Philip Knop discusses Memorandum of Understanding (MoU) between the Isle of Man and UK for the automatic exchange of tax information in 2016, and the impact this may have on the jurisdiction.
Tax transparency, automatic exchange of tax information, FATCA, new global tax standards… this really is a new world from that previously experienced in the Isle of Man, Jersey, Guernsey, Cayman, BVI, Switzerland and many other overseas financial centres. Who would have anticipated a few years ago Switzerland entering into a tax co-operation agreement with the UK? We are undergoing a huge sea change; not just in the rhetoric surrounding avoidance and evasion of tax, but we are seeing many countries increasingly signing up to a raft of agreements designed to uncover and deter individuals from using overseas territories to invest funds without any subsequent need to declare and pay corresponding tax due on income, gains and other profits. What does this mean though for the Isle of Man, its trust and fiduciary sector and the impact this will have on its continuing contribution to what has previously been over 25 years of continuous economic growth on the Island? Should we be embracing these changes or running scared?
In early 2013 the respective Governments of the Isle of Man and UK entered into a Memorandum of Understanding (MoU) whereby it was agreed that prior to the introduction of automatic exchange of tax information in 2016, clients with undeclared UK tax arising from accounts or other interests held in the Isle of Man would be able to avail of yet one more HMRC led tax disclosure facility. Fast on the heels of this MoU, our friends in the Channel Islands followed suit by entering into similar arrangements with the UK tax authorities. As a licensed trust and corporate service provider Boston Limited, like other financial intermediaries, has had to notify its clients to make them aware of the disclosure facility before 31 December 2013. Under the terms of the MoU, we are obliged to contact our clients again and remind them of the availability of the facility during the six month period ending on 30 September 2016. The favourable terms for taxpayers to come forward now and make a disclosure reduce the tax penalties for previously undisclosed liabilities to between 20 per cent and 40 per cent of the amount of tax due, compared to a potential 200 per cent penalty if HMRC come knocking on doors uninvited. The merits, or otherwise, of the current facility are not up for discussion here but as all financial intermediaries have been bound by the terms of the MoU to write to their clients before the end of 2013 it will be interesting to see in the next few weeks and months the number and nature of enquiries being received from clients and whether there are many who feel they are affected by the impending changes to exchange of tax information.
The actual tax information sharing agreement between the UK and the Isle of Man was signed in October 2013 and was hailed by both parties as a first of its kind not to involve the US. Immediately following the announcement, the media were quick to pounce on this as being further evidence that the Isle of Man was ‘doomed’, no doubt encouraged by the UK Government’s insistence that the Isle of Man along with other Crown Dependencies are harbouring billions of pounds of evaded and avoided UK tax, figures subsequently considered by many experts to be completely speculative and without foundation. Interestingly, the agreements are clear that the exercise is about tax evasion (still illegal) and not avoidance (still legal though increasingly seen as ‘immoral’), though I can understand commentators’ confusion as the two words have become somewhat interchangeable of late with ‘avoiders’ becoming as maligned as those deliberately hiding money and other assets to evade tax. A discussion for another day! I don’t believe for one minute that licensed trust companies and other financial intermediaries in the Isle of Man are harbouring a multitude of tax evaders from the UK or elsewhere. However, I am also not so naïve to believe that there aren’t a small number of individuals with interests in the Isle of Man who have and may continue to either deliberately or unknowingly not pay tax that is due in the UK. There may also be firms based here who continue to turn a blind eye to such activities. I have no evidence to support such a conclusion but tax evasion is not going to be a contagion that has spread to every corner of the planet except for the Isle of Man! However, as the UK, EU and the US increase the heat on these minority cases the scope for such individuals and businesses to continue to flourish is greatly diminished leading to an industry with better controls and of a higher quality.
This leads me on to where the industry will be in 2016. We are already seeing greater consolidation between trust companies and this is only going to increase in my opinion. Not only will firms with clients ‘caught’ by the Agreement be squeezed out of the market but smaller firms, even those with credible client bases but limited resources, may well have to look to larger and better equipped operators for support to deal with the increased costs and complexities of on-going compliance, including UK, US and a Europe wide FATCA. Addressing such matters successfully requires input from specialists and resource comes at a price if trust companies are to get this right first time. As head of Boston’s tax, risk and compliance function and having engaged with one of the larger accountancy firms in the very early days of US FATCA, I am acutely aware of both the necessity of the work as well as the associated costs. Many smaller companies will simply be unable to continue alone on this journey, which is why the landscape will look considerably different in 2016 to the current state of play whereby there are still close to 200 licensed trust and corporate service providers operating in the Isle of Man. I expect this number to reduce considerably in the next two to three years, ultimately leaving much larger players in the game.
With size and scale comes opportunity and the ability for companies to diversify and invest in new and growing markets. Whereas previously the sector has primarily been driven by tax efficiencies, we recognised some time ago that this situation was not sustainable and therefore, as an example, we have expanded our single family office proposition into the provision of multi-family office services, with Boston able to provide a wider range of in-house capabilities supported by a close network of professionals from other sectors resulting in a holistic approach to wealth planning and asset protection, where tax forms just one component amongst a wide array of other considerations. There has been a shift away from a UK centric client base and so geographically our focus is now much more diverse culminating in a completely different approach to how we serve and satisfy each of our clients’ varying needs. We have also expanded our fiduciary service offering by opening an office in Malta in 2012. Having said all of the above, we recognise that the UK still has a huge part to play in our success story and, as one of the great financial centres of the World, Boston has committed to opening an office in London in early 2014. This will enable us to grow our multi-family office proposition by giving us better access to clients and the professionals that serve them, whilst also leaving us well placed to leverage our alternative service offerings such as in the venture capital markets via Boston Ventures Limited, one of our group companies.
Moving back to the Isle of Man, we have built a first class reputation as a leading financial centre that is well regulated and recognised as such across the globe. Not only that but we are innovative and dynamic and have previously faced numerous challenges to the industry and economy, but each time we have stood strong, weathered the storm and actually come out the other side even stronger than before. Time will tell whether our traditional trust sector will be able to weather this particular storm quite so well and I anticipate that for some this may result in longer and maybe more lasting damage. However, the industry moves apace as evidenced by the Island’s eGaming sector now contributing upwards of 8 per cent of the country’s GDP. This success can be traced back to vision, leadership and entrepreneurialism. We have invested heavily to develop the best technology to service clients and their customers. We have attracted and host the World’s leading online poker company in the Isle of Man. We have access to a high quality pool of people and resources working in the industry which sets us apart from our competitors. These are just some examples of where we have been able to diversify our economy and as substance becomes an increasingly important argument for businesses these qualities are going to come to the fore with entrepreneurs looking to take more office space, recruit more staff and further utilise the technological infrastructure we already have here.
In conclusion, nobody ever said this was going to be an easy ride but we are up for the challenge in the Isle of Man and, with most other jurisdictions in the World now on an equal footing insofar as automatic exchange of tax information is concerned, we believe we have the qualities to address these challenges much better than others. Traditional trust and corporate services will still be around in 2016 and beyond though the sector itself may look and feel very different. Sensible tax planning will continue to play its part but the industry has to recognise that this should not and cannot be the sole or overriding proposition on offer. We recognise and acknowledge this at Boston and have re-modelled our strategy accordingly. We have and will continue to diversify operations whilst ensuring clients remain both tax efficient and compliant in the new World.
Director. Independent Chartered Tax Adviser, Certified Accountant and Member of the Institute of Directors