TaxApr 18 2018

When it's time to come back onshore

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When it's time to come back onshore

Towards the end of last year, the offshore financial affairs of hundreds of politicians, multinationals, celebrities and wealthy individuals were exposed when data believed to consist of around 13.4m documents was leaked. 

Known as The Paradise Papers, it is reported that some 6.8m documents come from the offshore legal service provider Appleby and corporate services provider Estera, and another 6m documents from corporate registries in some 19 jurisdictions, mostly in the Caribbean.

Press leak

It is stated to be the fifth major leak of financial papers in the past four years. The use of offshore arrangements to structure tax efficient wealth management and retirement planning is not a new concept, nor is there anything unlawful about holding money offshore.  

However, the recent leak of the so-called Paradise Papers has catapulted these arrangements into the spotlight, causing offshore investors, and those who advise them, to pause and consider the tax position and whether the structures holding the assets are as legally sound as they were led to believe when the investment was made.  

If not, the investor will want to understand what options they have to secure and return the assets to the UK and whether they can recover any losses suffered as a result of entering into the arrangement.

There are also important issues of data protection, privacy and confidentiality to consider.  Fundamentally, much of the information leaked is private and/or confidential. An investor who has lawfully entered into an offshore arrangement has exactly the same legal rights to privacy and confidentiality as any other individual. 

Key points

  • In November 2017, 6.8m documents from an offshore firm were leaked, known as the Paradise Papers
  • In light of the current climate, some investors may wish to bring their assets back onshore
  • Under Article 8 of the European Convention for the Protection of Human Rights, "everyone has the right to respect for his private and family life"

Whether or not that was done to mitigate a tax liability does not override the individual’s legal rights. As that position and those rights can seemingly sometimes be overlooked, investors should be aware that preventing disclosure of their financial affairs is an option, as is seeking compensation after the event for the distress and embarrassment caused.

While each investor’s situation is individual, the legal framework and documentation underpinning such arrangements is typically complex, with assets being held in overseas jurisdictions and through a range of corporate structures, trusts and / or pension schemes.  

More often than not, the investor will have entered into the arrangement having taken professional advice at the time and many will have paid significant arrangement fees to the individuals or entity promoting the structure.  

Similarly, on the advice of the promoter, investors may have transferred existing pensions out of their personal and company pension schemes into overseas pension schemes under the misapprehension that they were gaining greater control and tax efficiency by doing so when, in practice, the opposite may turn out to be the case. In those circumstances, it should be considered whether the investor has a potential claim before the pensions ombudsman.

Repatriating assets

In light of the current climate, the investor may now wish to bring their assets back onshore and within their direct control. The question is how they do so and what issues or obstacles may the investor have to overcome in doing so.  

The complexity of the structure may make it difficult to ascertain how and where the assets are held, let alone how the investor can repatriate the assets.  

Further, on investigating the structure the investor may discover that the underlying documentation is incomplete or contains inconsistencies; that the arrangement has not been properly implemented or that the tax planning is fundamentally flawed.  In some cases, it may not even reflect what the investor originally intended to achieve when entering into the arrangement. 

Consequently, the question also then arises as to whether the investor has any right of recourse against the original promoter of the arrangement to recover losses suffered and / or taxes and fees paid. It is critical to act quickly when advising an investor client in this type of situation and that independent, specialist legal advice is taken in order to understand what rights and options are available to the investor. Each case will be fact-sensitive and whether a valid claim can be established will depend on the specific circumstances of the arrangement.  

That said, in situations where the investor considers they may have been wrongly or negligently advised by the original promoter there are a number of common factors which should be considered at the outset when determining the strengths of any potential claim and what the investor’s next steps should be:

Timing is key: Depending on when the arrangement was entered into, a claim may be statute barred, or the time for bringing a claim shortly due to expire. Urgent steps need to be taken to ascertain what the relevant time periods are for bringing a claim and if they can be extended.

Promoter identity: Who was the promoter at the time the arrangement was entered into and what advice did they provide? What is known about the original promoter – is it still in existence and, if so, where is it located – in the UK or abroad?  If the latter, the investor will need to consider the potential impact this may have in terms of enforcing any court order later down the line.

Documentation: What documents does the investor have and is there anything missing? All contractual documents, emails, notes and communications relating to the arrangement should be collated and preserved.

Jurisdiction: Where would a claim need to be brought and would English law apply? The very nature of these structures mean that the assets are held outside the UK and the contractual documentation may not be governed by English law. The English courts may not have jurisdiction to decide any claim so, potentially, an action may need to be brought in a foreign court and / or it may be the subject of foreign law.

Insurance: Does the investor have legal insurance to cover the legal costs in bringing a claim? Equally, is it known if the promoter has professional indemnity insurance?

Limitation of liability: Is it known or can it be ascertained if there are any exclusions of, or limitations on, the promoter’s liability which may preclude or limit a claim? 

If investors or advisers find themselves at the centre of a media storm, it is important to remember that under Article 8 of the European Convention for the Protection of Human Rights, “everyone has the right to respect for his private and family life, his home and his correspondence”.  “Everyone” means everyone. That includes members of the government, wealthy individuals and celebrities.  

Legal protections

Further, even if the information is not private, it may well in any event be protected by the law of confidence. There may also be data protection law implications.

In addition, the Editors’ Code of Practice, administered by Independent Press Standards Organisation (IPSO), prohibits the press from publishing material obtained, among other things, “by the unauthorised removal of documents or photographs; or by accessing digitally held information without consent”.

The media are not therefore entitled to ride roughshod over the privacy and confidentiality rights of those who have chosen, often for perfectly sensible and entirely lawful reasons, to have some of their assets held in offshore structures. 

Of course, if the documents in question disclose serious wrongdoing, let alone criminal offences such as money laundering or sanctions busting, then the media may well have a public interest defence. 

Whatever the circumstances, the scrutiny of off-shore arrangements is likely to run and run.

Susan Garrett is a partner and Helen Collinge is legal director in dispute resolution at law firm Addleshaw Goddard