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  1. Law
February 25, 2009

Let’s Not Do Lunch

By Spear's

Good tax lawyers are worth their weight in gold — sometimes almost literally. But that doesn’t mean you actually have to like them, says Caroline Garnham

My first blog as Queen B on the Family Bhive website explores the hypothesis set out in the Harvard Business Review paper ‘Competent Jerks, Lovable Fools and the Formation of Social Networks’. The hypothesis is that people tend to seek advice from people they like, rather than advisers who are good.

Speaking to a prospective client some weeks ago I was fascinated to hear how, on becoming an adult, she had been keen to seek out her own advisers. After a decade of searching she was now considering going back to the family retainers.

‘The other advisers,’ she told me, ‘made everything sound so complicated, especially when dealing with cross-border issues.’

She is not alone. From my experience, wealth owners prefer advisers to set out advice on no more than two sides of paper in words they can understand. They do not want advice which makes them feel stupid. In other words, they want advisers who make them feel good.

Sadly, in the current climate, where governments are increasingly keen to stamp out all tax evasion and avoidance, the complexity of our tax systems is likely to increase and the prospect of getting good advice on which you can rely set out on two sides of paper is likely to become more and more remote. [page break]

The temptation is to shoot the messenger. Most wealth owners cannot believe advice can be so complicated or take so long to try to simplify in a letter or opinion that the average client can understand.

Seeking advice about law and regulation is like seeking a guide through a field of buried landmines. The person you choose as your guide you will want to know is the very best. Whether you like him or not should be irrelevant. He will be very different from the person you choose to have a stroll in the park with after a good Sunday lunch.
The law may be an ass, but just like landmines it can still blow you up.

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Most good advisers are difficult to understand, not because they are stuffy but because the regulation and legislation they have to steer their clients through has grown at an exponential rate, with little debate or thought as to how it interacts with other laws or what impact it will have on the people who have to comply with it or implement it.

Staying on the right side of the law is no longer a matter of good ethics and a large dollop of common sense.

It is hardly surprising, therefore, that David Kilshaw, head of tax at KPMG, replied to my blog to say: ‘In some cases, particularly in the early days, [good tax advice] can actually increase a client’s tax bill… [but] the client needs to have confidence… that he is secure from HMRC challenge.’

Anyone who has been through an HMRC investigation will know that it is something to be avoided at all costs.

The law in many cases is an ass, because there is not enough dialogue between the Government, the tax specialists and the taxpayer in formulating policy or drafting legislation. I can only think the dialogue is not forthcoming for fear that the tax specialists will conspire with their clients to introduce loopholes to reduce the tax for their clients.

From my experience, most wealth owners do not mind paying tax provided it is reasonable and certain, and that when it is paid they need not fear an investigation. What they cannot bear is tax law which is over-complex, uncertain and threatens their right to privacy.

Take the anti-avoidance rules for the non-domiciled UK-resident wealth owners. Seventy pages of anti-avoidance legislation was introduced for non-UK domiciliaries in last year’s Finance Act. Each non-domiciled UK-resident wealth owner is expected to know this new law and apply it correctly to his circumstances.

It is this heavy-handed approach, not the increase in tax, which will drive non-UK domiciliaries away — just at the time we need them in our shops.

It is possible to devise a solution that gives certainty, is simple, raises taxes, reduces the threat of an investigation and keeps the non-domiciliaries in the UK. One such solution could have been to make the remittance system of taxation more like the Swiss ‘forfait’ tax system for non-Swiss nationals living in Switzerland.

For those people Swiss tax is paid not on worldwide income and gains, but on a person’s estimated expenditure in Switzerland.

Under the current system in the UK, before they introduced these complex anti-avoidance rules, pure capital which does not include any element of income or capital gain is a tax-free remittance.

If, rather than being tax-free, all remittances whether capital or income were charged to tax regardless of source (with possibly an exemption for remittances to acquire certain UK-based capital assets), all objectives would have been met.

The non-domiciled, UK-resident individuals would pay more tax but they would have certainty their privacy would be preserved and they would have a reduced threat of an investigation. Non-UK domiciliaries would continue to come to the UK at a time when we desperately need them.

In addition, the money wasted by HMRC and the taxpayer in investigating whether tax is payable and in calculating how much should be paid could be saved and spent on other things.

If you agree, please let me know by joining Family Bhive and airing your views. Together we could make a difference, for the benefit of all.

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