As the Panama Papers leak shines a light on offshore funds available in the UK, we examine the tax issues and what protections are offered.
The Panama Papers have given a glimpse into the secretive world of offshore funds used by wealthy individuals – including the prime minister’s father – to stash cash in tax havens but are they inherently dodgy or a legitimate way to invest?
An unprecedented leak of 11.5 million documents from law firm Mossack Fonseca, which is based in Panama, one of the world’s largest tax havens, has shed light on some of the labyrinthine structures the wealthy put in place to hide their money and avoid tax.
Within the documents, it was revealed 12 national leaders – among a total of 143 politicians and their families – have been funnelling cash into offshore tax havens, including a $2 billion trail that leads back to Russian president Vladimir Putin.
The UK’s own prime minister David Cameron has also been implicated as his father, Ian Cameron, was a client of the law firm and in the early 1980s set up a multi-million pound investment fund in the Bahamas called Blairmore Holdings, named after the family’s ancestral home in Scotland.
The fund managed millions on behalf of families including restaurant owner J Sheekey and private bank Leopold Joseph. However, in 30 years it has never paid any tax in the UK.
The prime minister has tried to distance himself from the furore over his father’s, and by implication his, tax affairs. A spokesman for 10 Downing Street said: ‘There are no offshore funds/ trusts which the prime minster, Mrs Cameron or their children will benefit from in the future.’
However, Cameron later admitted he previously held shares in Blairmore, selling them for £31,500 shortly before he became prime minister.
Although there is nothing illegal about the methods used by those named in the Panama Papers, aggressive tax avoidance has been heavily criticised by the Conservative government and it has made efforts to be seen as the party clamping down on wealthy tax evaders.
This included the introduction of a register of beneficial ownership, which is trying to crack the problem of offshore shell companies being used to avoid tax. By understanding who is the recipient of benefits from shell companies, governments can then tax the gains appropriately.
An Organisation for the Economic Co-operation and Development (OECD) agreement to share information will also help identify tax dodgers who have squirrelled their money offshore.
The Panama revelations show that information sharing is needed more than ever and again asks the question of whether pushing money offshore can ever be a truly legitimate way for UK residents to invest and tax plan.
Offshore offers
UK investors have access to over 4,000 offshore funds that have a combined value of £1.9 trillion, with the majority of the funds domiciled (or set up in) Luxembourg or Dublin, proving that it is a lucrative stream of business for asset management companies.
Jorge Morley-Smith, director of business support at the Investment Association, said there were ‘any number of reasons a fund would domicile offshore’ that did not include tax avoidance.
'Mostly it is to do with who the fund is being marketed to and how the fund is going to be run,’ he said.
Morley-Smith said regulatory rules also determined where investment managers liked to domicile funds, often moving offshore to get round investment regulation they believed would be a constraint.
‘Over the last 20 years people set up hedge funds and do not want to be constrained. The reason why they use the Cayman Islands is because they do not have the same restrictions on investment…there is more flexibility,’ he said.
It is not just regulation that fuels the creation of offshore funds, according to John Christensen, executive director of the Tax Justice Network.
He said offshore funds were set up due to a ‘combination’ of regulation, tax and secrecy.
‘Fund managers themselves are earning a small fortune so they like to be in a tax-free environment,’ he said. ‘The regulatory environment [in some offshore jurisdictions] is permissive by any standards and the supervisory environment is weak to non-existent – the law in the statue books may look fantastic but without supervision the [laws] are just bits of paper.’
He said people channelling money into offshore funds were ‘those holding cash offshore and who do not want it to be onshore and often they are operating offshore companies’, adding that offshore funds were ‘where money meets money on the street and does business’.
Christensen said there was no offshore jurisdiction that was more credible than another, as was evidenced by 2014's 'Lux Leaks' scandal, which implicated Luxembourg as the centre of tax avoidance deals orchestrated by the big four accounting firms.
Christensen said British jurisdictions such as the Isle of Man, Jersey and Guernsey, could not be seen as more legitimate than other tax havens as the rules were ‘just window dressing’.
‘It all depends on the politicians – if you have politicians who are not captive to the financial services industry and law firms then you have strong regulation and a strong regulator but if you have a captive state – which Panama and places like British Virgin Islands are – then you have a combination of weak politicians and a weak regulator and weak supervision.’
Should you go offshore?
The lax regulation and supervisory environments offered by offshore jurisdictions may be attractive to fund management companies who can use them to their advantage but there are question marks over the benefits they provide for individuals.
Morley-Smith said ‘it entirely depends on the investor’ if they feel comfortable investing offshore or not but said UK-based investors would face the same tax consequences whichever jurisdiction they picked.
‘There are the same [personal] tax consequences of investing in offshore funds [in whatever jurisdiction],’ he said.
‘The tax rules are designed so the choice of jurisdiction or vehicle does not matter. If you invest in an offshore fund you will have a requirement to fill in a certain box on a tax return [in the UK], it does not matter if the fund is in the Cayman Islands or Luxembourg.’
And investors shouldn’t try and skirt the law by failing to fill in offshore income and gains on their UK tax return as the OECD information-sharing agreement ensures they will be found out.
‘There is the agreement that the government has entered into to share information. The rules state that if you have investments in an offshore fund or have an offshore bank account the information will passed between the governments so a Cayman Islands fund will report to HM Revenue & Customs…It will be effective from this year and will make it harder to hide money [offshore]. Panama had not signed up but all countries where people typically have funds have signed up,’ he said.
Investors pulled offshore may not be doing so to avoid tax, merely because they are a fan of the investment on offer, however they should realise that investing offshore may leave them out of pocket thanks to the lack of compensation schemes operating in offshore jurisdictions.
If an investor puts money into an offshore fund, which subsequently collapses due to mis-management (there is no compensation for funds that perform badly) there will be little to no protection on offer. If a UK-based company or adviser encouraged an investor into a fund, then it may be possible to receive compensation from the UK Financial Services Compensation Scheme (FSCS), which pays out on losses up to a maximum of £50,000.
Offshore Centers Around the World
1. Isle of Man
- Number of open-ended funds domiciled in the area: 13
- Collective value of the funds: £537 million
- Information sharing with UK in place: Yes
- Compensation offered: 100% of the first £30,000, 90% up to the next £20,000 to a total of £48,000
2. Luxembourg
- Number of open-ended funds domiciled in the area: 2,775
- Collective value of the funds: £1.2 trillion
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme that covers Ucits open-ended funds
3. Ireland
- Number of open-ended funds domiciled in the area: 1,378
- Collective value of the funds: £637 billion
- Information sharing with UK in place: Yes
- Compensation offered: If a Ucits open-ended fund domiciled in Ireland (typically Dublin) collapses there is no recourse from the compensation scheme. However an investor can claim if the fund has been mis-sold by an Irish adviser. The scheme pays out up to 90% of the total claim up to a limit of €20,000.
4. Guernsey
- Number of open-ended funds domiciled in the area: 21
- Collective value of the funds: £1.2 billion
- Information sharing with UK in place: Yes
- Compensation offered: The Collective Investment Scheme Rules 1988 provide compensation up to 90% of the first £50,000 and 30% of the balance up to £100,000 – a maximum total of £60,000. The compensation scheme pays out an absolute total of £5 million a year.
5. Jersey
- Number of open-ended funds domiciled in the area: 20
- Collective value of the funds: £7 billion
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme that covers Ucits open-ended funds
6. Bermuda
- Number of open-ended funds domiciled in the area: 1
- Collective value of the funds: unknown
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme
7. The Bahamas
- Number of open-ended funds domiciled in the area: 1
- Collective value of the funds: unknown
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme
8. British Virgin Islands
- Number of open-ended funds domiciled in the area: 2
- Collective value of the funds: £42 million
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme
9. Cayman Islands
- Number of open-ended funds domiciled in the area: 5
- Collective value of the funds: £841.6 million
- Information sharing with UK in place: Yes
- Compensation offered: No compensation scheme
- citywire
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