The Channel Islands have never looked so good. A new report by the International Monetary Fund has ranked Jersey as one of the best jurisdictions globally in terms of regulation and supervision, and an increasing number of hedge fund and private equity managers have said they are seeking to follow the lead of Terra Firma’s Guy Hands in relocating to Guernsey to escape recent tax hikes in the UK.
Both jurisdictions have an advantage in competing with other low tax havens such as Switzerland for British citizens, as they are close to the UK, share a common British-feeling culture, maintain good transportation links and contain quality schools that teach a UK curriculum. However, UK managers looking to escape burdensome regulations and taxes in their home country should be aware of several things before they make the move to Guernsey or Jersey.
Guernsey: home to Hands and Moulton
In March Hands became the highest profile manager to flee into the arms of Guernsey and its 20 percent tax on income and zero percent tax on capital gains. Alchemy Partners founder Jon Moulton also owns a house there, although he is still a UK resident for tax purposes. Under British law, citizens can become non-residents for tax purposes but keep their passports as long as they do not spend more than 90 days a year in the UK.
Paul Blackwell, senior manager in the private clients tax group for Deloitte, Channel Islands, said in terms of establishing a residence, UK citizens would also usually have to be in Guernsey a minimum of 91 days in a calender year if they had not spent time in Guernsey previously. He adds that when the UK’s HM Revenue and Customs agency is making the decision about whether you should be taxed in the UK, much will depend on how many links you sever with the UK. Becoming a tax resident in Guernsey, while helpful, is not definitive in this regard.
“Everything is looked at on a case-by-case basis and there are a number of key indicators that will assist in persuading HMRC that you have left the UK,” he said. “You have to show that you have left the UK permanently or indefinitely, rather than temporarily. So you would have a stronger argument, for example, if you moved your wife and children out to Guernsey, you sold your available accommodation in the UK, as well as doing things like cancelling your membership in UK golf or other clubs and joining such organisations in Guernsey. HMRC looks at the whole picture and there is no one thing that will guarantee that you will be treated as having left the UK, but from a tax perspective you have to be very clear that a move has been made and build up a picture which suggests that your life is primarily based in Guernsey, and most importantly, not in the UK. In addition, it is wise to keep your visits to the UK down to a minimum, and certainly, post your departure, down to less than 91 days average per annum.”
When it comes to moving part or all of the business to benefit from Guernsey’s corporate tax rates, Jo Huxtable of Deloitte says a firm must be able to demonstrate the “management and control” of the operation is not located in the UK. This will ideally require the relocation of main decision-makers like directors to Guernsey, and the migration of the company to Guernsey.
“If a key individual is resident in and operates from the UK, the offshore company may struggle to demonstrate that it is being managed and controlled outside the UK such that it is treated as UK resident for UK corporation tax purposes.” she said. “But if that individual moves with the company offshore, the position should be much stronger, even if the company has some ancillary activities which are carried out in the UK, and should therefore be taxed at Guernsey corporate rates.”
Managers should not take such considerations to leave the UK lightly, as HMRC recently released revised guidelines which have made it more difficult to leave the country. Blackwell said even if UK residents think they have taken the action necessary to persuade HMRC that they have left the UK permanently or indefinitely, they may be hit with penalties later if they find out they are still considered UK residents and have missed the deadlines for filing their UK tax returns.
“If you moved away and assumed you were fine and HMRC subsequently disagreed, then there could be interest and penalties attached to associated UK Tax liabilities arising,” he said. “it is therefore important to monitor your affairs on an ongoing basis to make sure you have not inadvertently become UK resident by virtue of spending too much time in the UK, even if you have shown to HMRC's satisfaction on full disclosure of the facts that you have permanently or indefinitely left the UK.”
Jersey: the new centre of your life?
As in Guernsey, UK residents wishing to relocate to Jersey and benefit from Jersey’s tax rates must be able to demonstrate to the UK tax authorities that they have moved the “center of their life” to the jurisdiction, said Wendy Dorman, tax partner at PricewaterhouseCoopers in Jersey.
“It’s not difficult to establish tax residence in Jersey, it’s proving that you are not resident somewhere else that tends to be more difficult so you may have to make quite a break from your home jurisdiction,” she said. “For example, the UK tax authorities consider all sorts of factors like where your biggest house is, where your children are in school, what societies you belong to as well as time spent in the UK. If all or part of your business is moving to Jersey there may be additional benefits in lower tax rates on corporate profits, but you need to make sure you are paying the right tax in each location. You have to look at issues around where the profits are booked, where the activities are carried out, and where the high level decisions of the business are made. There is a definite trend toward fund management groups that have structures in Jersey wanting to increase the level and range of business activities carried out there, and that means more profits can justifiably be booked in Jersey.”
Geoff Cook, chief executive for promotional and advisory organization Jersey Finance, says that as far as Jersey – home to firms such as Nordic Capital – is concerned, there is no minimum number of days a UK citizen would have to live in the jurisdiction before being considered a resident. It is possible to settle and buy property as a “high-value” resident by making a minimum contribution to tax receipts of £100,000.
Fund managers could get similar consideration by qualifying for “essential employee status” if they employ people in the jurisdiction. They would then be considered residents on a conditional basis for 10 years, after which their status becomes permanent.
Cook says that while local authorities recognize that UK managers moving the business to Jersey may rely on their existing team at first, a business plan that employs local people over time would be encouraged. “We recognize that a lot of businesses maintain a brand presence in London or even some support services, and will have offices in both London and Jersey, but we are looking for businesses with some substance and commitment behind their relocation that goes beyond tax advantages.“
He adds that in addition to getting professional tax advice beforehand, UK managers should also make sure they are not just basing their decision on whether to move on their bottom line. “The final decision is often based on, “would my people, my employees, my colleagues and my family be happy living and working here in this place?” Cook said. “Those are often the things that are the final tipping factor and to really understand these issues a visit to Jersey is advisable.”
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