Channel Islanders could be forgiven for feeling somewhat unloved by the rest of the world. An attack in January by Labour leader Ed Miliband, in which he urged the European Union (EU) to clamp down on “tax havens” starting with the British crown dependencies, preceded a series of UK Government decisions against Jersey and Guernsey.
Chief among these were the removal of Low Value Consignment Relief (LVCR) and moves to rein in Qualifying Recognised Overseas Pension Schemes (QROPS) – a lucrative sector that has become increasingly important to Guernsey’s financial services industry in recent years, and which Jersey was poised to enter.
Add in other external pressures, such as the uncertain macroeconomic environment, the growth of competing offshore financial centres around the world, and the potential challenges posed by regulatory initiatives – notably the US Foreign Account Tax Compliance Act (FATCA) and Europe’s Alternative Investment Fund Managers (AIFM) directive – and the Channel Islands appear to face significant headwinds over the next few years.
So how well placed are Jersey and Guernsey to cope with the tests ahead? Could they work more closely together to strengthen their position? And where are the opportunities for growth in their financial services industries?
LVCR abolition
The abolition in April of LVCR – a tax-break which enabled Jersey and Guernsey exporters to undercut UK rivals on low-value items including CDs and DVDs – was a blow to the islands’ economies, and reportedly put thousands of jobs at risk.
Senator Sir Philip Bailhache, Jersey’s assistant chief minister with responsibility for international relations, says it was understandable that the UK Government should seek “to stem any leeching of taxes”, but argues the decision to withdraw relief from the Channel Islands was discriminatory, as it did not apply to other non-EU jurisdictions (a challenge on this basis was dismissed by the UK High Court in March).
But while the move against LVCR was foreseeable – given the UK Government’s renewed focus on tax revenues, and sustained lobbying by high-profile campaign group Retailers Against VAT Avoidance Schemes – recent developments in relation to QROPS were unexpected and therefore trickier to deal with.
They are particularly worrying for Guernsey, given the rapid expansion of the sector in recent years.
According to HMRC data obtained by pension provider Concept Group under the Freedom of Information Act, and first reported by International Adviser, the island accounted for about one-third of QROPS transfers in the first part of 2011 (a significant sum, based on global transfer values of £471m for the 2010 tax year, up from £367m in 2009).
Indeed, the size of the market brought it under closer scrutiny from HMRC, and towards the end of 2011, the agency announced a clampdown, in part focusing on regimes designed to attract non-residents’ tax-relieved savings by offering different treatment to non-residents and residents.
Tax reasons
Guernsey introduced pensions legislation (section 157E) to accommodate the revised rules in March, but this prompted HMRC to remove 310 of the island’s 313 QROPS from its register.
In an explanatory memorandum published last month, HMRC highlighted a paper discussed in the Guernsey parliament itself, which stated 157E schemes were “unlikely to be attractive to a large proportion” of residents taxpayers, because they would not receive tax relief on contributions to the scheme and would be subject to a 20% tax charge on transfers from an existing Guernsey pension. As a result, HMRC argued they were a vehicle for non-residents and would encourage transfers from UK schemes, “primarily for tax reasons”.
The prospects for Guernsey’s QROPS industry appear bleak. Peter Niven, who will this month step down as chief executive of Guernsey Finance, to focus on his non-executive directorships, says the island has tried to work within HMRC’s rules. Nevertheless, given recent developments, Guernsey should “move on” and instead focus its attention on new sectors that can take over from QROPS, such as foundations and image rights – both of which will be boosted by changes to legislation this year.
“Fortunately Guernsey is firing on a number of cylinders, and we are not wholly reliant on any one sector of the financial services industry,” Niven adds.
Rex Cowley, a pensions specialist and the principal of Jersey-based New Dawn Consultancy & Research, takes a similar line, and says Guernsey is unlikely to attempt further appeasement of HMRC by re-drafting its legislation yet again.
He instead expects corporate activity on the island, as QROPS providers seek to remain in the market either by acting as consolidators – acquiring the books of smaller operators – or establishing a presence in alternative jurisdictions.
As an example of the type of deals that could be done, Cowley highlights the recent acquisition of Momentum by its Isle of Man rival, BW Oakfield. Crucially, the purchase gives BW Oakfield a foothold in Malta, which as an EU jurisdiction is likely to be viewed more favourably by HMRC.
Unclear position
As for Jersey’s long-awaited QROPS debut, the implications of Guernsey’s position are unclear. Bailhache says a Jersey parliamentary debate on its new legislation was postponed last month, until the island “has greater clarity” from HMRC.
Cowley says the odds are even on whether Jersey will press ahead with its plans, but forecasts that, even if the island decides not to pursue QROPS, it may instead turn its attention to Qualifying Non-UK Pension Schemes (QNUPS).
“Hence Jersey and Guernsey will probably end up competing for the international market through IPPs [international pension plans] and QNUPS,” Cowley predicts. “It is a non-UK tax relieved market, so a very different kettle of fish compared with QROPS.”
Joining forces
With external pressures increasingly coming to bear on both Jersey and Guernsey, many commentators ask whether the islands should work together, to reinforce their position in the global economy. The question is a thorny one, given the history of the two jurisdictions and their competing commercial interests.
Nevertheless, the opening of a joint office in Brussels last year showed that cooperation is possible, and Bailhache says the venture has raised the profile of the islands within the European Commission (EC).
He adds: “I will not say we are necessarily influencing the direction of policy in the EC in any material way, but I think it is helpful that the Commission officials and commissioners understand what the Channel Islands are doing.”
Niven says Guernsey plans to promote itself in South America, and suggests that “a joint message from the Channel Islands” there could also be cost-effective, given the large number of countries in the region and the consequent travelling costs. However, the entente cordiale should only extend so far according to some islanders.
For example, while suggestions that Jersey and Guernsey could create a joint financial services regulator are broadly welcomed by Niven and Bailhache, Cowley warns that such an initiative could be harmful. In particular, he raises concerns that such an institution would be overly bureaucratic, blunting its ability to react effectively to developments affecting the financial services of one island or the other.
There are also mixed views on the possibility of opening a joint London operation. Bailhache says Jersey Finance will establish a presence in the city in late 2012 or early 2013, which he hopes will “lead to better relationships and fewer collisions” with Westminster. But while Bailhache’s preference is for a Channel Islands office, Niven scotches the idea.
Niven says: “It is good to work on new jurisdictions that do not know our brand and where we could work more cost effectively to get the brand understood – places like South America, for example. But London has been a more traditional market for both of us and we both have our very strong contacts there. I personally would not see any need at all to have a joint office in London.”
Where there is unanimity, however, is that both islands should focus their attention on building relationships in emerging markets for their future success.
In addition to Brazil and other parts of South America, Jersey also plans to expand its business in the Gulf.
Looking east
Bailhache recently returned from a visit to Qatar, where he signed a double taxation agreement, and says the resource-rich country is one of Jersey’s key target markets, alongside Oman.
As an example of the island’s success in the region, Bailhache points to the establishment of Abu Dhabi Commercial Bank in Jersey last year.
Meanwhile, Guernsey Finance is focusing on attracting banks from the Middle East, as well as Asia, where it has a Shanghai office. Niven says the island is also considering whether it should establish a presence in India.
Cowley says the islands are on the right track.
“Traditionally, the Channel Islands had a big focus on the UK and western Europe, but the nature of wealth has shifted towards the emerging markets,” he adds.
“If you look at the offices of the trust companies, they are starting to spring up in interesting places like Hong Kong, Singapore, Jakarta and Beijing.
“There is definitely a move in terms of the physical presence, as they start to diversify their businesses away from what was the high net worth UK or European private client, and I think that trend will continue.”
