Pandle Insights: What the Paradise Papers Leak Means for Tax Avoidance

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Paradise Papers

The Paradise Papers, much like the Panama Papers leak, marks a turning point for many who still use - or are considering using - tax avoidance schemes overseas.

With both leaks, those revealed to be avoiding tax have come under heavy criticism, with many calling for changes in legislation. While the Panama Papers didn’t change everyone’s minds, another leak a year later shows that this issue is not going away any time soon.

We believe that the more leaks like this, the less tax avoidance will be an issue and the more likely changes to legislation will happen. People will soon be too hesitant to get involved in these schemes after seeing the reaction to others being outed by leaks like this.

It’s probable that as changes to legislation begin to take effect, the number of those looking to avoid tax will naturally decrease.  

Behind the scenes of tax avoidance

The Paradise Papers leak has revealed what goes on behind the scenes of the huge industry of offshore tax havens.

Appleby are the central figure in these leaks. They are a legal firm specialising in helping companies and individuals set up offshore accounts for tax purposes.

While they are one of the top companies in the world in this industry, the leaks reveal that their operations have run into difficulties in the past that has meant they’ve risked crossing an ethical line.

There were meetings in Bermuda (2012) and letters from Bermuda’s Monetary Authority (2015) about concerns regarding their position on anti-money laundering policies. In 2014, the British Virgin Islands Financial Services Commission warned Appleby that it could be in breach of client checking rules. In response, a high risk client register was compiled that led to an “enhanced due diligence” vetting process for clients.

Those who are in favour of tax havens say that their money is at the mercy of whatever figure the government decides to charge tax as. Bermuda’s ex finance minister, Bob Richards, said that recovering tax for the UK economy is up to no one but the UK government and that Bermuda is not responsible. “It’s not up to us to collect your taxes”, he said in an interview with the BBC.

The downsides for businesses

Tax avoidance schemes put companies in a tricky legal situation where those who aren’t involved can become subject to vigorous HMRC investigations. These investigations can be lengthy and expensive, taking a toll on businesses as a result. 

For the public paying their taxes without question, hearing about tax avoidance schemes can be infuriating. Once the public knows that a company has been involved in tax avoidance, many will boycott the brand out of principle, in fact one Yougov survey revealed that one in five consumers have boycotted a brand before.

This damage to a business’s reputation can be long-lasting and some companies may not be able to recover from it. This is particularly true in a time where consumer confidence is down and people are more cautious about where and how they spend their money.

What to advise clients

No one wants to pay more tax than they need to and as accountants it’s our job to make sure that our clients are operating as tax efficiently as they can. However, there are still times when clients want to go one step further and avoid even more tax in a way that crosses an ethical line. You might be asked about offshore accounts, whether they’re worth it and how you can fit in.

In these cases, it’s worth talking to your clients about the downsides to these schemes and making your own policies clear. While you can’t stop them from going through with it, you can maintain your distance and if necessary drop a client who you feel is going about tax in an unethical way.

The risk for you, as an accountancy firm, is being pulled into the spotlight when these schemes are revealed. This could then cause your business to be put under uncomfortable scrutiny and risk losing potential clients.

While it’s likely that these leaks will make people more hesitant to try tax avoidance schemes, it’s still worth preparing for the odd client who will want to know more about them. In these cases, it’s a good idea to make your policies clear and advise as best as you can about the risks in getting involved in one.