Ask the taxing questions
26 March 1996
30 September 2014
24 February 2014
30 September 2014
21 July 2014
2 December 2013
Two recent tax cases that have aroused the interest of those in the offshore trust sector involved the Inland Revenue taking action to prove that certain offshore transactions generated profits which are subject to UK tax.
One case, where the Inland Revenue was successful, involved a UK lawyer acting for an Isle of Man company. The High Court decided the lawyer had acted as an agent of the offshore company in the purchase of UK property.
In the other case the Inland Revenue has not yet been able to prove to the tax commissioners that the 'mind and management' of various offshore subsidiaries of a household name company were truly offshore. However, it is likely to appeal against that decision.
The fact that these cases have been brought is indicative of the Inland Revenue's intention to ensure that transactions with some UK involvement are correctly assessed for tax. And it would be a brave man who would ignore these warnings. Or a foolish one.
Properly managed offshore structures have always been effective for tax planning. However, it is essential that such structures and the personnel who control them have real authority and are truly offshore. Remember, there is no such thing as a 'nominee' director or trustee.
If follows, therefore, that a great deal of care has to be taken in choosing offshore trustees or company administrators and officers.
There are five questions, and my corresponding answers, that any lawyer assessing potential trustees or company administrators should consider.
If you are appointed will you be willing to 'rubber stamp' decisions which have been made in the UK?
If the organisation does not explain that full management and control must remain with it at all times then I recommend you ignore the following four questions and immediately find another organisation to quiz.
How long has your company been involved in administering offshore trusts and companies?
Remember that the modern offshore industry is over 30 years old and the longer an organisation has been involved in offshore trusts the more likely it is that it knows what it is doing, although the next question should also be taken into consideration when applying the 'longevity' test.
Tell me something about your staff. What experience do they have; are they professionally qualified; do you suffer a high staff turnover; do you encourage vocational training?
In many ways the strength of an organisation lies in its people. Even if you make a decision to appoint an organisation entirely on the strengths of its current staff there is no way to guarantee they will not all disappear tomorrow and be replaced by a possibly inferior second team. Although past performance is no guarantee for the future, if a firm has a good history in holding on to its staff and demonstrates a genuine interest in developing them to their mutual benefit then it seems likely the trust administrator you are happy with today will still be there tomorrow and for a long time thereafter.
Do you offer legal or tax advice?
If you have reached the stage of looking for an organisation to control your clients' offshore structures then in all probability the detailed structure will have been finalised. Although it can be useful for the offshore service provider to offer legal or tax advice, in most cases the ability to work closely with the clients' advisers is paramount. In all cases this has to be a partnership of equals. Your firm will have designed the structure and you will require the offshore partner to administer it competently.
Tell me something about your organisation and especially what makes you unique in relation to your peers?
There is a huge difference in offshore service providers ranging from the one-man band to subsidiaries of Triple-A rated international banks. Each has a role to play and your final choice will be a matter of personal preference. However, it is possible a larger firm will be able to offer a wider range of ancillary services combined in a lower fee package.
The offshore trust industry has seen major changes in recent years. Although new trusts are still being set up a shift towards quality for existing structures is emerging. To a large extent this is a predictable result of the explosion of trust formations in the 1980s and early 1990s when many firms jumped on the bandwagon, some with disastrous consequences for beneficiaries.
Therefore, it is essential to be absolutely satisfied that the organisation you recommend to your clients can do its job properly, particularly following the Inland Revenue's interest in "management and control".
Positive answers to the first, second and third questions should help allay any fears you may have about a lack of substance in the offshore service provider. If you have faith in the company and its personnel, and are convinced that they have the experience and expertise to control the offshore vehicle then it is likely that the Inland Revenue will feel the same way.