The good, the bad and the ugly

It would appear that in this world of instant media and rolling news, we are never more than six feet from the next moral crusade. Somewhat surprisingly the newly appointed custodians of the moral barometer seem to be the journalists, both tabloid and broadsheet, and their recent cause célèbre is tax planning and avoidance.

It is a topic they have approached with gusto, whipping up a media frenzy as confusing as it is misinformed. All over Middle England nooses have been thrown over the lower branches of oak trees, prone but waiting for anyone suspected of engaging in overly aggressive tax planning.

The tabloids do not seem to worry about whether or not anybody has actually done anything illegal and don't differentiate between tax planning, tax avoidance and tax evasion.

Tax planning is the process of implementing actions to reduce tax liabilities. At the more basic level, these actions could include gifts to charity, investing in assets that qualify for tax relief, opening a tax-free ISA or paying into a pension scheme.

Tax avoidance is simply an extension of this tax planning to legally use the taxation legislation created by parliament to organise taxation affairs to the best advantage.

Tax evasion, however, is purposefully employing actions designed to help escape paying taxes illegally, most likely by misrepresenting or concealing the true state of affairs to the tax authorities.

If we go back to the definition of tax avoidance, it is essential to remember this is a legal activity, despite the best efforts of the newspaper journalists to suggest otherwise.

Yes, comedian Jimmy Carr had his K2 scheme and Starbucks really did organise its structure to minimise its corporation tax bill. However, neither party was alleged to have actually broken the law. The schemes and structures they took advantage of were deemed to be legal.

Press bias

Interestingly, if one delves through most press clippings in the past months, you are unlikely to find much (if any) mention of the millions in National Insurance, business rates and PAYE that Starbucks deliver to the Exchequer, or to the thousands of jobs they provide.

It is probably not unreasonable to suggest that much of the moral indignation may have been instigated and encouraged by the politicians or the taxman, and that the figures quoted as being lost to the Exchequer each year as a result of all the tax avoidance are somewhat exaggerated.

And it would perhaps be equally reasonable to suggest that concentrating the government's efforts on simplifying the taxation legislation would provide a more lasting solution. After all, the longer and more complicated the law governing a specific area is, the more likely it is that loopholes can be found and exploited.

It certainly seems that if you look at things rationally, it is a question of perceived morality rather than legality. The media is dictating what we should consider 'good' and what we ought to consider 'bad'.

By extension those involved in the management of client assets offshore seem to have been dragged into the 'bad' camp, painted as some sort of shadowy puppet master. Clearly the old adage remains true that every pantomime needs a villain, but it's difficult to see from the viewpoint of a fiduciary trust company based in Guernsey what would be gained from assisting others to purposefully break the law by tax evading.

The client may be happy initially, but this position would soon change if they were prosecuted. The resulting headlines would play a significant part in damaging the fiduciary's reputation beyond repair. Long-established clients would be 'persuaded' to reassess their position and take their business elsewhere and prospective clients would certainly be difficult to come by.

Wholly liable

In addition, not only would the fiduciary's business be damaged, but because of the strict regulatory environment that governs all of the financial service companies operating in Guernsey, the directors of those companies are wholly liable for any unlawful activity. Highly unattractive for the fiduciary director is that it translates into a range of measures the authorities can take, from the guarantee of heavy fines and the revocation of fiduciary trading licences, to the possibility of a custodial sentence.

Regarding tax avoidance and planning, those involved in the industry, whether they agreed with it or not, have had to acknowledge the global pressure that is dictating the current moral direction of the offshore industry. This is undoubtedly affecting the level of new business, which is motivated by tax planning.

However, many offshore structures are set up for reasons other than this. And there remains a confidence that those offering a high quality of professional services and expertise will continue to be able to assist high net worth families and international multinational companies with their global wealth management and financial planning considerations well into the rest of the 21st century.

Andy Parr is a director at Hansard Trust

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