This is a real story that my tax tutor shared during a class. I really enjoyed the story and thought it would be also fun to share.
I am retelling it with a rather low level of accuracy. But you will get the gist of it.
Context
A super rich guy wants to sell his shares in a big company. The capital gain tax that he would have to pay had he taken no tax saving measures would be 25 million GBP.
A tax consulting firm was engaged to advise.
Key step 1: become non-UK tax resident
He has to spend more than half a year no in the UK and not become tax resident in any other countries. Most surprisingly, his dependents and spouses would also need to do the same. Essentially, the family, which includes a daughter he had with his ex-wife, two children with current wife, and the wife, needs to become tax nomads for a year. They stayed in France for a week, then Italy, a month, Japan, a month, and some random country in Caribbean for another week. At one point, he told his daughter, honey, I need you to go to Morocco and stay there for fortnight.
However, there is a catch. The UK tax authority (HMRC) dislikes people like him. So they introduced another rule: if at any point in the next five years the person become UK tax resident, any tax avoided will be payable immediately.
Key step 2: stay overseas for another five years
The good thing with this step is that the whole family didn’t need to move with him any more. It sufficed that he wasn’t in the UK for too long.
The bad thing is that, he couldn’t work for any UK companies, which was difficult because he still had a lot of business interests in the UK. The rule is that, if he works for a UK company for more than three hours each week, he will not be able to claim he is not a UK resident, given the fact that his families are in the UK. Even if he was relying to emails from a Caribbean beach, as long as the work is related to UK business, it would count as working for a UK company.
Nevertheless, the tax firm was helpful. And he followed its advice word to word.
However, after all this, HMRC decided to investigate this person’s tax affairs and asked him to substantiate his claim.
Below I will share three key things tax consultants did for him.
- Prove that he didn’t work for more than three hours a week for his UK businesses
- Prove that he wasn’t in the UK longer than the critical threshold
Key step 3: prove that he didn’t work for more than three hours a week for his UK businesses
For this one, the guy gave tax consultant access to all his emails. Consultants calculated all replies he sent out and measured his typing speed and made the argument that since he types X words per minute, and he wrote Y amount of words in his emails in five years, it would took him less than 3 hours per week.
In addition, consultants also got his full phone call history and talked to each business-related person he talked to in the last five years. Consultants asked each person what the conversation was about, and kindly reminded some people that the call over three years ago was about football matches.
This way, tax consultants were able to prove to HMRC that he didn’t work for more than three hours a week for UK businesses.
Key step 4: Prove that he wasn’t in the UK longer than the critical threshold
The guy also needed to prove that he wasn’t in the UK for too long. Consultants asked for his travel history and his assistant kindly provided. However, consultants soon discovered that he was in France in the morning having tea, and then had lunch in Russia, and then back in Morocco for dinner. No flights details, boarding passes were provided.
“He travel on his private jet and never needed to carry his passport”, replied the assistant. How could consultants then prove his physical presence?
The consultants then relied on the location information in the photos the guy took on his iPhone.
If you don’t stay in the midnight, you are not in the UK.
What they soon also found out was that in many days, this guy came into the UK in the morning, stayed until afternoon and flew out of the country. It seemed like he was in the UK for too many days for the whole tax plan to work.
The trick here is that, according to the general rule used by HMRC, you are considered to be in the UK on any day where you are there at midnight. If you leave the UK before midnight, that day may not count as one of your days in the UK. Therefore, this guy can go back to the UK, meet his friends and families, go to his favorite restaurant, catch up with his dentist and still considered to be not in the UK (for tax purposes) as long as he leave before midnight.
Concluding thoughts
I was really thrilled by this story and such an elaborate tax avoidance plan. To be fair, it might well worth the effort given that it was a 24m GBP tax bill. And this guy didn’t really need to do a lot of thinking and all the hassles could be taken care of or reduced by using other professional services and having assistants.
One of my classmates asked:” Why doesn’t the government fix the loopholes”?
The tutor said, hesitantly, “maybe politicians were supported by wealthy people who don’t like to pay a lot of taxes”. I also thought politicians are rich people and they don’t want tax either.
What I learned from this story is that tax is interesting and there is a lot of room to maneuver. I should probably learn more about tax.
In addition, like my own experience immigrating to Canada, there are many innovative approaches to things where careful planning and unique insights can prove invaluable. Next time when you are stuck on something, remember that if you think harder or get other people to think harder for you, you might get better solutions to your problem.
Dig deeper.