Brexit & EconomyHMRCParadise Papers: The role of the accountant

Paradise Papers: The role of the accountant

The leaks have reignited a public debate about the structures that permit tax avoidance and the professionals complicit in creating them

Paradise Papers: The role of the accountant

Containing a colossal 1.4 TB of data, the Paradise Papers is one of the biggest data leaks in history, second only to the Panama Papers.

Like its predecessor, the Paradise Papers shine a light on the tax affairs of the world’s most rich and powerful, exposing their use of labyrinthine artificial structures to shelter their wealth in offshore tax havens. Among those named and shamed are the Queen, Justin Trudeau, Bono, and multinationals including Apple and Facebook.

Law firm Appleby is at the heart of the leak and firmly denies any wrongdoing or illegal behaviour, stressing they advise clients on “legitimate and lawful ways to conduct their business”.

Nonetheless, the leaks have reignited a public debate about the structures that permit tax avoidance and the professionals complicit in creating them, and has increased pressure on HMRC to clampdown on improper tax behaviour.

View from industry

Brian Palmer, tax policy expert at the AAT, commented: “In its purest form there is nothing wrong with tax planning when it is merely arranging one’s affairs in the most tax efficient manner under UK legislation.”

Palmer added that over the last decade or so “there has been a conflation of the words avoidance and evasion, resulting in some perfectly legitimate tax planning being perceived to be inappropriate by the public and the media.”

Although no apparent illegal activity has occurred, the release of this data still sparks questions about the laws and structures that permit tax avoidance. Furthermore, concerns have been raised over the role of professionals – namely lawyers and accountants – in recommending and facilitating such structures.

Amongst the masses of data is a 60-page report on tax structuring produced for Blackstone by PwC on how to trim its tax bill and avoid paying stamp duty tax, according to the Guardian. At a later date Deloitte provided similar advice to the private equity group.

The Guardian also revealed that Lewis Hamilton’s participation in a scheme to avoid paying taxes on his private jet was upon the advice of EY, which involved setting up artificial leasing and renting his own jet from himself. Although also not technically illegal, this is more contentious than other revelations as the artificial nature of the scheme opens it up to scrutiny from HMRC.

Despite these activities being within the scope of the law, perceptions of the ultra-wealthy and multinationals not paying their fair share continues to be a source of public outrage, and is causing pressure to mount on tax professionals and the government to put an end to tax avoidance.

Palmer added: “Calls will again be growing for Chancellor Philip Hammond to clamp down on the complex offshore tax structures of some wealthy Britons in his forthcoming Budget.”

View from HMRC

With support from the Prime Minister, HMRC has called on the BBC and the Guardian to hand over evidence from the Paradise Papers to help them investigate the allegations. The outlets have declined on the basis that the information is held by the International Consortium of Investigative Journalists.

Nonetheless, in a meeting of the Public Accounts Committee earlier this week Jon Thompson, Chief Executive and Permanent Secretary of HMRC, confirmed that the Revenue will be investigating each allegation, but will not be employing the aid of the Big Four due to too many conflicts of interest existing with the tax profession.

Revelations made in the Paradise Papers will likely galvanise the taxman in its ongoing battle against tax evasion.

In recent years HMRC has introduced a bevy of legislation and “increasingly punitive measures” to combat tax evasion, including the new Requirement to Correct (RTC) legislation and penalties for Failing to Correct (FTC) introduced in the Finance Bill 2017, as well as the new crime of failure to prevent tax evasion in the Criminal Finances Act 2017.

Blick Rothenberg explains that RTC gives individuals with offshore arrangements a window of opportunity to make voluntary disclosures through the Worldwide Disclosure Facility (WDF) by 30th September 2018, after which any offshore discoveries will penalised more heavily.

This date coincides with the first full automatic exchange of information under the Common Reporting Standards (CRS), which will grant HMRC unprecedented access to information about individuals with offshore interests.

Fiona Fernie, partner and tax investigations specialist at Blick Rothenberg explained that although the Paradise Papers are undoubtedly impactful, “great amounts of information are already coming to HMRC as a result of the UK Foreign Account Tax Compliance Act (UK FATCA)”, involving UK crown dependencies and overseas territories, including Jersey, Guernsey, the Cayman Islands and Gibraltar.

Fernie warned: “The combination of leaks and tools in HMRC’s arsenal is making it increasingly difficult for individuals to keep offshore matters secret, and those with offshore assets should urgently consider whether these require a review.”

She added: “The risks of not identifying any errors or omissions and failing to correct them have increased dramatically with enormous potential penalties that could be in excess of 200% of any additional tax due.”

“Additionally, claims of carelessness or innocent error will no longer be considered a valid defence.”

It is unclear what actions, if any, HMRC will take in retaliation to the release of these 13.4m documents, but at the very least individuals and corporations will now have their tax affairs and offshore empires brought under a microscope.

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