The premise that the only real purpose of holding wealth “offshore” is to abuse the domestic tax system. The basis of a castle made of sand.
Statistics continue to reverberate from the Tax Justice Network’s (“TJN’s”) publication late last year – “The State of Tax Justice 2021”. A 72-page document, it seeks to quantify the scale of “Offshore Tax Abuse” together with a separate exercise trying to quantify the scale of “Corporate Tax Abuse”. Using crude data and broad-brush assumptions it attempts to do so for every country in the world – including the UK.
Where the UK is concerned, TJN estimates that the UK loses over £19bn to “Offshore Tax Abuse” – a term which for their purposes seems to both span tax evasion and tax avoidance interchangeably without distinction. Ranked on TJN’s figures against the rest of Europe, the UK is purportedly by far the biggest absolute loser to offshore tax abuse in Europe and the fifth biggest relative to GBP behind Luxembourg, Ireland, Cyprus and Malta. However, closer scrutiny of the number crunching shows the figures are highly questionable. It also doesn’t make sense to those of us with first-hand professional involvement in the operation of the UK’s tax system.
The starting point for the methodology was to estimate each country’s total offshore wealth based on assumed crude aggregated net capital outflows over time. In the UK’s case, its citizens’ overseas wealth was found to be c. £854bn / $1,133bn. Given the UK’s globalised history and the role of the City of London as one of the world’s largest financial centres in facilitating British overseas investment, such a large number may well be credible – albeit even in that regard it appears curious that the other biggest relative losers also happen to be countries with the largest international financial services sectors compared to the size of their economies. Have estimates of net outflows of “native” wealth somehow picked up and been distorted by throughflows of international capital? That seems likely.
The other fundamental assumptions are obviously untenable – the £19.2bn annual estimate of lost tax is based upon:
- the premise that all of the £854bn estimated UK owned wealth moved outside the UK also left the UK tax net;
- a 5% average assumed rate of investment return applied to all of the said £854bn – coming to some £42.7bn of income supposedly kept away from the UK taxman;
- a flat 45% rate of UK Income Tax – the England / Wales / Northern Ireland’s highest possible rate of Income Tax on investment income – applied to all of the £42.7bn.
In reality, less than ever of the UK’s wealth is now wilfully hidden in traditional tax havens. To coin one of HMRC’s own campaign phases, there are now “no safe havens”. Global transparency initiatives such as the Common Reporting Standard as well as a succession of data thefts from offshore service providers have thrown a light like never before on wealthy people’s offshore arrangements. What’s more, carrot and stick initiatives from HMRC over the last decade and a half have cajoled legions of people who once held numbered offshore investment accounts to come forward whilst raising the level of civil punishments for determined ongoing offshore non-compliance to potentially eye-watering levels – as much as 300% of the outstanding tax in some cases.
Meanwhile, an increasingly vast amount is legitimately held by UK residents overseas – not just in the so-called “offshore” financial centres but also in other mainstream onshore jurisdictions. Typical pension and general investment advice to run of the mill Britons involves investing in stock markets throughout the world to spread risk and smooth out returns. In a country as globalised as the UK it is as quick and easy to invest, for instance, in an overseas tracker fund or actively managed fund as a UK one. There is no element of offshore tax abuse in that sort of investment activity, and it is fully transparent to HMRC and overseas tax authorities to tax in accordance with their own rules and the international treaties between each other. It is a fallacy for TJN to assume that overseas investments are not taxed in the UK simply by virtue of being overseas or that a suitable quid pro quo does not exist between the UK and many of the main destinations for UK investment.
Alongside financial investments many UK residents now own overseas holiday homes. These are frequently not let and held for the long-term and are intended not to abuse the tax system but simply to provide their owners with a nice place to go to a few times a year.
None of this is to ignore that there are still many wealthy people in the UK who use offshore tax planning to seek to minimise their UK tax bills. However, to do so they must contend with some of the most highly developed offshore tax avoidance legislation in the world and a more purposive UK tax judiciary that now has little truck with anything that might be held to be contrived, artificial or somehow inequitable. In the present environment, legitimate offshore tax planning surely succeeds because it deserves to.
At its core, the TJN report fails the credibility test because the authors’ overriding premise is that the only real purpose of holding wealth outside one’s country of origin is to abuse one’s domestic tax system. For most such people in the UK now nothing could be further from the truth.
By Andrew Park, Tax Investigations partner at Andersen.