Tax Havens

Jaco70

Usual apologies about this being in the wrong forum, but I didn’t know which one was most relevant.

I haven’t got enough money for this to be pertinent to me, it’s simply something that interests me, and I know nothing about.

I was reading about the Channel Island of Sark, which is desperate for more people to move there, and it mentioned that one of the draws for people is that it’s a tax haven, but I really don’t know what that means. 

Presumably most incomers (to Sark or any other haven) wouldn’t generate their money there, they’d make it in the UK, so how is tax avoided? Surely HMRC would have a claim on it?

For instance if you run your UK-based business remotely, or have rental income, or investments? 

DullGreyGuy

Depends on how you are generating your wealth, where the transaction(s) are deemed to have taken place and where you are resident etc. 

It generally doesn't apply to those who work as an employee for someone but much more for those running large companies or other complex financial affairs. 

The classic example that you'll see everywhere is take a fictional banana company, they own plantations in Ecuador and sell their bananas to supermarkets in France. It costs them $1,000 to produce a crate of bananas which they can sell for $3,000 in France, so where does the $2,000 profit materialise and therefore get taxed? In the tax avoidance scheme they have a central company, it buys the bananas for $1,000 from each of the producing sister companies and sells them to their French entity for $3,000 so the $2k per crate materialises in Caymans, Sark or wherever it is and the Ecuador and French companies may no profits so no corporation tax.

Obviously an intentionally extreme example and most will not go that far. Similarly some countries have laws on pricing between related entities which attempts to combat this but even playing things by the book by being vertically integrated there is capacity to shift some profits offshore.

Its not always done with goods, a well known company set up an offshore entity and transferred all its intellectual property rights to it, now anyone that wants to use the brand, including sister companies, have to pay a licensing fee to the tax haven entity. Its not too hard to see what the value of a crate of bananas is but its much harder to calculate the value of putting an Apple logo on something... Apple sold its IPO outside of the US to a subsidiary in Jersey in 2015. 

There are clearly some that go further and move from tax avoidance to evasion with falsifying documents, more than one celebrity has bought a jet or yacht with an offshore company claiming it was for chartering thus enabling them to reclaim millions in VAT but in reality its being used by the celeb for their personal use and given they are the ultimate beneficial owner of the offshore company they wouldn't have been able to recover the VAT as its personal use. 

Jaco70

DullGreyGuy said:

Depends on how you are generating your wealth, where the transaction(s) are deemed to have taken place and where you are resident etc. 

It generally doesn't apply to those who work as an employee for someone but much more for those running large companies or other complex financial affairs. 

The classic example that you'll see everywhere is take a fictional banana company, they own plantations in Ecuador and sell their bananas to supermarkets in France. It costs them $1,000 to produce a crate of bananas which they can sell for $3,000 in France, so where does the $2,000 profit materialise and therefore get taxed? In the tax avoidance scheme they have a central company, it buys the bananas for $1,000 from each of the producing sister companies and sells them to their French entity for $3,000 so the $2k per crate materialises in Caymans, Sark or wherever it is and the Ecuador and French companies may no profits so no corporation tax.

Obviously an intentionally extreme example and most will not go that far. Similarly some countries have laws on pricing between related entities which attempts to combat this but even playing things by the book by being vertically integrated there is capacity to shift some profits offshore.

Its not always done with goods, a well known company set up an offshore entity and transferred all its intellectual property rights to it, now anyone that wants to use the brand, including sister companies, have to pay a licensing fee to the tax haven entity. Its not too hard to see what the value of a crate of bananas is but its much harder to calculate the value of putting an Apple logo on something... Apple sold its IPO outside of the US to a subsidiary in Jersey in 2015. 

There are clearly some that go further and move from tax avoidance to evasion with falsifying documents, more than one celebrity has bought a jet or yacht with an offshore company claiming it was for chartering thus enabling them to reclaim millions in VAT but in reality its being used by the celeb for their personal use and given they are the ultimate beneficial owner of the offshore company they wouldn't have been able to recover the VAT as its personal use. 

Thank you, that is really interesting, and relatively easy to understand.

Essentially it’s for income that is difficult to pin down, such as IPO, whereas rental from an office block in Slough, for example, is very definitely UK income.

Thank you for the explanation.

Cobbler_tone

...or a Temu/Shein parcel landing on foreign shores. Topical   

ChilliBob

Tell you what, I'd certainly visit Sark before committing to it that's for sure! (I know you're not, I know this is just for info/interest). I went to Sark, wasn't quite what I was expecting for sure! 

ChilliBob

Oh and sometimes it's about where you live for x amount of the year I believe - a friend of a family member has to spend a certain amount of time in Switzerland each year for tax reasons for example - sounds bonkers eh?

It's also why so many investment trusts are domiciled in say Jersey or Guernsey. Interestingly, Guernsey has one of the largest income disparities of the world as a result. Cool place to explore with some nice beaches thou! 

kinger101

You'll save a fortune on vehicle excuse and fuel duty

LillythePink

Sark has other qualities no cars, dark sky status but I wouldn't want to live there and I don't really see the attraction - been there twice and not for years but others love it.

Guernsey has a wealth of history (Victor Hugo, Nazi occuplation etc) and as you say, lovely beaches but is expensive to live here and yes, there are a lot of differences in salaries and it's hard to own a house given the average price of a 3 bed is over £600k - but good experience if you ever get the opportunity to come over and work for a while

There are other better places to put funds out of prying eyes given we are signed up to all sorts of information sharing arrangements.

It can be very tax efficient to live here if you are very wealthy given the tax cap, but then you are paying huge amounts for your little piece of Guernsey.

cricidmuslibale

Right now in the UK the personal allowance (the amount of non-savings, non-dividend income anyone can earn each year before paying income tax) is frozen at £12,570 and has been for almost the last 4 years now (since 6 April 2021)! Worse still, it is due to remain frozen until 2028 at the very earliest! This is effectively an ever-increasing income tax grab from some of the very poorest workers in the UK; £12,570 is not much more than a third of the median annual earnings of UK workers at present! [This median amounted to £37,430 in 2024.]

Frankly, if one of the 'reforms' that has to happen in the near future in order to first unfreeze the personal allowance and then allow it to rise annually with inflation in future, would be the effective closing down of all tax havens within the UK through appropriate tax treaties (including e.g. the Isle of Man, Channel Islands etc.) to enable more tax revenue to be sourced from some of the very richest members of society who have legally avoided an awful lot of tax over many years now, then I for one am very much in favour in such a move!

ETA: As @eskbanker has correctly pointed out below, the Isle of Man, Channel Islands etc. would first need to be brought within the UK's legal and financial jurisdiction through mutual agreement; I don't know how difficult that would be but it is by no means impossible, surely?

eskbanker

cricidmuslibale said:

...the closing down of all tax havens within UK jurisdiction (including e.g. the Isle of Man, Channel Islands etc.)...

If they actually were within the UK's legal and financial jurisdiction in any meaningful sense then they wouldn't be tax havens!

eskbanker

cricidmuslibale said:

ETA: As @eskbanker has correctly pointed out below, the Isle of Man, Channel Islands etc. would first need to be brought within the UK's legal and financial jurisdiction through mutual agreement; I don't know how difficult that would be but it is by no means impossible, surely?

Shall we go for Greenland, Panama, Canada and Gaza too?

* strokes white cat on lap while grinning maniacally *