The tradition of the wealthy keeping their cash at arm’s length from tax authorities by finding a secretive offshore home could be set to end if new proposals for openness are agreed by world governments. The move could mean each person in Britain being more than £700 better off each year.
If the UK prevented residents from lodging money in tax havens, it would save each man, woman and child £300 a year, according to figures produced by chartered accountant tax specialist Richard Murphy along with the TUC. If the UK also stopped tax-avoidance and planning schemes, that would save another £415 per head annually. That means, instead of facing tax hikes over the next few years, some people could be taken out of taxation completely.
Although tax havens will not be abolished – and nor will tax avoidance and planning – they will begin to operate within a much more restricted structure in future. And this |summer, leading tax experts will be working behind the scenes to suggest new operating frameworks, which will be discussed by the world’s leaders at a series of high-profile meetings in September.
The tax system might seem too dry a subject for ordinary people to care much about, but issues such as MPs’ expenses and tax havens are increasingly coming to the forefront of the public’s awareness.
The charity Christian Aid, for instance, has become one of the |main players in the debate on tax havens. “The lack of transparency in tax havens does not just make it easy to dodge your tax responsibilities,” says Alex Cobham, the charity’s policy manager.
“It facilitates people in government in shifting assets out of the country. It corrodes the social contract between government and citizen. The thing that is holding back the poorest countries most is a lack of transparency.”
Christian Aid also calculates that multinational companies save more on tax on transfer pricing and other cross-border pricing issues than the world’s 40 or so main developing countries receive in international aid.
During July and August, a small group of people, including Christian Aid policy advisers, will try to convince the US, UK and other governments that we must go further than current plans.
At the moment, the UK government stands accused of making gestures. For instance, in June it signed a double taxation treaty with the Cayman Islands through which the Caymans will disclose information to the British tax authorities upon submission of an appropriate request.
But former Warburgs director Lord Oakeshott, now a Liberal Democrat Treasury spokesman, said at the time: “There is nothing in this feeble treaty that means any person or company is going to pay more tax.
“For [Prime Minister] Gordon Brown to trumpet his clampdown… and then sign bits of worthless paper is a disgrace.” A similar treaty has existed for seven years between the Cayman Islands and the US and, according to statistics obtained by Lord Oakeshott, only six disclosures to the US authorities were made in that period.
The problem is that many double-tax or similar agreements require exact details of a person’s name and other details before the tax haven will release information.
It is for this reason that Richard Murphy, a chartered accountant tax specialist at the independent Tax Justice Network, Christian Aid, the TUC and a handful of others are |asking for “automatic information exchange” (AIE).
Under AIE, the Caymans and the world’s 40 other tax havens would all disclose to HM Revenue and Customs (HMRC) the names of British residents with bank accounts, trusts or companies set up in their territories. It would then be a fairly easy job for HMRC to get them to pay all the tax they owed.
Murphy believes that the number of tax havens could dwindle from 40 to about 10 over the next decade if AIE were to be implemented.
“This should be pretty popular,” he says. “We are talking about 1 per cent of the population who are involved in tax havens. But the tax loss as a result is extraordinary.”
On the other side of the fence, the big accountancy firms, which often advise big business, and the mainstream accountancy profession, are not in favour of AIE.
While both the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales (ICAEW) say they back moves to greater openness and transparency, neither wants AIE. “There is a serious issue about privacy and confidentiality,” says Ian Young, technical manager of the ICAEW.
Until now, the UK Government has not seemed much interested in AIE either, but Murphy thinks that could change in time for the G20 meeting that will be held in Pittsburgh in the United States this September. “I am hopeful,” he says. “The Government is looking at more flexible and innovative ways of making these arrangements work.”
Murphy also believes that the current approach to tax havens, led by the OECD (Organisation for Economic Co-operation and Development), produces a lot of apparent controls and international treaties, but does not actually expose much tax fraud. He fears that if we stick with this approach we will get the same results that our complicated money-laundering rules produce.
“Banks have all the arrangements in place but they don’t properly assess the risks,” Murphy says on money laundering. “If a kleptocrat from an African state moves money into these banks they will simply accept his assurance that it is ‘from my own property dealings’ rather than asking for documentation.”
Christian Aid came into the debate when it saw how often corrupt politicians and civil servants had plundered their own poor states by moving money into London and Jersey.
We could get indications as to who is winning the AIE debate when the G20 meeting of leading nations starts on September 24.
However, if the AIE lobby does not make progress soon, it could find it difficult to continue much longer. It is, essentially, a group of six or seven tax experts backed by a handful of organisations with little money |to spare. It is up against the big-business lobby which has almost unlimited funds. “A very small number of people have created most of the debate,” says Murphy.
“Very little money is coming from the Government to fund this thinking. I am genuinely worried that the momentum for change will slow down for that reason.”
Overseas saving: The benefits of using offshore accounts
An HM Revenue & Customs (HMRC) crackdown on offshore accounts has been targeting the super-wealthy who use tax havens to avoid paying tax on their savings. Should their investigations worry the estimated 500,000 honest people who are thought to have an offshore account?
If you have been disclosing and paying any tax you should\[Stuart Henderson\] pay to HMRC then you\[Stuart Henderson\] should have nothing to worry about. There are respectable reasons for having money offshore. If you have not disclosed, or are not sure if you have complied, you should check your position with a tax adviser or with your tax office.
HMRC can\[Stuart Henderson\] charge fine people 100 per cent of the tax due\[Stuart Henderson\] to people who if they knowingly understate their tax liabilities – and it is getting tougher in its approach. This autumn it will launch\[Stuart Henderson\]es an “offshore disclosure opportunity” through which\[Stuart Henderson\] people those who disclose unpaid tax will have to pay a 10 or 20 per cent penalty.\[Stuart Henderson\] But However, these penalties are low compared with what it could charge\[Stuart Henderson\]. P and people who do not own up now could expect a rougher ride if they are found out later,\[Stuart Henderson\] and with HMRC plan\[Stuart Henderson\]s somening possible criminal prosecutions.
From 2011 the Channel Islands tax havens\[Stuart Henderson\] are due to will\[Stuart Henderson\] begin disclosing disclose interest paid to account-holders to HMRC. Jersey and the Isle of Man have already agreed to this, and Guernsey is expected to follow. If the Channel Islands get their marketing right, they could find that more UK residents open accounts there in future. The rates paid are often better than in the UK and they operate more specialist currency accounts such as euro and dollar savings deposits.
Although variable rates in the Channel Islands are not much better than those on the mainland at the moment, Michelle Slade, a personal finance analyst at MoneyFacts, says: “Historically, you would normally get slightly higher rates offshore.” The market is skewed right now, she believes, because mainland banks are so keen to attract money. But on fixed rates, the attractiveness of the Channel Islands is plain to see. The top offshore rate for a three-month bond is 4.25 per cent (Anglo Irish Bank Corporation) while the top onshore rate is 2.28 per cent (Halifax).
Many savings accounts are also set up so that interest is added in the form of capital, thereby avoiding income tax. Many savers can save tax completely by using their annual Capital Gains Tax allowance (currently £10,100).
In some ways, it is a surprise that so few people have offshore accounts.
As more and more pensioners retire abroad, it would be prudent for them to build up savings in their local currency. Nationwide Building Society offers its currency accounts through its Isle of Man-based arm, Nationwide International. Its managing director, Phil Dunne, says: “It’s a lot simpler for us to put a product together offshore. We’ve had a significant inflow of customers in the last year. If you are moving money from country to country, we are specifically geared up to deal with that.”
John Whiting of the Chartered Institute of Taxation says those who work or have property abroad, might want such an account “for a bit of diversification, or because there are slightly better rates of interest”.
One factor to be careful about is depositor protection. The Isle of Man and Guernsey now both offer £50,000 of cover per person, per banking group. Jersey is expected to launch a similar scheme on Tuesday week.
Solicitor Stuart Skeffington of Stevens & Bolton thinks that the tax attractions of tax havens could change a lot over the next decade. He says: “It will be very interesting to see whether offshore centres come under pressure to raise tax levels, and whether the world as a whole starts to move towards a system of everywhere charging tax (with credits being in place to prevent double tax) rather than some jurisdictions levying taxes and some not.”
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies