The Chief Executive of Jersey based Liberty Ermitage Group, Ian Cadby, said last year "The quality of lifestyle will play a key role in attracting fund managers, Jersey can become 'The Connecticut of the British Isles,' establishing a cluster around hedge fund managers. The island is close to London and provides an attractive and simple tax regime as well as a good quality of life."
This view was reemphasised by Zbysh Hermaszewski, who relocated to Jersey in 2005, and is one of the principals of Altis Partners: "We were attracted to Jersey by various factors. It is offshore but is not so foreign from London. It has a well regarded financial services centre. The neutral tax regime is attractive and it has good communications. But a key issue in our decision was the quality of life in Jersey and other less tangible attributes such as the quality of local schools."
Other hedge fund managers which have recently relocated to the Island include VHC International and Rochester Capital.
Increasing focus from HM Revenue & Customs (HMRC) has also created the need for some fund managers to rethink their current operational structure.
In this climate the need to protect the investor tax position is paramount, and a key part of this involves ensuring that the fund itself does not become UK tax resident by virtue of its central management and control being located there.
Whilst current Revenue activity in the UK hedge fund market place is focused on the manager and related offshore entities, it is not a huge leap of faith to go from there to reviewing the offshore fund itself, so even if residence is not the first line of enquiry from the taxman, the fund manager can be sure that the point may well come under consideration.
Whilst board meetings may be held in the fund domicile, say, the Cayman Islands, the sheer geographical stretch can make it difficult for the directors to demonstrate that all strategic decisions actually take place at those meetings. Moving to the Cayman Islands might be an option, if that is where a fund is domiciled, but it will always be difficult for managers to create and maintain client relationships at such a distance.
Operating from a centre like Jersey enables directors to maintain the strategic management of the fund outside the UK more easily, whilst remaining within easy reach of key relationships in London. Being able to make day trips to London without creating the need for overnight stays is an important factor for the fund manager, as is the ability to tap into the time zones of financial centres in the US and Asia. In essence, being close to London makes sound business sense.
Residence is far from being the only way in which a fund structure can be challenged. The Revenue's approach is wide-ranging and can come from a number of angles – challenging the pricing structure which operates between the different entities in the fund structure; building on this to assess whether or not the investment manager exemption applies (critical for maintaining the tax efficiency of the overall structure); and challenging tax and NI planning undertaken by the fund managers in relation to their own earnings.
Of these, pricing in particular is a key area for HMRC's attention and one where, according to anecdotal evidence, penalties have already successfully been applied in the industry. Creating a Jersey base for key individuals will also reduce the functions undertaken in the UK and help to minimise the UK tax 'footprint' of the structure. It will be particularly attractive in the early stages of a business when there is generally greater flexibility to relocate functions without attracting exit charges in the territory of origin.
Locating functions in Jersey also helps fund managers to deal with any HMRC enquiries efficiently on a practical level. A recent Special Commissioner's decision suggests that a UK fund manager could be required to provide to HMRC any information about the fund or its investment advisor which is in his de facto possession, regardless of whether the UK company is legally entitled to obtain it.
Meanwhile in Jersey the fund manager enjoys all the benefits of a simple low-tax regime. The top rate of income tax is 20%. Social security is minimal compared to that in Jersey's onshore neighbours, and contributions are capped. There are no capital gains or wealth taxes, so gains can be realised tax free without having to rely on (and qualify for) taper relief. There is also no need for costly and complicated remuneration tax avoidance techniques as the individual's tax rate can never be more than 20% and, with simple, non-aggressive planning, will normally be significantly lower. Low taxes mean that there is little incentive for residents to undertake complicated planning, and as a result the relationship between taxpayers and the tax authorities is benign and positive.
A key factor in increasing Jersey's popularity with fund managers was the introduction of the Expert Fund regime in February 2004. Its impact can be seen in the latestfigures from the Jersey Financial Services Commission which shows that during the 12 months ended 30 September 2005, the net asset value of specialist type funds (hedge, property and private equity) administered in Jersey increased by 73% to £64 billion.
The regulatory approval process for funds now takes a maximum of four days and provides promoters and other professionals with clear, pragmatic and workable criteria with no restrictions on borrowing or investments.
The qualifying criteria for an investment fund has been drafted to be as inclusive as possible and targets professional or sophisticated investors with a minimum investment of US$100,000.
There are other categories of public and private Jersey funds which are used for hedge funds and can be either open or closed ended and set up as a unit trust, limited partnership, or as a company.
Recent follow up regulations on non-domiciled funds has enabled promoters to select Jersey based administrators and custodians even if their 'materially equivalent' Expert Fund is domiciled elsewhere. This move enables fund promoters to tap into the expertise on the island, even if the fund is not domiciled in Jersey.
A number of global administrators operate in Jersey, including State Street, Royal Bank of Scotland, SG Hambros, Royal Bank of Canada, Standard Bank, Capita, Northern Trust, and Dresdner Kleinwort Benson, as well as local administrators such as Mourants and TriAlpha (source: Fitzrovia 2005).
Promoters are attracted by the appropriate level of regulation combined with the experience of the locally based administrators and advisers, its acknowledged reputation, sound corporate governance and range of servicing options. These promoters include Lyxor, Deutsche Bank, Bluebay, and Liberty Ermitage (source: Fitzrovia 2005) as well as a number of other fund managers.
The Jersey proposition needs to be weighed carefully when considering other options. Simplicity is a particular advantage given that other territories such as Switzerland or Ireland could typically require a substantial tax planning exercise to achieve the same benefits and will leave the fund manager with the continuing worry of what may change. In the meantime, territories which offer no income taxes, such as Bermuda or the Cayman Islands, typically rely on a heavy burden of other taxes which can result in hidden costs in terms of licences and work permits and potentially punitive payroll taxes, stamp duties and import duties.
All offshore centres – and some onshore ones – face challenges when it comes to balancing economic growth with the risks of over-population. Jersey has now concluded that a degree of immigration is vital to the future prosperity of the island. Hedge fund managers will find the Jersey authorities keen to support them in bringing expert staff to the island from outside. Future changes to the island's population policy will make the process even easier.
In addition to this, for Jersey, must be added the very substantial benefits of high quality regulation, experience and professional expertise. Jersey is a finance centre with substance and depth. It has received independent endorsement both for the quality of its financial regulations and its co-operative approach to highlighting money laundering and fiscal crime. International bodies such as the Financial Action Task Force and the Financial Stability Forum, organisations formed by the G8 nations to seek improved standards in financial regulation, as well as the International Monetary Fund, have endorsed the island's regulatory measures in recent years. In the meantime, the quality and breadth of professional expertise available within the island continues to be a key factor in attracting new business.
In a situation where the hedge fund industry is attracting increasing focus from HMRC, pre-emptive action is vital.
A move from the UK to another centre is an important option for fund managers to consider in seeking to protect the investor tax position and minimise the overall tax burden arising in a structure.
Choice of location often comes down to personal preferences. Family and lifestyle considerations, the environment and culture of a place will all play a part. Jersey won't be right for everybody, but it's well worth a closer look.
Jane Stubbs is Head of Tax and Administration Services, and David Pirouet is the Assurance Partner with the PricewaterhouseCoopers Channel Islands practise.