In November, a global elite, ranging from sporting and entertainment giants to multinationals and heads of state, were again exposed as engaging in complex tax avoidance schemes through a network of 19 offshore tax havens. The Paradise Papers project also shined a light on local business.
The Paradise Papers are a tranche of 13.4 million assorted confidential documents pertaining to offshore investments and tax avoidance which were initially leaked to two German journalists from the Süddeutsche Zeitung newspaper and then shared with the International Consortium of Investigative Journalists (ICIJ).
A subsequent BBC investigation uncovered evidence that several local businesses had engaged with aggressive tax avoidance practices. One such company is the Antrim-based Springhill Architectural Mouldings Ltd (SAM Mouldings). The business has been in operation since 1990, employs 160 people and produces MDF profiles and fibreboard.
Since 2008, Invest NI (formerly LEDU) has been a preferential shareholder in the company, within which a board member has a ‘beneficial interest’ (as a business growth mentor). However, the 264,967 £1 redeemable non-cumulative preference shares (originally 330,000) do not afford voting rights in any company decisions. The return on these preference shares is repayment of the original investment and an agreed 5.5 per cent rate of return. Invest NI has also offered £608,444 in financial assistance, £431,007 of which has been drawn-down since 2008.
In 2000, SAM Mouldings bought Department for Enterprise, Trade and Investment (now Department for the Economy) land for £280,000. The company then developed its business on the site and by 2014, the property (including factory and offices) was valued at £4 million.
In 2015, SAM Mouldings sold the property for a nominal fee of £1 to an ‘unconnected third party’ company in Mauritius. Leaked documents (including emails) indicate that the SAM Mouldings owners also had control of the Mauritian company (the owner directed the Mauritian company to buy shares off himself). Essentially, the owners had gifted the Antrim property to themselves.
Consequently, SAM Mouldings assumed a £270,000 annual rent bill. The rent was transferred through various intermediaries before reaching Mauritius where Global Business Category 1 (GBC1) companies are entitled to a foreign tax credit which means maximum effective tax rate is a mere three per cent. This is a form of ‘rent factoring’ whereby, in exchange for a single payment (in essence a loan), a company diverts future rents from a property to a financier. HMRC states: “By exchanging future income for a lump sum in this way the borrower aims to get tax relief that would not otherwise be available for loan repayments.”
As such, while SAM Mouldings paid £270,000 annual rent to the Mauritian company, the owner received a £200,000 loan. As a loan, only the inherent interest element of the rent is taxable. The owners, however, contend that they are fully compliant with HMRC obligations.
While Invest NI confirmed that it was aware of the property deal and had taken it into consideration, the tax-funded economic development agency referenced SAM Mouldings’ continued growth in both exports and employment and also its compliance with the repayment schedule for the preference shares. “A company’s tax planning is matter between it and HMRC,” it asserted in a statement to the BBC.