Practical Experience in Delivering Substance

By Richard Bray

Back in 2002 a London based family was looking to set up an office and base of operations in Guernsey. The Guernsey Company needed to establish a regulated advisor in London in compliance with the requirements of the FCA and with HMRC’s Investment Managers’ Exemption. The family were introduced to Wayne Bulpitt, Wayne told them how it could work and Aspida was borne.

Fast forward a year or three and we are speaking with the HMRC; this is our model, this is how we operate, this is how we demonstrate mind and management in Guernsey, this is the fee structure. Does this work? HMRC agreed it did.

Looking now at Guernsey’s new substance legislation (properly known as The Income Tax (Substance Requirements) (Implementation) Regulations, 2018), we see people offering tick box solutions to testing your compliance with the law. This is rather worrying as we know, based on 16 years of experience, that substance is not a tick box exercise.

“Substance is not, nor should it ever be, a tick box exercise.”

There may be some items on a tick box you can ‘tick’ – identifying your Core Income Generating Activity (“CIGA”), being in scope of the legislation, or number of Board meetings being held in Guernsey for example, but the real underlying evidence of whether or not you have substance comes down to value judgements on the evidence you can supply around the mind and management topics; evidencing activities such as decision making, and oversight of outsourced activities. It is these points that truly demonstrate mind and management over the CIGAs.

It is worth re-iterating that point – substance is not, nor should it ever be, a tick box exercise. To copy one of the recent Data Protection mantras, substance should be incorporated into your operations ‘by design and default’. Providing substance should be built into the very essence of your service delivery. By extension, substance should not therefore be proved only through quarterly minutes, but by the day to interactions that demonstrate engagement with and oversight and
control of the CIGAs. In short substance must be in your culture.

At Beauvoir, our very genesis was the provision of substance suitable to meet the rather exacting demands of HMRC and the Regulators. As a result, the provision of substance is built into the very fabric of our being. When we talk substance, we know what we are talking about. We have lived substance for the last 16 years, not just studied the Guernsey legislation since it was released last year!

The cost of failing to properly provide substance is far more than the penalties and fines written into the legislation – onerous though they may be. Not properly delivering substance could move the perceived tax domicile of the company to a different jurisdiction, resulting in far greater costs to the client and opening you to potential litigation. It is thus clearly important to know that your substance delivery works, hence the growing demand for substance audits.

So when you are looking for someone to perform an audit on your substance delivery who should you ask? Someone who has looked at the theory? Or who someone who has lived and breathed substance for 16 years, been reviewed by HMRC and found to be delivering substance as required?

There is really only one substantial answer – call Beauvoir.

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