A Little Local Trouble Big Tax Avoidance Problems At HSBC

HSBC has called itself the world’s local bank. Revelations about its tax avoidance tactics have made it globally notorious and emphasised the continuing dangers of tax avoidance schemes.

For many, from the outside at least, things seemed to be going rather well at HSBC.

It appeared to avoid many of the pitfalls that befell some of its biggest rivals towards the end of the last decade. In 2009, in his final year as executive chairman, Stephen Green was hailing the combined 178 years of service of the bank’s executive directors and claiming here was no better management team in banking. This, he argued, was why HSBC remained profitable through the financial crisis – scandal free and with no need for a taxpayer rescue while other banks tarnished the reputation of the industry.

Shortly after this statements, Stephen Green stood down, became a peer and took the position of trade minister for the coalition government. It’s hard to guess who is the most embarrassed by the recent revelations about the bank that was under the stewardship of him and those colleagues he so lavishly praised.

The bank's offices in Geneva have been searched following reports that it helped many of Europe’s wealthy avoid paying taxes while also turning a blind eye to arms dealers and other questionable individuals to whom it provided services. Apologies emanating from the bank say that the revelations are historical events and that the bank now operates to higher standards. If the revelations are true, it would be difficult for the bank to operate on any lower standards. The leaked information identifies 7,000 British clients of HSBC, of which 1,100 had not paid their taxes.

The timing is not good for those customers. In recent years, HMRC, along with other agencies, has been bringing cases to court and looking very closely at any scheme, investment project or other means being used to help people reduce or remove their tax liability. Anyone who has been involved in such schemes can expect to be the subject of especially close attention from the authorities. Both tax avoidance and tax evasion are high on the agenda of both this government and whoever forms the next one as they look to close the tax gap – the shortfall in tax collected.

In 2012, the tax gap stood at £35 billion. Of this, £4 billion was blamed on tax avoidance and £5 billion was put down to tax evasion. These are figures that the state wants to see reduced. This means that many working in finance need to be very careful about schemes they are recommending to current or future clients. Just asking a few basic questions could head off future trouble. For example, is the scheme doing what it is set up to do? Tax avoidance schemes claiming to have been devised for film production and music industry projects have fallen foul of the tax man; meaning huge bills for those who invested in them and questions to be answered by those who created, promoted and managed them. Anyone looking to be involved in a tax avoidance scheme needs to carry out proper due diligence. Without  proper due diligence there is a real risk that the authorities will not view the scheme as bona fide, with financial penalties and prosecution the likely outcomes.

Financial advisers may feel they are a better judge than the authorities when it comes to legal tax avoidance. That may well be the case in some instances. But it is worth noting that many schemes that were in operation for many years without anyone suspecting any wrongdoing have since been the subject of prosecutions. There is a large political appetite for tackling tax avoidance, as reflected in some of the provisions of the 2015 Finance Bill, last October’s agreement between 51 countries to share information in order to crack down on tax evasion and the December 2014 EU update of measures to stop anonymous organisations being used to help promote tax evasion or launder money.

Only time will tell whether the new enthusiasm for tackling tax avoidance and evasion endures and is successful. But if the HSBC saga tells us anything, it is that there is no such thing as a fool proof illegal approach when it comes to trying to escape paying tax.

As we write, HSBC is at the start of what promises to be a very lengthy investigation. It is likely to shine a light on its activities and the role played by a number of third parties. Many of those implicated will have to prove their activities were beyond reproach and in accordance with the letter (if not the spirit) of the law. The argument often voiced concerning banks is that they are too big to fail. That may be the case. But the problems surrounding HSBC at least prove that no one is too big to be brought to book.

The non-payment of tax is an issue where the government believes it can score points, claw back cash and restore public confidence in the UK’s financial sector. HMRC has been given more resources to investigate and secure convictions and the figures back up its claim that its newly-aggressive stance is gaining results. In such a climate, an ongoing commitment to compliance, the ability to seek the best legal advice at the earliest opportunity and an ongoing awareness of the need to tread carefully regarding tax law are all vital components in the day-to-day work of anyone involved in tax affairs.

HSBC now has the unwanted distinction of being one of the most high-profile names associated with tax avoidance. Its claims about the quality and integrity of its work over the years now look increasingly hollow. The problems of the world’s local bank may well serve as a warning to many about the risks of tax avoidance.