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By Tom Winnifrith | Saturday 11 November 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
The Guardian's coverage of the Paradise Papers has now turned to my old friend the Isle of Man based fugitive from Korean justice, Mr Jim Mellon. The Grauniad's coverage goes far but, sadly, its journalists fall for some slam dunk lies. This all concerns the Hoxton Pony,a fashionable bar in uber hip Shoreditch. I used to live round the corner and know it well.
According to the Guardian: In 2007, Mellon teamed up with his longstanding business partner, the Canadian billionaire Stephen Dattels, to become a co-partner in the venture although companies house suggests that the bar was not bought until 2008. The Guardian writes:
"Rather than invest directly in a British business, Mellon created a layered structure. The bar was run by a UK-registered company, Calabrese House Ltd, which was entirely owned by an Isle of Man company, Calabrese Holdings Ltd, which had four equal shareholders.
Mellon and Dattels provided the funds, investing £500,000 each. They each held 25% via the Isle of Man. And it was the Manx vehicle that would pay out any dividends. If the bar was ever sold at a profit by its Manx parent, there would be no corporation tax to pay – because the Isle of Man does not tax company profits.
The leaked files show Appleby suggesting various ways this structure could help minimise tax. Mellon’s representative said the recommendations had not been acted on. The financier told the Guardian the bar had never made a profit, and that “the Calabrese investment has not been a good one”.
There are no tax advantages to holding the business outside the UK, according to Denham Eke, managing director of Mellon’s Isle of Man based Burnbrae Group. He added: “The reason we used an Isle of Man holding company is that we operate from the Isle of Man. It is our domicile and it is where we have our accounting and support infrastructure.”
Gerardo Calabrese, who runs the bar and holds a quarter share, said the dual Manx and UK structure was for convenience, for “minimising any cost duplication”, and had nothing to do with avoiding tax. Dattels did not respond to an emailed request for comment.
Well let's start with Mr Calabrese first as he is telling an obvious lie, a demonstrable porky. Having two companies ( a parent and a subsidiary) each filing accounts, annual returns etc does not result in "minimising cost duplication", it creates cost duplication! And the cost of filing accounts etc in the IOM is far more than in the UK. So Geraldo is telling a lie and that begs the very real question why?
So let's now turn to Mellon's henchman Denham Eke who runs all of his business affairs in the Isle of Man and who insists that there are no tax advantages to running a business outside the UK and that you need an extra company in the IOM as a holding company simply to tie in with the Mellon infrastructure offshore. Well Denham, as we both know, that is not entirely true either is it?
It is normal for Mellon to own a UK entity and a sister IOM entity. See Sleepwell Hotels UK Ltd as an example. But it is not needed. The Mellon accounts team can, and do, provide support for a number of stand alone UK entities without there being an IOM parent - for instance the chronically loss making Master Investor Ltd. As to there being no tax advantages that is not really true either. There can be very material advantages indeed.
The Guardian notes that Mellon and Dattels each invested £500,000 into the IOM company providing ALL of its finance. The UK company's accounts show that from 2009 onwards all of its liabilities were sorted but a new long term liability of £1 million was created. Since the UK company publishes only abbreviated smaller company accounts you cannot see where that is from but I suggest that it is in fact a loan from the IOM company. So the UK Company pays interest (which reduces its taxable profits) and the IOM gets interest income (which is tax free). Had Mellon & Dattels merely injected £1 million of equity into the UK company there would have been no interest charges to reduce UK tax payable and no cash heading back to the IOM tax free.
And it may be better still. I have confirmed with those who have first hand experience of privately owned Mellon operations in the UK, that they are often invoiced for very steep fees by IOM based entities - a management charge. Of course there is no reason why a bar in EC1 producing its own accounts and managed by Geraldo who is based in East London, should pay a management fee to an IOM entity such as Calabrese Holdings Ltd. But were it to do so that would be even more tax free cash in the IOM and even lower taxable profits in the UK.
So Mr Eke there can be massive and perfectly legal tax advantages to such a structure as you well know which is precisely why you and others set them up. Perhaps you might want to say how much has been paid in both interest charges and management fees from the UK to the IOM?
And that brings us back to Mellon's claim that the bar had "never made a profit". A bar in Shoreditch losing money seems like a class act, it really is almost impossible. Such bars change hands for vast sums because they are quite simply a license to print money.
The 2017 accounts are overdue but in the year to 31 January 2016 the company did indeed report a loss: £30,579. That rather begs the question what would the loss have been without interest charges and any management fees. Accumulated losses at 31 January 2016 were £693,855 so perhaps there is enough tax shelter to mean that the Pony could make a profit and not pay tax. But we will never know. The UK accounts are abridged and so we have no idea what interest payments and management fees going to the tax free IOM are. And IOM company accounts are not published on its companies house for all to see.
But were Calabrese IOM to charge its loan at a 10% interest rate (the standard loan rate Mellon has used in other situations) then the interest alone would have been more than the reported losses since he invested. If there is any sort of management charge then that would be a bonus but already you can appreciate the scale of potential, legal, tax avoidance.
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