A man. A plan. An offshore scheme. Panama.

Let me begin with a confession. I have for twenty five years been a Guardian reader. It started when someone passed a copy around at a party, and after reading Nancy Banks Smith I was hooked. They knew what they were doing though. She doesn’t write as much any more, but once you’ve formed the habit you’ll accept less strong fare but more of it. As time went on I’d read the comment pages, occasionally nod in agreement (never at Simon Jenkins though. I’m not an animal). Sometimes I think that if they ditched the Saturday Review section and Marina Hyde left I’d be away. But for what it’s worth I remain a Guardian reader. And subject to the stereotypical views attributed to all of that class. I am though less certain in my views, finding life complicated. Messy.

Which brings me to Panama .

My gut reaction is similar to that of most people. I feel queasy about it, uncomfortable with the mechanisms used. But…

You see, there’s always a but. Mechanisms to minimise or even avoid tax are common. You are even encouraged to use them.  For example, various mechanisms are put in place to encourage avoidance of certain taxes, eg to encourage saving and investment UK tax law allows a tax efficient device the ISA which allows investment (subject to limits) with no income tax due, or the rules on Potentially exempt transfers (PETs) in inheritance tax where lifetime transfers giving away part of the estate more than seven years before death are not caught and those within the period are caught at tapered rates. In relation to the latter I spent time advising clients in executries and wills and estate planning. If I did not advise on the use of PETs and using the spousal exemption to the maximum or in certain cases using a discretionary 0% rate trust (to allow the estate to maximise the amount passing without tax) I’d potentially have been negligent. Is this legal? yes. IS it moral? I don’t have a problem with it (it allows families to retain assets), but others will, as the net effect is to deprive the exchequer. The Panama situation is, on one view, this on a larger scale using the flexibility that different legal systems give you.

Is it the use of a “foreign” legal system that makes us uncomfortable? Even here, the use of foreign systems is something that happens regularly with no problems. People use different legal systems all the time in day to day business. For example, many Scottish businesses (advised by their lawyers) use English law in their contracts because it is easier to raise finance on English contracts rather than the more convoluted and formalistic Scottish rules (which requires notification of any transfer of a right to enforce the contract (and claim any payment under it) to the debtor in the contract). Is this use of a “foreign law” to circumvent the restrictions of Scots law legal? Yes. Is it immoral? Should the Scottish business be forced to use Scots law and as a result incur greater costs and place their business at an economic disadvantage relative to non-Scottish competitors? I, again, have no problem with this. I know a number of lawyers in other jurisdictions across Europe who use English law – sometimes to use the English courts, sometimes to use English contract law – and each time for the financial advantage of their client business. There is a growing business in Europe where companies verging on insolvency seek to change their centre of main interests to England in order to make use of the law of administration, corporate rescue. These actions all involve (to some extent) the circumvention of domestic rules for advantage. But this does not attract moral opprobrium.  It doesn’t make us queasy.

So why do the revelations of the Panama papers make us uncomfortable in a way that using PETs or a Scottish business using English law doesn’t? where are the boundaries of morality when a course of action is perfectly legal? What is the qualitative difference between the Panama revelations and these other mechanisms and approaches detailed above? I am interested in exploring this because subjectively they feel different. My moral sensitives are pricked. But I am struggling to explain why.

Because real life is complicated. It’s messy.

And the  more I think about this,  the more I incline to a view that if you want to prohibit someone’s freedom to act in particular ways this should be done explicitly – rather than relying on condemnation derived from a nebulous moral sense that may differ from person to person.

About loveandgarbage

I watch the telly and read when not doing law stuff and plugging my decade and a half old unwatched Edinburgh fringe show.
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9 Responses to A man. A plan. An offshore scheme. Panama.

  1. Fraser Whyte says:

    Good piece, agree with much of it and have had similar thoughts myself.

    I think one of the reasons is that these avenues are not, realistically, open to all of us. It would appear that the mechanisms which are being used in the Panama case, and in others like it, are limited only to those who can afford to pay the “fancy accountants” etc. Joe Bloggs, rightly or wrongly, feels aggrieved about this – one rule for me and one for them.

    As opposed to ISAs or other more common “tax efficiency” schemes, it’s not the common man who is benefitting, it’s the perceived elite. The same people who make the rules. And so there’s the impression that it’s all a nice big cosy Old Boys’ Club, lining each others’ pockets with shady foreign deals and loopholes that aren’t available to us.

    I’m not saying I agree entirely but I have a degree of sympathy with the idea.

  2. crimeworm says:

    Interesting piece, must say I agree with much of what you say. Until the government make these immoral – but not illegal – manoeuvres actually illegal, they will continue. But they won’t do that as they, as individuals, benefit. Also if they paid the tax accountants at HMRC more money they might be able to retain some of the cream of the crop, instead of them all going to private firms and advising the very rich. Gordon Brown complicated the tax system massively, leaving so many loopholes. It all needs fixing and simplifying.

  3. Paul Newton says:

    A very thoughtful piece. Maybe what we really feel is simply envy, which we prefer to dress up as self-righteousness. After all, nobody pays more tax than they have to – it just burns us that rich people are so much better at it than us

  4. Neil Gordon says:

    Interesting post.

    think Fraser Whyte’s point about exclusivity of these mechanisms compared with ISAs accounts for some of the queasy feeling.

    I agree with the feeling that moral judgements rather than legal rules aren’t a particularly fair way of condemning people for behaviour that is not illegal.

    But to me the reason this type of behaviour is not illegal as well as immoral is due to the political influence of the kind of people who benefit from it. For example, HMRC have told select committees that they do not have the resources to investigate and prosecute offshore tax evasion. And there is the example of the UK lobbying against EU efforts to increase transparency.

    I’m not saying that solving the issue would be easy, but it seems that despite the rhetoric no one bothers to try.

    Sorry this ended up a bit long.

  5. John Thacker says:

    I’ve definitely seen some overheated rhetoric that has made me want to take the side of those using the offshore bankers, rhetoric that uses the same kind of “nothing to hide” accusations people use against cryptography, or any sort of privacy.

    At the same time, it’s obviously easy to burn at the hypocrisy of those like David Cameron that have both attacked cryptography as well as offshore banking.

  6. Don’t agree.

    The “loopholes” in IHT are designed to achieve government aims, ie, to put otherwise ossified wealth into circulation so that the economy and the young can benefit. The governemnt has created the alleged “loopholes” (PETS and so on) to achieve this effect. This is not tax avoidance – this is the government incentivising taxpayers to behave in socially desirable ways.

    This should be contrasted with tax avoidance where the government has not deliberately incentivised the behaviour at issue and where taxpayers have gone to great lengths, often at great expense, to overcome the legal barriers erected by the government to impede socially undesirable behaviour.

    It’s false equivalence to equate IHT exemptions with tax avoidance

  7. Alistair says:

    Its a problem if we have a political class that theoretically declares its financial interests but it practical terms squirrels assets away offshore in the style of an African Dictator whilst making a different set of rules for the rest of us. Putin, FIFA, Cameron all in theory acting in the interests of others.

  8. If a government, any government, wants to make what is currently legal, illegal, then all that needs to happen is for a majority to vote for it in Parliament. I really don’t want differing views of what is “moral” or “immoral” to have any part of this. Tax evasion is a crime and if identified can/should result in punishment. So-called “tax avoidance” (whether “aggressive”, or not, although I think attempts to classify some kinds of investment thus are completely spurious) has no legal status. Something is either illegal, or it is not. A government, this one or the previous one or the next one, could easily make various things which are currently legal, illegal, if it thought it worthwhile and it could command a majority for such measures in Parliament. Tax policy is designed to raise funds for government expenditure, not as some kind of “punishment” or “moral enforcement”; it has no other purpose. Having an ISA, or owning Premium Bonds, is no more (or less) “moral” than having an investment in an overseas investment vehicle; what is crucial is that if one is a UK resident subject to UK taxation that one declares all taxable income to HMRC; not to do so is to “evade” tax and that is a crime. The UK (that’s to say UK-resident individuals, organisations and companies registered in the UK) is amongst the largest overseas investors in various foreign countries and has been so for many decades and a few centuries; this is what helps to make the UK’s “invisible earnings” so crucial in balancing the national accounts in the face of a long-standing (over at least many decades) trade deficit. Some of the talk in recent days seems to want legitimate deployment of assets of UK-resident persons/organisations/companies outside the UK to be reclassified as somehow unacceptable. This is to display extreme ignorance of what makes an economy function and how the UK, somehow or other (with a fair bit of “borrowing” added into the mix) “balances the books”. Most employees in the UK have traditionally had either a company pension or more recently a privately-organised pension plan, unions have such mechanisms too for pensionable employees as of course do employees of public bodies. Most such pensions plans have some of their funds invested outside of the UK (although pensions of public service employees, employed in the past, are generally paid out of current government tax revenue, just as those currently employed in public service will have their pensions paid from future current government tax revenue, when they retire). Is this wrong, or “immoral”? Merely to ask this question highlights just how juvenile has been much of the commentary on “financial planning”, using perfectly legal mechanisms, in recent days. The UK economy is closely integrated into the world economy, so unless it is being proposed that exchange controls be re-established and that a “protectionist” economy is reinstalled, the idea that the restriction of investment of assets outside the home country (in this case the UK) is in any way viable is “for the birds”.Not if we in the UK wish to be able to continue to buy goods and services abroad (for example an annual holiday abroad, just as one minor example). Such a society was accurately portrayed in the dystopian nightmare world of the novel “1984”. That’s where the current leadership of the Labour Party (and some other ideological bedfellows, eg the SNP, the Greens and the various ‘socialist’ parties, not to mention “Momentum”) seem to be wanting to lead us. I hope calmer heads, able to see beyond the next headline, will prevail and help us avoid the abyss these economic ignoramuses seem want to lead us towards.

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