Many high net worth individuals, families, entrepreneurs and businesses are familiar with using offshore structures for tax planning purposes.
The way in which a particular structure is put in place typically follows the same process. The individual or company appoints a tax adviser to provide advice on the potential tax benefits of the structure and the potential risks involved. An offshore corporate service provider is brought on board to assist with setting up the structure (perhaps an offshore company or maybe a trust) and it will normally be involved with the ongoing administration and day-to-day running of the offshore entity.
So far, this seems like a fairly routine process with all of the appropriate measures taken. So how do things typically go wrong? Tax rules in relation to offshore structures can be highly complex. Involving a qualified tax advisor to provide the advice at the outset is important; however, it is also crucial all parties involved fully understand the advice received. One of the most common reasons for tax planning to fail is that it was not implemented correctly.
It is not sufficient to simply have tax advice held on a file. The client (ie high net worth individual or company behind the structure) and the corporate service provider need to ensure they understand the advice received and adhere to the recommendations when running the structure. If, for example, the corporate service provider fails to fully understand the tax rules in question, it is possible their misunderstanding could result in unforeseen tax charges in the future (and potential interest and penalties payable to HMRC).
Also, it is often important an offshore structure maintains proper accounting records for tax purposes. This is especially true if, for example, the offshore structure in question is a trust and there are beneficiaries of the trust who are tax resident in the UK. If the beneficiary were to receive benefits from the trust, how they are taxed on such benefits in the UK personally will depend on whether there is any income and/or capital gains within the trust structure. The income and gains in this scenario would need to be calculated in accordance with UK tax legislation, ie it is not as simple as looking at the annual accounts (albeit, having up-to-date accounting records is a good starting place). If the corporate service provider does not have in-house tax expertise, it is likely that the tax records necessary to ensure all UK tax is properly declared and paid will not be available. In the event of an enquiry from HMRC, this could lead to an expensive tax bill in the future for either the offshore structure, the UK beneficiary or both.
How can Abacus help?
At Abacus, we have a dedicated tax team who is experienced in dealing with UK and cross-border tax planning. Our tax team works alongside a client’s tax advisor to ensure tax advice is understood by the people administering the structure and the advice is implemented as planned.
Our tax team prepares annual records of income and capital gains where required and ensures these are reported to beneficiaries via an annual beneficiary statement. This should ensure UK resident beneficiaries of offshore trusts, for example, are properly reporting any UK tax liabilities in relation to an offshore structure to HMRC.
Furthermore, utilising the services of a corporate service provider with tax expertise such as Abacus, will mean your client is well placed to deal with changes in tax legislation in the future. Once a tax advisor has provided their advice on establishment of a structure, the advisor may have discharged their duties under the engagement letter. An advisor is not normally required to follow up in the future if the legislation related to their advice changes: tax advice is issued based on the rules as they stand at that date. Our tax team at Abacus is able to review changes in UK legislation in conjunction with the structures under management. Where a structure is potentially impacted by a change in legislation, our team can assist with obtaining up-to-date tax advice.
In short, if individuals and companies want to have added comfort that their offshore structure is being managed in accordance with the original tax advice provided, they should consider using a corporate service provider with in-house tax expertise. Utilising the services of Abacus and their in-house tax team could prevent any unwanted and expensive surprises in the future.
No action should be taken on the basis of this note, nor should it be construed as amounting to tax, legal or VAT advice. Suitable, specific and professional advice should always be obtained in respect on any particular issue.
