Ahead of the game

Wednesday, 02 April 2014
Practitioners in the Isle of Man face new laws and regulations - the UK’s statutory residence test came into force, the Isle of Man Disclosure Facility opened, and new reporting obligations under the intergovernmental agreements signed with the US and the UK are on the way.

Paul Hotchkiss set up his own firm, Hotchkiss Associates, five years ago, prior to which he was a tax partner at KPMG. He has always enjoyed the technical aspects of tax advisory work, but found that, as he progressed through the ranks, more of his time was spent on managing people and the practice. ‘I actually quite enjoy a lot of the technical stuff, but really wanted to be master of my own destiny,’ says Paul.

His firm provides tax advisory services: ‘We provide clients with general tax advice across the board, with a specific focus on offshore-related taxation. This also includes assisting with tax enquiries, investigations and the use of disclosure facilities where necessary. The practice also covers international work where required. It’s a busy practice and has tripled in size in the past year.’

Lateral thinking

Much of the work Paul undertakes is on behalf of UK-resident non-domiciled clients, as well as people leaving the UK who wish to establish themselves overseas. The UK’s new statutory residence test, which took effect from 6 April 2013, affected many of Paul’s clients. It is a complicated bit of legislation: ‘It is very easy to fall foul of the conditions, especially the split-year treatment,’ says Paul. ‘But it’s a good thing – you know where you stand with most of it.’

Keeping track of all the new changes that might aect clients is quite difficult, so the ability to think laterally through all of this when you are dealing with specific client situations is essential

Paul also deals with a lot of disclosures under the Isle of Man Disclosure Facility and other disclosure facilities. The Isle of Man Disclosure Facility runs from 6 April 2013 until 30 September 2016. It can be used by individuals and companies which have undeclared tax liabilities and were UK-resident in the past 20 years. ‘Provided a full disclosure is made and all conditions are complied with, it provides the opportunity to declare tax liabilities for tax years from the year ended 5 April 1999 only, and pay limited penalties and interest,’ Paul says. He adds that many taxpayers have made innocent mistakes because the UK tax rules are so complicated: ‘It’s very easy to fall foul of them and not realise. The Disclosure Facility is a good incentive for people to come forward. The hard part for the taxpayer is realising they have a problem.’

The tax landscape is ever-changing; the UK statutory residency test and the Isle of Man Disclosure Facility are already old news. This year – more specifically from 1 July 2014 – practitioners will also have to contend with new reporting obligations under the UK and US intergovernmental agreements (IGAs). The IGAs are reporting mechanisms to allow the UK and US governments to determine the tax compliance of their residents. They will affect many of Paul’s clients, but a lot of the detail is still to be worked out. ‘There’s a lot of uncertainty around the IGAs and the practical implications haven’t yet been fully thought through. That’s certainly the case in the Isle of Man anyway because of the types of structures here,’ Paul explains.

As far as reporting obligations go, the US and UK IGAs are just the start. The OECD has recently announced its common reporting standard for the automatic exchange of tax information, which the G20 has endorsed. By 2016, it is expected that information exchange will be implemented worldwide. Paul believes it is a positive move: ‘We are moving to a world of greater transparency and I actually think that’s a good thing.’ But, he notes, there is a conflict between governments’ sensible demand for greater transparency on the one hand and the individual’s right to privacy on the other. ‘I think there is a very real conflict because a lot of individuals want to keep their affairs private and in principle they should be allowed to do that; however, there is also the growing suspicion among governments that taxpayers are not always paying the right amount of taxes,’ says Paul.

The US Foreign Account Tax Compliance Act (FATCA) was the precursor to the OECD’s common reporting standard. Worldwide information exchange is a few years away, but Manx practitioners have to deal with the repercussions of FATCA and the UK IGA. And it is not just taxpayers who are affected; the legislation has also had an impact on the industry. ‘Everybody is worried about the effect of FATCA on the financial sector; it is a real administrative burden but, as a jurisdiction, we need to remain competitive in terms of what we can offer,’ says Paul. The Isle of Man, he explains, is moving towards specific types of industries, including e-gaming, yachting, aircraft, space industries and biomedical, in order to maintain the island’s competitive offering. An increase in the number of double-tax treaties the Isle of Man has would help the island stay competitive. ‘Double-tax treaties are essential if the island wants to develop some of these industries, and, in particular, a modernised double-tax treaty with the UK would be welcome,’ Paul says.

With the introduction of the UK statutory residence test and Isle of Man Disclosure Facility, and the UK and US IGAs on the horizon, it is perhaps no surprise that Paul says keeping up to date with the latest laws and regulations is a challenge. ‘Tax legislation is becoming a lot more complicated; I think this is a worldwide phenomenon really. Keeping track of all the new changes and not inadvertently overlooking the subtleties of the law that might affect clients is quite difficult, so the ability to think laterally through all of this when you are dealing with specific client situations is essential.’ Thankfully, Paul has a good team to help him go through that thought process, and he is able to keep on top of the latest regulations via the STEP Isle of Man Branch’s programme of events.

Stepping up

Paul is the current chairman of the STEP Isle of Man Branch, and was recently elected to represent the island on Council. He became a member in 1993 because he wanted to learn more about trusts and estates. Paul was a passive member to begin with, until a good friend encouraged him to become more involved: ‘John Rimmer suggested I join the Isle of Man Branch Committee. I did, and, two years later, when John was stepping down as Chair, he encouraged me to stand for the position.’ Paul went for it, became Branch Chair, and discovered that he really enjoyed the job.

At that time Paul’s work periodically took him to the Cayman Islands. While there, he met up with the STEP Cayman Branch and was impressed by how it was run. ‘They were having monthly meetings, and I thought, well, we can have monthly training sessions. At the time, we were only holding sessions on a periodic basis.’ Now the Isle of Man Branch holds up to 12 events a year, plus its annual conference. The addition of an administrator has helped this process enormously: ‘Taking the administrative burden away from committee members means we are a lot more efficient and are able to concentrate on trying to do more for members. We are now able to give much more back to the members in terms of their continuing professional development.’

Professional development

Paul’s involvement in STEP has always been very much from a professional perspective; membership means more to him than an additional line on his CV, and he believes it should mean more to all members. The efforts of the Isle of Man Branch follow this professional line. The Committee tries to provide the best service it can to its members by, for example, trying to get a balance of speakers from a wide variety of firms to address Branch meetings. But, Paul explains, meeting the needs of members is an ongoing challenge: ‘Employers don’t always recognise the value of STEP because membership is a personal thing. Sometimes they don’t want to pay for their employee to attend the CPD events.’ Paul believes employers need to be made more aware of the value STEP membership can bring to their organisation. The introduction of a number of qualifications in recent years has greatly helped: ‘The STEP qualifications reinforce the fact that STEP itself is very valuable in terms of education. The Special Interest Groups allow members to specialise and I think they are gathering an awful lot of momentum.’

The new Qualifications Framework, which is due to come into effect later this year, will help. ‘Once that happens, STEP will gain the same sort of status as the Institute of Chartered Accountants in England and Wales, the Association of Chartered Certified Accountants and the Chartered Institute of Taxation’, says Paul. Hopefully, he explains, having a STEP qualification will then become a prerequisite to getting certain jobs.

Improving the value of STEP membership in employers’ eyes and continuing to offer an extensive range of highly regarded qualifications will help strengthen what the Society can offer members. But Paul says engagement with governments at a policy level is also important, as it will help improve STEP’s standing globally: ‘I think STEP has made incredible strides in the last four to five years in raising its global recognition, and that is set to continue.’

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Paul Hotchkiss

Practitioners in the Isle of Man have had to contend with a barrage of new laws and regulations in recent times. In the past year alone, the UK’s statutory residence test came into force and the Isle of Man Disclosure Facility opened. In the very near future, practitioners will also have to get to grips with new reporting obligations under the intergovernmental agreements the island has signed with the US and the UK. ‘Simply keeping up to date with the latest laws and regulations is a challenge for practitioners,’ says newly elected Council member Paul Hotchkiss TEP.

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