Independence for Jersey is not the remedy for political attacks

Sir Philip Bailhache, Jersey’s Assistant Chief Minister, has hit back at recent political attacks on the Island’s finance industry by suggesting in an interview with the Guardian newspaper that Jersey should consider seeking full independence from the UK.

Jersey is one of five crown dependencies (the others being Guernsey, the Isle of Man, Alderney and Sark), all of which are largely self governing save that the UK government is responsible for representing them internationally.

Sir Philip's controversial comments come after a period of difficult relations between the UK and the Channel Islands, which has seen the scrapping of Law Value Consignment Relief for goods shipped from the Channel Islands, changes to the QROPs legislation which seem particularly to have targeted Guernsey, and, last week, the Prime Minister branding legal tax avoidance as morally repugnant.  These things, in the view of Sir Philip, demonstrate that the interests of the Islands and the UK are not always aligned.  He commented:

"I hope that the constitutional relationship with the UK will continue. But if it becomes plain that our interests in fact lie in being independent it doesn't seem to be that we should bury our head in the sand and say we're not going to do that."

Whilst I understand Mr Bailhache’s frustration with UK politicians taking action which sometimes damages the Channel Islands’ interests whilst offering little, if any, concomitant benefit to the UK, I struggle with the idea that declaring independence would improve the situation.

The UK is not the only country which is clamping down on legitimate tax avoidance. François Hollande made a manifesto pledge to stop French banks operating in tax havens and has introduced a raft of new measures which penalise the use of trusts, and the US has introduced its FATCA legislation which has put new and very onerous tracking and reporting requirements on the assets of US persons, shifting the onus for reporting from the individual tax payer to the financial institutions they use.  Doubtless other countries will also introduce similar measures in time. The fact of the matter is that the political climate has changed since the economic crisis, and the smaller international finance centres have to find their feet in the new paradigm.  At the moment, they are struggling to do so.

One of the current difficulties and frustrations for the crown dependencies is that they are not generally members of the big decision making bodies, such as the EU, G20 or the OECD and therefore do not get a chance to actively participate in debates regarding the future of tax regulation.  There is an old adage that if you don’t have a seat at the dinner table, you are on the menu for lunch – a position of great vulnerability. 

The crown dependencies currently have to rely on the UK to represent them at these fora – something which the UK sometimes does vociferously but increasingly often does not.  It is far from an ideal position, but what would declaring independence from the UK achieve?  Surely it would make a weak situation much worse?  Not only would Jersey not have a seat at the table, but nor would it have the UK to fight its corner at least some of the time.  And indeed even if it did have a seat at the table, it is such a small territory that it would have no realistic prospect of having its voice properly heard.  Imperfect though it undoubtedly is, speaking through the aegis of the UK government is better than not being able to speak at all.

Furthermore, if Jersey becomes independent, it won’t stop the UK introducing a general anti-avoidance rule (as was announced in the last budget) or any other measures it wishes to implement to penalise those who choose to use tax planning structures.  Nor will it stop other countries doing what they feel is right.  So I am struggling to understand what would improve.

However, one area where I am broadly in agreement with Sir Philip is in his attitude to tax structures.  He is quoted in the Guardian as saying:

"I think this idea that there is some kind of grey area where things are within the law but you shouldn't do them is potentially quite difficult … People have to ask themselves: 'If you feel strongly [about] something people ought not to be doing, why don't you change the law to make it unlawful?'" 

Holding oneself out as a moral arbiter is dangerous territory for those who work in the finance industry.  How can one judge what is right and what is wrong, and where the line should be drawn?  Up until this week, most people would have said that for independent contractors having a company through which to bill work was an entirely legitimate and appropriate method of mitigating tax, and yet a cursory glance at the Daily Mail will see that they, at least, are now condemning such arrangements.  What next – will it be considered morally repugnant for wealthy people to invest money in ISAs?

I am not arguing that there should be no debate around tax avoidance and the UK government (and others around the world) are perfectly entitled to bring in GAARs or similar measures if they feel it appropriate.  As an when such measures are introduced, the crown dependencies need to react to them.  But morality should be a matter for the individual tax payer, whereas matters of law should be paramount for the financial services companies which assist them.

In my view, it is naive to think that independence would improve Jersey’s ability to defend its finance industry and I have very rarely in 25 years of working in the industry heard strong voices in favour of independence.  I suspect, therefore, that Sir Philip remains in a minority.

The future of Jersey’s prosperity, and that of many other offshore financial centres, probably lies much further afield than the UK, the US and western Europe.  Other economies, such as in the BRICS, are growing faster and offer more opportunity for business. Countries tend to go through a cycle of maturity.  When they are rapidly growing, they want to encourage inward and outward investment and will permit and even encourage structures which facilitate the free and effective movement of capital.  As they mature and growth slows (as has happened in many of the traditionally strong western economies) so the focus shifts towards ever increasing complexity of regulation, and a desire to prevent "leakage" of cash from the system.  Jersey Finance Limited is therefore, in my view, right to be  building relationships in those territories who have the most growth potential, and should remain focused on this rather than trying to achieve independence.