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June 23, 2006

Jersey VAT abuse

Filed under: Jersey, Tax avoidance, Uncategorized — Richard Murphy @ 10:36 am

The Forum of Private Business in the UK, inspired by a remarkable record shop owner turned campaigner Richard Allen, has been campaigning against the VAT abuse where CDs and DVDs are shipped from the UK in bulk to Jersey in the Channel Islands to be returned in separate packets the next day to UK customers, VAT free, in response to sales generated on UK websites.

They’ve now got a mass campaign of smaller record retailers together to stop this tax abuse by the larger chain stores, as this link shows.

Good luck to them I say.

It’s time the UK government stopped this. Their estimate is that this is costing the UK £200 million a year.

And it’s time the Jersey government stopped the business in its tracks, which it has said it will do, but from which it does in the meantime profit enormously since the trade generates about £6 million of profit annually for Jersey Post, which is State owned, according to internal documents I happen to have seen.


June 19, 2006

‘Sir’ Philip Green – the rewards of tax avoidance

Filed under: Jersey, Tax avoidance, Uncategorized — Richard Murphy @ 2:25 pm

Nick Cohen wrote eloquently in the Observer yesterday about the knighthood given to Philip Green. He noted that:

“in the spring, the BBC’s Money Programme calculated that Green and his family had ‘saved themselves’ £300m from their £1.2bn salary by living for a part of the year in Monaco, whose residents don’t pay income tax.

Standing up for such paupers used to be the point of a Labour government. Even if it could not force the likes of Green to pay their fair share, it retained the power to shun them and make it clear that those who don’t contribute towards their country can’t expect their country to be grateful.

Even that modest defiance of the plutocrats is beyond Labour now. Yesterday, the Queen announced her birthday honours and high on her list was Green, who received a knighthood for ‘services to the retail industry’.

If I were in the Inland Revenue, I would fret about the moment when the little people who stupidly still pay taxes realise that the state is treating them like fools. It insists that they must hand over their earnings on pain of punishment by the courts, while inviting Philip Green to Buckingham Palace to be honoured by the Queen.

I couldn’t have put it better. I would have corrected the figure for tax saved. It was £285 million, and I know because I was the person who calculated it and presented the number on air for the Money Programme.

But there is more to it than that. First of all, let’s put Green’s side of this. He said “no tax was avoided because none was due”. An interesting argument from a retailer but which means I hope in future he does not mention the word ‘save’ when promoting his regular sales because there will be no saving over the original price during such events since that original price is not due during the sale and, therefore the comparison cannot be made. Which just shows how disengenuous is his argument about tax saving because it is obviously contrary to current usage of English.

Second though, let’s be cautious about saying Green (or, perhaps his wife) enjoyed the biggest pay day ever in UK corporate history because there was more to this deal than met the eye. It’s true Green associates (and we can put it no better than that) received a dividend of about £1.14 billion. But a closer look at their accounts might suggest that this was not a pay day, more a financial architecture day. The reason is simple. A dividend is paid out of accumulated profits. But at the end of August 2004 (its year end date) the Arcadia Group had £291 million on its P & L account. In the year to August 2005, when the dividend was paid it earned after tax profit of £185 million (all data from Arcadia Group results announcement, by the way). That gives a maximum apparent positive balance of £476 million, out of which a dividend totalling £1,299 million in all was paid.

The result was obvious. At 27 August 2005 the profit and loss account had a deficit of £820 million on it and the overall accounts showed a deficit of £807 million. Borrowings grew by over £900 million in a year, which seems to have been used almost entirely to finance the dividend. The Arcadia Group parent company, Taveta Investments Limited showed a broadly similar consolidated position.

Now, I’m not for one minute suggesting wrong doing here. But my reading of the Companies Acts says dividends can only be paid out of accumulated realised profits, and my practical interpretation of this has always been that if a dividend leaves the profit and loss account overdrawn you do, at least in theory, have a problem to deal with.

No doubt PWC (who did not mention the issue in their audit of Taveta) found good reason why this was not an issue, and I’m sure advice was taken from learned friends, so all is fine. But given that the Greens did not pay tax on this deal it looks rather more like a bit of sophisticated financial engineering to me than the UK’s biggest corporate pay day.

Oh, and as usual there is a Jersey dimension to this story. Taveta Investments Limited in the UK is owned by a company of the same name in Jersey (just to confuse things) and it is owned by two nominee companies that appear to own each other. Which makes things as clear as mud when it comes to working out what’s going on.

June 15, 2006

Jersey passes law allowing ‘sham’ trusts for use by tax evaders

Filed under: Jersey, Trusts — Richard Murphy @ 2:13 pm

I have always had a considerable problem with the concept of trusts, even as a practicing tax accountant. But I have much more of a problem with Jersey’s new trust laws passed in May 2006 which allow the creation of ‘sham’ trusts where there is in fact no such thing, but just the bogus impression of one. I have even more difficulty with this because I have no doubt that Jersey knew the new laws would facilitate tax evasion. Indeed, it is hard to see what other purpose they could have.

Let me deal with the concept first though. Trusts are an instrument normally only available in Anglo Saxon common law. Wikipedia describes a trust as:

“a relationship in which a person or entity (the trustee) holds legal title to certain property (the trust property) but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more individuals or organizations (the beneficiary), who hold “beneficial” or “equitable” title”

I have simplified this slightly for clarity, but that is a fair description. To put it another way, one person says to a second “please look after this asset for me, but when doing so make sure (for example) that the income goes to this third person during their life and when they die the remaining property goes to another, fourth person”. All trusts are meant to incorporate this split of roles, responsibilities and entitlements. If they did not then there would be no need for a trust. The property would be owned absolutely by one person for their own benefit.

Why is this important? There are two reasons. First of all trusts are not registered. Unlike companies or partnerships which are either legal entities, or which if trade have to disclose their identity, if not their accounts, there is no requirement anywhere that I know of for a trust to be registered even though it is an artificial arrangement that exists only under the rule of statute law, even if the concept started in common law. So trusts are used to assist secrecy on and offshore, and especially in the latter case where nominee trustees act as trustees to hold nominee shares in companies managed by nominee directors etc., etc. As the Swiss rightly point out this means that the UK and its offshore dependencies do not need banking secrecy to achieve the benefit for clients they had to introduce banking secrecy for, Anglo Saxon common law countries achieve it through trusts. This secrecy is almost without exception harmful.

Second, and as importantly, the role of trusts in tax planning is dubious at best. Unfortunately the UK has encouraged this. For example when the EU Savings Tax Directive was introduced the entities for whom disclosure of information would have to be made did, in the opinion of the EC, include trusts. But the UK objected, saying trusts were not entities and so helped massively reduce the effectiveness of the Directive. It was not one of the UK’s prouder moments.

Now I come to my main point. Because the use of a trust can prevent disclosure of offshore interest earned under the terms of the EU Savings Tax Directive to a person’s home country of residence those seeking to avoid such disclosure have poured their cash into them. My recent research on funds held in Jersey proves this point. And, as a matter of fact the trust market in Jersey has boomed, up by 30%, for example, in 2004 according to Phil Austin, CEO of Jersey Finance. The reason is simple. There are a great many people who have money on which tax has been evaded in Jersey and elsewhere and who do not want the interest declared to their home state as that would lead to questioning on where the money on which the interest was paid came from as well as to questions about the interest itself. Using a trust prevents such questions arising and perpetuates the tax evasion.

But note what a trust is. It is something where the settlor gives the property away. This imposes a cost on the settlor. But now look at what Jersey’s doing with its new trust law. These are explained by the Jersey firm of Volaw Trust & Corporate Services Limited. Jersey will now allow the creation of what can only be called ‘sham trusts’, although they’re calling them trusts with ‘reserved powers for the settlor’. What are those reserved powers? Well, the settlor can tell the trustee what to do, which means the trustee only has a nominee role. And the settlor can claim the property back, which means that no gift of assets into trust has taken place since they clearly remain in the ownership of the settlor in that case. And, because they can be claimed back the settlor is always likely to be the beneficiary of such a trust. In other words, the settlor continues to have complete beneficial ownership of the asset and there is in fact no trust in existence at all, just a sham that suggests that there is.

In that case what is Jersey actually doing by passing this law? It is creating a situation where a person can claim they have put an asset into trust but the reality is they have done no such thing. This is a completely bogus transaction. And why would Jersey want to do this now? I have no doubt that a primary reason is to assist people who wish to avoid declaring their income under the EU Savings Tax Directive or suffer tax withholding at source, which is the alternative. Indeed, at a meeting I attended recently some very senior people in the financial services industry complained about the effort they have had to put into the process of creating such arrangements to assist those clients who had evaded funds offshore and who do not wish them to be disclosed now even though (as I suggested to them) they are assisting money laundering by doing so. These new trusts assist that objective and shoot a massive hole through Jersey’s claim to only want legitimate business in the Island.

There is only one purpose for this new law. It is to promote secrecy, and the prime use for that is to assist tax evasion.

This legislation proves that the mentality of promoting aggressive tax avoidance and even of providing shelter for outright tax evasion persists in Jersey, and is, regrettably, assisted by its government, which passes legislation of this type that facilitates such arrangements.

June 9, 2006

What is happening in the Isle of Man?

Filed under: Guernsey, Isle of Man, Jersey, PWC — Richard Murphy @ 2:52 pm

A curious tale is unfolding in the Isle of Man.

It passed its new tax legislation that, among other things introduces a 0% corporation tax rate, in March. Then they sent it to the UK for approval as is required as the Queen is the Lord of Mann.

In April they expected approval by the end of the month.

In May when I asked them they were confident they’d get approval by the end of May.

Now it’s June and they’re only hoping that they’ll get approval by the end of this month.

They claim this is normal, but as yet have not provided evidence to support that claim. Nor is any explanation available for the failure of their previous confidence.

Or could it be that the UK government is in fact very worried that the Isle of Man’s proposals for “look through” taxation on shareholders so that they pay the tax on the profits of the companies they own do not in fact comply with the EU Code of Conduct on Business Taxation, as I suggested last year, and with which opinion PWC concurred in January this year in a change of heart on their part when telling Guernsey not to go down this route, having previosuly told Jersey it was OK to do so?

If the new laws don’t comply with the Code it will be the UK’s job to report that fact to the EU Code of Conduct Group, whose chair happens to be Dawn Primarolo, the long serving UK Paymatser General. And that would not be fun.

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