they couldn’t admit to at home.  They may have been serving politicians, sports administrators or business-people.  The money may be bribes for turning a blind eye, or commissions for securing a lucrative deal.

7. Valuable property transactions

People owning large houses, planes and yachts often have them held in other names, and registered in other countries.  Often using companies or trusts based in tax havens.  This used to be popular with expensive London properties to save on stamp duty when selling.

8. Hiding assets from creditors

If someone realises their business is going down the tubes, they may stash some money overseas for a rainy day.  This could leave them funds to spend should they be made bankrupt.  Of course this is illegal as well as immoral – if you are declared bankrupt you must declare all your assets, no matter where you have them.

9. Hiding your name

Offshore tax havens make it easy to hide your connection to money or property.  The use of nominee directors is common – where some locals are paid to be the directors or trustees.  They actually do what you tell them to, but your name doesn’t appear. (Remember ‘The Night Manager’?)  I expect the Panama Papers will include correspondence linking the people with the money to those who are fronting-up the companies or trusts.

10. Secrecy and commercial confidentiality

The secrecy offered by tax havens is attractive to many wealthy people and big businesses.  It may allow them to bid for or invest in projects without the person behind the money being known.  Sometimes there will be sensible and legitimate commercial reasons for this. I suspect however that some of the other 10 factors are also involved when people use these tax havens.

 

The Panama Papers story has been prepared over the past 8 months, and the repercussions will last for years.  As the information comes out and turns to confessions and prosecutions, we can expect this to be the gift that keeps on giving.

VIDEO on this story – see here http://tinyurl.com/HustonTV53

The #PanamaPapers story is being run by The International Consortium of Investigative Journalists – see http://panamapapers.icij.org

 

Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.

Dividend tax changes from 2016/17

Dividend tax changes from 2016/17

Nasty extra dividend tax hits owners of small companies.

April 2016 sees the start of a new dividend tax regime which will affect the owners of most of the UK’s small limited companies. Many will be hundreds or thousands of pounds worse off.

Individual investors who own shares can also be affected, but only if their total dividends in the year exceed £5,000.  So that means a fairly small number of people.

The Chancellor George Osborne has introduced this new dividend tax to balance out the tax bills suffered by people who have the same income, but receive it in different ways.

My video at http://tinyurl.com/HustonTV52 explains the change, and read on for further details.

Take 3 categories of people:

  • Jenny runs her own limited company. It can make £50K per year and she can take a mix of salary and dividends.
  • Roger is a sole trader who makes profits of £50K per year.
  • Andrew is an employee and his salary is £50K.

Prior to April 2016 Jenny could arrange her dividend/salary mix to make a big saving, mainly on National Insurance Contributions (NIC)

If we worked out the 2015/16 total tax and National Insurance bills (including Jenny’s company tax) there would be widely varying bills, as follows:

  • Jenny’s percentage of the £50K taken in taxes could be as low as 18% (or up to 33% if she took all her money as salary, against the advice of her accountant.)
  • Self-employed Roger would lose some 25% of his profits in tax and NIC.
  • Andrew, the employee would lose 27%.

Why the changes for 2016/17 and beyond?

With previous governments having encouraged businesses to form up as limited companies, now the Chancellor has decided to take away one of the main advantages – the ability to juggle your salary and dividend split to save some money.  He wants self-employed and limited companies to have a more similar tax regime.  I do not need to get into the morality of the old or new approaches, I must merely warn those with large dividends about the new regime. Before I go into the detail, let’s see the effect of the changes in April 2017.

How do Jenny, Roger and Andrew fare in 2016/17?

  • Jenny’s best case split of salary and dividend raises her tax bills to about 21%, up from 18%. (If she took all salary there would be no change at 33%, but that would be daft.)
  • Roger, being self-employed, is unaffected at 25%.
  • Meanwhile employee Andrew is also unaffected at 27% to the government.

So we can see that the Chancellor’s measure is closing the gap in the tax regimes between someone being self-employed and choosing to set up their business as a limited company. Jenny faces a few thousand more in tax each year due to the dividend tax.

The 2015/16 dividend tax regime in summary

Up to 5 April 2016 dividends, to the basic rate taxpayer, were simply treated as if they had already been taxed.

Higher rate taxpayers paid extra tax on dividends – 25% of the net they received.

This meant that the owner of a small company could take out a salary of say £10,000 and dividends of say £28,000 and pay no tax and only minimal National Insurance.  The company would pay tax, but taken together the company and owner would be better off that if they had just been self-employed.

Working out if you were close to the limit to start paying higher-rate tax was confusing.  Net dividends you received had to be grossed up.  Every £90 of dividend was treated as £100 gross.  The gross dividends plus your other income dictated whether you had some higher rate tax to pay.

The 2016/17 measures in detail

Dividend income will no longer have any form of tax credit to confuse the sums.  What you get is regarded as the gross dividend.

If your dividends in the year are £5,000 or less there will be no income tax to pay. This £5,000 is called your Dividend Allowance.

More reading and some examples are on the HMRC website at https://www.gov.uk/government/publications/dividend-allowance-factsheet

If your dividends exceed £5K, then those dividends above the allowance will be taxed.

The tax rates will depend on whether your total income exceeds the basic rate threshold. (£43,000 in 2016/17)

  • The starting rate for dividend tax is 7.5% on dividends over £5,000.
  • Any dividends which push you into the higher rate threshold will be taxed at 32.5%.
  • People earning over £150,000 will have a dividend tax rate of 38.1%.

Tax planning points for those in business

If thinking about setting up a limited company, then the decision is much less clear-cut than it used to be. You might decide just to be a sole trader or some form of partnership.

Limited companies will still be attractive if you can make a lot of money but do not need to take it all out of the company each year. They will also still provide some protection from risking your house and savings if something goes wrong or the business is sued.

Advice on the best form to use for your business is now more important than ever.

If you already operate through your own limited company then look carefully at dividend levels, amount you need to take out, and pension contributions.

Tax planning points for people with high dividends but are not in business

This new tax makes it much more attractive to reduce your dividend income to under £5,000, and one way to do this is to move your shareholdings into an ISA.  Dividend income in an ISA is tax-free.

Ba careful of Capital Gains Tax if selling a lot of shares or ones which have risen well since you bought them.  If worried, then paying for a chat with a tax expert might be worthwhile.

In conclusion

Anyone who gets more than £5,000 in dividend income will be affected by this from 6 April 2016.  They need to know what tax they will owe, and how to declare the income to HMRC.  They also need to set some money aside to pay the bill when it arrives.

VIDEO: See also my video on this subject at http://tinyurl.com/HustonTV52

 

Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.
Tax codes explained – are you on the wrong tax code?

Tax codes explained – are you on the wrong tax code?

Is my tax code wrong?

Tax codes dictate how much tax we lose from our wages and pensions. If they are wrong then the tax is wrong. If we don’t spot it then there is no guarantee that HMRC will! This is why understanding tax codes is important.
Unless your tax code begins with a K, or is BR or D0, then there is a simple rule of thumb. Most tax codes show your tax-free allowances, but divided by 10.
For example the standard tax-free Personal Allowance is £10,600. Divide this by 10 to get the tax code. Thus most people are on a code of 1060L.
Picture is an example tax code for 2015/16 for a 40% taxpayer who pays gift aid and personal pension contributions

HMRC tax code
Example tax code for 2015/16

Adjustments to tax codes
Sometimes HMRC will try to make adjustments to your tax code. This is normally a good thing. They are trying to have the correct amount of tax deducted from you over the year. In theory this should leave your tax correct at the year-end of 5 April.
Examples of adjustments made include:
• State pension or benefits expected
• Collect tax owed from an earlier year
• Rental profit estimated
• Company car – the taxable benefit
• Relief for professional subscriptions you pay
• Relief for gift aid payments (if you pay higher-rate tax)
• Higher-rate relief for pension contributions
So your tax code may have extra allowances added – to give you extra tax relief. Or it may have things deducted – HMRC’s way of taxing some income.
By far the most common adjustment is to reflect the state pension HMRC thinks you will get this year. State pension is taxable, though if that was all you earned it would be below the tax-free Personal Allowance. However if you have another source of income, and it is taxed at source, then HMRC will try to collect the tax due on both the pension and that other source, all from the same place. This can make it look like you are losing a lot of tax from your job or works pension. In fact you are losing the tax from two sources of income, but only having it taken off one!
What if I think my tax code needs changed?
You need to contact HMRC in one of two ways:
• Phone them on 0300 200 3300 (open 8-8 weekdays, 8-4 on Saturday)
• Write to them at HMRC, BX9 1AS. (Yes the address is that short.)
If you are nervous about phoning them then write to them. The answer may take longer, but at least the answer will be in writing. You will have time to study it. If phoning then write down the date of the call and who you speak to.
If you don’t understand part of what makes up your tax code – then ask for it to be explained. It is the tax official’s job to help you understand.
What happens if code is wrong and I do nothing?
Then your employer or pension provider will deduct the wrong amount of tax. Depending on the error, this may never be discovered by HMRC, and you could lose out.
Deferred state pension
HMRC is normally told how much state pension you will get. They use this to adjust your code. The adjustments are NORMALLY correct.
However I have seen some cases recently were people put off receiving their state pension for a few years. I found that HMRC was adjusting their tax code each year. In other words HMRC assumed they were getting the pension, and were taxing them too highly. One client was owed a tax refund of thousands.
Unusual codes
Here are the most common codes which are NOT simply 10% of your tax-free allowances after adjustments:
• BR – means deduct Basic Rate tax of 20%. Used for second jobs, extra pensions etc.
• D0 – means deduct 40% tax. Used for second jobs where the person pays higher-rate tax.
• K codes – mean the items deducted from the code are greater than the allowances, and you have a negative amount of tax-free allowances. The K code is roughly 10% of the negative allowances. These codes are most common with company cars or large state pensions.

In conclusion

• Tax codes dictate the amount of tax your employer deducts.
• They may be wrong, and the mistake can go undiscovered.
• If in doubt ask HMRC to check your tax code.

The author Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.

Tax avoidance – for dummies (i.e. explained for non-experts!)

Tax avoidance – for dummies (i.e. explained for non-experts!)

Tax avoidance schemes – not only the rich and famous get burnt!

Why so many words?

This is not an article typical of my articles about tax, as it is very detailed and about twice as long. My more normal articles can be accessed on my website at www.huston.co.uk/blog.html

The article was written, on request, as a detailed background to, and opinion on, the tax avoidance cases we read about in the national news, and should be a valuable resource for journalists and anyone with an interest in the tax avoidance subject.

Who is the author Adrian Huston?

Adrian was a senior HM Inspector of Taxes before leaving the Revenue to set up UK tax firm Huston & Co Tax Consultants & Accountants www.Huston.co.uk . He was joined by his Tax Inspector wife Felicity Huston and they have built a successful practice with a national and international profile.

Adrian has hundreds of overseas clients and the firm has the full range of accountancy clients ranging from landlords through business-people and companies to High Net Worth Individuals.

Adrian & Felicity help people who find they are being investigated by HMRC, whether for a failed tax-avoidance scheme or for suspected tax fiddling. Many are brought to them by accountants, and then, once all sorted, handed back to the accountant who continues with their routine affairs.They use their tax/negotiation skills, and HMRC inside knowledge, to steer the client though this stressful time with the minimum of cost and in the quickest possible time.

Adrian is regularly consulted by the national media and frequently quoted by them as a tax expert. He commented on Tony Blair’s business network in Bloomberg Magazine http://www.bloomberg.com/news/2013-04-04/blair-scorned-at-home-builds-business-empire-abroad.html

Adrian frequently appears on the BBC (TV & radio) and independent news channels and is quoted in The Times, the Mail on Sunday, Sunday Times, Belfast Telegraph etc.

 

Background and timeline of a tax avoidance scheme

After many years where complex tax schemes were talked about in hushed tones and no-one knew who was in them, a new era has dawned. One where word reaches the national press perhaps monthly of failed tax avoidance schemes and the well-known people caught up in them. Gary Barlow is the latest to hit the headlines, in May 2014.

In just one week in February 2014 we heard how:

 

 

Those involved in tax avoidance schemes includes very experienced and respected professionals as well as highly paid media personalities and business-people. These people probably have some idea of how things can go wrong.

For the rest of you I will paint a picture of what happens and how it can all unravel – very, very slowly. I will use a fictional character called Danny Danegeld.

  1. Danny pays 40% tax or more and decides he would like to pay less. People like Danny typically pay a lot of tax every year, but sometimes his friends want a tax saving on an isolated Capital Gain or house deal. There they may want to reduce the CGT or Stamp Duty.
  2. Danny finds an advisor who knows the ‘perfect’ scheme to cut his tax bill. Maybe for a fee they can even make the tax bill disappear altogether (however the fee might be 10-15% of the income covered, which is as good as a tax.)
  3. This scheme has usually been devised by clever financiers, accountants and lawyers who believe they have spotted a weakness in UK tax law, and plan to exploit it until the weakness is corrected by new legislation.
  4. The schemes have often been reviewed by QCs (Queen’s Counsel) who give their opinion that if implemented properly the tax avoidance scheme will legitimately reduce one’s tax bill. And if challenged by HMRC it should stand up to scrutiny. This QC opinion is a massive selling point used by the promoters selling the idea.
  5. Danny decides to go for it and hands over a hefty fee to the promoter. The paperwork starts being generated.
  6. Tax avoidance schemes generally have some odd features – like loans which will never be repaid, businesses you really aren’t running, but for tax purposes look like you are – that sort of thing.
  7. In due course Danny files his personal or company tax returns with HMRC. The tax bill is greatly reduced.
  8. HMRC expects those using registered tax avoidance schemes to declare them on their Tax Return. For example in the 2012/13 Return this is entered in the Additional Information, page 4 – see http://www.hmrc.gov.uk/forms/sa101.pdf
  9. The idea of having a tax avoidance scheme registered with HMRC, and having to put down its number on your Tax Return always amuses me. If a tax expert tells HMRC they have devised a clever scheme and plan to sell the idea to others, what’s going to happen? Of course HMRC is going to try to close whatever loophole they plan to exploit. And then HMRC will investigate everyone they find using the scheme.
  10. In Danny’s case he either admits on his tax return that he is using scheme number 123456, or his advisors tell his he is not obliged to admit it. (Perhaps because they say the scheme does not need to be registered.)
  11. Then HMRC discovers some or all of the people using the scheme, including our Danny. This is easy if he and others put the scheme reference on his tax return.
  12. In other cases HMRC might stumble across the scheme when investigating someone’s affairs. Or investigating a scheme promoter. Then they might require the promoter to tell them everyone who is in the scheme.
  13. There then follows a deliberately long and protracted game. HMRC launches formal tax ‘enquiries’ into the hundreds of people in the scheme, including Danny. They have to do this to keep open their chance to ask for extra tax.
  14. HMRC then selects a small sample, say 5, of the taxpayers. In their case they will be required to supply all the supporting documentation about their tax scheme. HMRC’s aim is to probe the papers and see if they can find faults, or perhaps to see if the scheme is legit.
  15. HMRC has no interest in doing this quickly. Remember while only 5 people have their affairs gone over with a fine-toothed comb, Danny and the other 500 are told their enquiry (investigation) remains open until the samples are examined. This could be years. (Chris Moyles’ tax return was for 2008 and only now in 2014 does he know he has to pay the full tax after all!)
  16. If properly advised Danny and the 500 will consider paying, on account, to HMRC the original tax they would have owed – to reduce the amount of interest HMRC can charge them. If Danny wins the case he will get the tax back. If he loses then he only owes HMRC penalties and interest to the date the tax was paid. Interest over 6 years could add nearly 20% to what he owes HMRC.
  17. If HMRC, after taking its own sweet time, decides the scheme is legal and achieves the tax advantage it set out to do, then they will apply this decision to Danny and all 500 investors. They are in the clear. (HMRC may change the law to stop new people doing the same.)
  18. Of course on the other hand if they decide the case fails then they will expect all Danny and the 500 investors to accept the ruling and cough up their tax, interest, and probably penalties.
  19. Only the brave would continue to fight their corner since they would be spending thousands of pounds with a limited chance of success.

So what were Alex Ferguson and Chris Moyles up to?

  • Alex Ferguson, in common with Sven-Goran Eriksson and about 287 others, joined a partnership to buy the rights to Disney films Enchanted and Underdog. The scheme was called Eclipse 35 and was first used in 2006. Yet only now in 2014 is it becoming clear that HMRC has successfully defeated the scheme. (See what I mean about the long delays.) The partnership borrowed money to buy the rights to the films. These were bought by Eclipse 35, who then promptly leased them back to Disney over 20 years. HMRC has to date successfully challenged the legitimacy of the scheme. Fergie could face a £1 million bill in the end and lots of fees to advisors.

 

  • When Moyles’s tax avoidance scheme came to a Tax Tribunal he asked for anonymity as the bad press could damage his career. He lost that point as well as the overall tax case. In his case his tax returns claimed he was a car dealer making massive losses and thus claiming tax relief. His scheme was called Working Wheels. In an incredible tax return Moyles declared used car sales of just £3,731. (Was that one car or maybe two?)  Yet finance costs left him with losses of £1 million! Amazing that HMRC noticed this looked a little odd. It was clear to the tax Tribunal that Moyles was not really a car dealer and the whole aim of the exercise was to generate losses and thus tax advantages. Of all the fund managers, celebrities and high earners who tried this ‘Working Wheels’ Moyles was one of 3 taken for detailed testing. All the other 450 people who paid to get into scheme will now be expected to settle up with the tax-man – including paying penalties.

Why does HMRC take so long on these cases?

They will say the matters are complex and accountants take time to supply information.

However it is clear to those in the tax avoidance field (and those of us who help clear up the mess) that HMRC is quite happy that the cases drag on. If people considering a tax avoidance scheme know their affairs will be under scrutiny for 5 or 6 years – and they won’t know their true tax liability until it’s over, then this will discourage people from the schemes.

The March 2014 Budget saw the Chancellor announce that he wants people embarking on a tax avoidance scheme to pay their full tax, then argue with HMRC and hope to get the tax back later.  This will make tax avoidance schemes much less sexy.

What to watch out for in tax avoidance schemes?

Have in your mind the old saying “If it looks too good to be true…then it probably is.” Paying 11% fees to a tax avoidance scheme and no income tax might seem attractive. 5 years on and HMRC descends. Then you have years of uncertainty, and end up paying all the original 40% plus of tax, added to that interest and penalties. Not to mention tens of thousands in accountancy and legal costs. And then you may not be able to get back any of the 11% fees to paid the scheme. So you end up massively worse off than if you paid the full tax in the first place …and could have slept easy in your bed.

Also watch for schemes where – if the full workings were sent to your own tax office – the Revenue might not agree with the tax treatment. Ask the person promoting the scheme if you should do this, and watch their reaction. I find this approach flushes out the truth from many people who say they have the perfect scheme. Most schemes involve some form of smoke-screen. Many also involve offshore jurisdictions, though that aspect on its own may be legal. HMRC often looks for the commercial purpose of a series of transactions. If none is visible, then they may win their tax case.

Conclusion

I do not recommend these tax avoidance schemes to my clients. Even the ones which sound good can leave people with years of uncertainty. And just because it has worked for a few years does not mean you are in the clear. HMRC can look back 20 years! At worst a failed scheme can cost people a small fortune.

There are legal ways of managing your tax bills – especially now Corporation Tax rates are going to be at most 21%, and 20% for many. It’s not long ago that big companies paid 30%, 21% is pretty good. Pension contributions can be very helpful, though not of much help for those earning millions.

If you use a company then the amount of personal income tax you pay will be a factor of the amount of money you insist on taking out of your company to fund your lifestyle. Take more salary and dividends, pay more tax. Live quieter, pay less. You decide.