By Philip Clothier
October 20, 2010
In the Cayman Islands they are celebrating the end of one of the more scary windy seasons. The gigantic Hurricane Earl had promised to cause havoc, just as Hurricane Ivan had in 2004. But this time the islands were saved, as Earl swung away to terrorise the eastern seaboard of the US instead.
Meanwhile, a more serious threat has been hovering over the Caymans: the threat to its famous tax haven status. The issue is whether to let the Caymans continue as an offshore haven through which billions of pounds are funnelled, untaxed, around the world. The power to make any changes lies with Westminster, the ultimate political controller of this British overseas territory-and thanks to the financial crisis London has suddenly found itself with unusual leverage over the Cayman authorities.
The key to tax havens like Cayman is that they charge no income tax, no corporation tax and no stamp duty. Even better, they exempt some companies from tax for long periods in the future. They are also places with an extraordinary degree of anonymity, where companies don't even have to file accounts on the public record.
This combination has attracted finance from around the globe ever since the British developed some of its overseas territories as tax havens in the 1950s and 1960s. Of the 50 or so tax havens today, many are closely tied politically to Britain. The rules governing them are complicated, but essentially they allow investors or companies to conduct their business offshore and out of reach of HM Revenue & Customs. Avoiding paying tax in this way is legal; companies that take advantage of offshore banking are not illegally evading taxes.
Apart from the investors themselves, the winners from this system are the lawyers, bankers, accountants and financiers who take their cut along the way. The loser is Britain, because of the lost tax revenues-anything from £7bn to £25bn each year. So as the government grapples with a big gap in public finances, one might expect closing these loopholes to be an urgent priority. Yet the message so far has been mixed.
At the Liberal Democrat conference Danny Alexander, chief secretary to the treasury, promised to help "crack down on those hiding money offshore." Despite planned job losses at HM Revenue & Customs, he has promised to allocate 900 inspectors to the task. Similarly, George Osborne has vowed to look at the possible introduction of a wide-ranging general anti-avoidance rule. Yet he was rather more silent on the subject at the Tory conference, foregoing the chance to attack tax avoiders.
A better clue to the government's agenda may lie in a chain of events that started over a year ago-and which offered the new government a perfect opportunity to shut the Caymans down as a tax haven.
Last year, when the banking crisis threatened to bankrupt the islands, the territory's government turned to London (still its ultimate paymaster) for the guarantee of a £200m loan. The relevant minister, Chris Bryant, suggested they should consider their position and think about bringing in new direct taxes-and not presume on their offshore status-before they took their request further. The Labour government, which had started to develop a real appetite for clamping down on tax avoidance, had spotted its chance. By refusing to act as a lender of last resort, it could nobble one of the world's most infamous havens.
That's where things stood until the Labour lost the election in May. Just a few days later, Henry Bellingham, newly-appointed minister for overseas territories, gave the Caymans the go-ahead to borrow the money-without bringing in new taxes.
Why was it that the Conservatives so quickly reneged on their own election promises to clamp down on those who make money offshore? No doubt they were torn between the need to stick to their word and their perception that tax havens help to keep the City of London open for business. But it is also tempting to be more cynical. Under British law, hedge funds are able to register in the Caymans-and make their deals tax-free through the islands. This is allowed even though most of those running the funds work thousands of miles away, mainly in central London. If you delve into the public records in the Caymans-as researchers for the Channel 4 Dispatches programme I have just produced did-you will find lists containing many hedge fund names, many of them based in London. Some of the names of owners of these funds can also be found on the electoral commission's record of Conservative party donors.
Indeed, just a few weeks before the government U-turn on the Caymans, a number of British hedge-fund owners handed over large sums of money to the Conservative party, in the run-up to the general election. Some had also given up to six-figure sums to George Osborne to pay for his office in opposition. No laws have been broken. But would it be getting a little carried away to wonder if they were all in it together?
