Res’ non doms’ and UK revenue investigations

John Carrell, who is head of the Farrer & Co tax practice in London, has been working for wealthy European families who have moved to Britain, for more than thirty years “quite discreetly” he says. John was with Stephenson Harwood for eight years before Farrer & Co and tells me there are several partners at Farrers who specialise in advising the international wealthy including Mark Bridges (Middle Eastern) and Jim Edmondson (international entrepreneurs).

John dedicates his working life to setting up arrangements for clients moving into Britain (the celebrated non-doms) and confirms that most of his work comes from Swiss lawyers, private bankers and trust companies. “Once instructed, I take clients from cradle to grave.” He comments in his assured and measured drawl. “I do their tax planning before they arrive, setting up their remittance arrangements and trusts and structures for home ownership. Then I announce their arrival to the tax office and get the right rulings .” Although John acts somewhat like a family office, he doesn’t undertake basic functions like tax returns but says he will choose and supervise accountants who do this. “I keep a general watch over client affairs to keep things running smoothly.” He adds this with a surety that must engender some confidence and allay any panic clients might have about revenue investigation. John adds a sentiment that many lawyers share. “In recent years the changes to investment products and funds have been immense. So I have to keep on updating the advice I give my clients on what investments they can safely hold from the tax point of view and what monies they can bring in to the UK. ”
I wonder how John approaches a seriously rich client with what some might consider dentist drilling type material when ultra high net worth entrepreneurs are known for sometimes being a law unto themselves. John has streamlined his procedures. “I give them a UK spending guide, a sort of one pager with practical advice detailing which accounts they should pay bills from and which credit cards to use.”

John also deals with foreign domiciliary tax investigations and his change in manner suggests that they can be pretty unpleasant places for clients to wind up. “The Revenue has a special unit that targets the offshore arrangements of the wealthy” he says. “For foreign domiciled clients the rules are generous but you have to play by them: if you get it wrong a large bill is the penalty.” He hastens to add that the investigations he handles are not generally into his own clients but those referred to him by other advisers. John has been involved with the high profile Gaines-Cooper case acting for one of the parties targeted by the Revenue. “The enquiry has been going on for five years and still continues.” Before adding with some feeling: “investigations can last for years and be very stressful.”

Of the rise of the non-dom’, John says the increase has been particularly sharp in the last five years and the march continues with the arrival of the Russians buying London properties purchasing at the top end of the market. “The UK really is a tax and fiscal friendly environment for foreigners, compared to France, Germany or the USA. So with criticism mounting daily in the national press against resident non domiciles who don’t pay tax on foreign assets, I look for the counter argument from John. Should we change the law to potentially put off this type of incoming individual or leave it as it is and benefit from knock on wealth distribution because the individuals spend time and money in the UK? He obliges with his view. “I don’t see any problems with this law and the government is constantly saying they are going to revoke it but haven’t done so, thus far. It is a satisfactory state of affairs. The incoming wealthy bring in a lot of revenue and they do pay VAT and in most cases stamp duty land tax. A large number come to work for banks and their salaries and huge bonuses are taxed at 41% with employers national insurance at 12.8% on top of that. If we brought in tougher tax rules, the exchequer would potentially lose all this income. They would move elsewhere: to Dubai, now a major financial centre with no taxes – or Singapore or Switzerland where taxes are low. This market is very mobile and the London regime suits them. If it didn’t they can move anywhere else with communications improving and lifestyle changes in other countries.” John highlights the statistics. “There are supposed to be 30-40,000 French men living here and I guess half a million resident non domiciles (res non dom). One of the reasons they come, is that they are prepared to pay tax, but they don’t want the hassle of disclosing overseas income. It involves complicated computations to offset tax in other countries. At the end of the day it’s a bit of a nightmare and they may well just turn around and go somewhere else. The result is that Britain loses out on taxable income and wealthy people supporting our general economy.”
MI’s: Mobile individuals.

We all have a plethora of mobile devices and regularly read about mobile working and virtual offices but mobile-individuals are another trend John can see on the rise. “A lot of people are working in the consultancy field, are highly paid and aren’t finding it necessary to have proper offices or secretaries. They can work from a phone, handheld device or Blackberry and do so just as easily on a plane as on the ground which gives them an opportunity to do away with a presence in any particular country. If they don’t have a tax presence here it’s difficult for the tax authorities to latch on to them and make a tax claim stick. They can organise themselves so that they are not resident anywhere, spending broadly less than three or four months in any particular country.

Tax office gets slicker

Surprisingly John says dealing with tax investigations is always fun and seems to suggest it is fun with a capital F. As this seems contrary to normal logic, I probe further. “It’s because there is quite a lot of technical argument. The revenue are very good on the law of tax and on statutes and important cases. So you deploy plenty of legal argument as a first stage. The second and final stage is about bargaining and ‘horse trading.’ , John is rather respectful and supportive of their approach. “They are commercial and will come to some pragmatic deal. They are very professional the says although there was certainly a time when some of the tax people who dealt with wealthy foreigners, used to literally kick their doors down and demand tax. They operated like a cowboy outfit and a law unto themselves. Those people have gone but this makes them tougher to deal with.”

John’s skills aren’t limited to private taxation because he believes like many counterparts that it’s important to have a breadth of skills. “I do quite a lot of business and corporate tax because client affairs frequently involve companies and sometimes VAT issues.” He continues with a view on the industry segmentation. “I think people are too specialised and those who advise wealthy non doms, will increasingly need to bring in corporate tax knowledge.”

Of Switzerland, John rates the law firm of Lenz & Staehelin very highly but says Homburger in Zurich is one of the “best and strongest commercial firms.” Although he concedes Homburger is more a corporate orientated law firm. “They have a lot of wealthy business clients and important individual clients. He confirms his point about needing corporate skills. “The European lawyers don’t make distinctions between private and corporate work. They get surprised when one week they send a personal client to us and the next week it’s corporate and people say they can’t deal with it. I had a client who was buying a flat here for £28million which was owned by a company and so normally it would be a straightforward transaction. He would buy the company and that would be it. Unfortunately for the client there was something wrong with the company he was buying. It meant the deal had to be reengineered which threw up complex tax, stamp duty and land issues. Accountants couldn’t advise on that sort of problem and many private client lawyers would have thrown up their hands in despair. Our general knowledge of business tax meant we could deal with it. We undoubtedly saved the client about a million pounds in tax on that deal which had gone seriously wrong.”

Philanthropy is the word of the year so I ask John about a comment I heard from another charity expert who mentioned that worthy causes have become a quick route into local acceptance at a high level for incoming super rich. John agrees but says that one of the things which has caused him most professional satisfaction in his career was when a client, ploughed back tax savings into charitable projects in India and used his management skills to ensure that it was spent with much better effect than had the money gone to HM government.
John offers a set of pointers that ultra wealthy clients should think about before entering Britain. “Firstly I think it’s very important that they get everything set up before they come here. They have to plan from the outset. Secondly, they should never have any meetings with the tax authorities themselves without their advisers. The tax office will try and have meetings but it is fine to say no.” He tells a rather alarming story. “There is an expensive street in Holland Park that was targeted by tax officials who knocked on every house. They would talk to unsuspecting gardeners and house keepers and ask about the owners and how many times they visited and if they were running businesses. They were systematic and went to every house. A client called me and said ‘they are banging on my door and want to interview me’. I said the tax people have no right to have a meeting with a tax payer unless the tax payer allows it, so send them away.”

John concedes that Farrer's weren’t seen as an international firm a decade ago. “They were very much UK families and landed estates. He started up the international private client side and it has really mushroomed.

And a final word? “In some parts of the private wealth market there is a move towards a broad brush approach in running the affairs of wealthy international people, but many overlook precise technical detail of our tax rules. It is vital to give proper tax advice to the resident non dom. Some think “if we can get it more or less right, the revenue won’t attack the arrangements.” It is the wrong way to go about it. You must get it correct down to the finest detail. The clients can then sleep well at night.” ©

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