Liechtenstein Disclosure Facility Explained
On 11 August 2009 the Liechtenstein government and HM Revenue & Customs (HMRC) reached a historic agreement by way of a Memorandum of Understanding (MOU). This MOU enables UK taxpayers with a relevant property (RP) in Liechtenstein and who owe UK tax in relation to any offshore assets held, to make a disclosure to HMRC under what is known as the Liechtenstein Disclosure Facility (LDF). The main benefit to the taxpayer was that HMRC agreed to only assess that person to tax from April 1999 onwards, charge a 10% penalty and give the person a guarantee of immunity to prosecution.
People have until the 31 March 2015 to disclose, though as HMRC obtain more offshore information the danger is they will enquire into people before they have the chance to enter into the LDF.
Normally HMRC have the legal right to assess taxpayers for the previous twenty years of unpaid tax with no time limit for IHT. The financial benefit offered in the LDF is exceptional and HMRC will not make such an agreement again.
The LDF though is not just restricted to people who held RP at the time the MOU was agreed. It allows for the acquisition of new RP and then subsequent participation in the MOU. Any person, company, trust, partnership etc. that as a result of having an offshore asset owes tax in the UK and has RP can qualify for the generous terms of the LDF with two caveats. Firstly iIf the offshore bank account in which funds were held was opened through a UK branch or agency then that person/entity will not be able to benefit from the shorter limitation period on which HMRC will seek to tax. The second caveat is that if the person/entity is under an investigation by HMRC, specifically under their Civil Investigation of Fraud procedures (known as Code 9) or subject to criminal enquiry, they will not be able to participate.
In all other circumstances the LDF will apply.
For example; If someone has assets held in Dubai that have created a tax charge arising in the UK or the funds originate from undeclared and untaxed sources in the UK, the first step for that person would be to obtain RP in Liechtenstein. At BTG Tax we have a number of contacts in Liechtenstein who can assist in obtaining such RP. There is no need for that person to visit Liechtenstein as a number of employees within BTG Tax are notaries for trust companies in Liechtenstein and can therefore undertake all the paperwork on the trust company’s behalf.
We have a number of clients in Switzerland and are in constant dialogue with HMRC so we are able to give advice on what assets can be obtained to ensure that you comply with the definition of RP in Liechtenstein.
Once that has been done that person could consider registration, however their affairs could be quite complicated. Many people with offshore structures will have a trust or foundation and possibly companies sitting under these. Investments are likely to have been made on their behalf, so it is not a simple job to calculate the liability or on occasions decide what the actual structure is. In our experience we have found that it can sometimes be preferable to interrogate all of the offshore bank accounts and ensure that we understand and are fully aware of all of the structure before registration is made under the LDF.
At this stage if the structure is complex, we can speak to our appointed contact within HMRC to discuss the issues on an anonymous basis. The real benefit here is that we can obtain agreement on technical issues that may arise, so when the disclosure report goes in we limit the possibility of the disclosure being investigated. This is something that has never been offered before and if we were to make a client disclosure outside of the LDF this facility would be unavailable and HMRC would certainly enquire into the disclosure.
If there are any domicile or residency issues that require confirmation from HMRC, they have agreed to make a decision within nthe LDF process, again this is a major concession by HMRC. In recent times HMRC have refused to give a residency or domicile decision on most occasions and are actively enquiring into cases where they believe there may be residency or domicile issues. Such enquiries often taking a number of years to resolve.
Once the tax calculation has been done and any technical issues resolved registration for the LDF can then be made with HMRC. Once the person receives back a Registration Certificate from HMRC, they have seven months to make the disclosure if they choose to calculate the tax on the composite rate or ten months if they wish to apply the actual rates.
The composite rate is 40% and applies to all closed tax years, HMRC are likely to confirm the composite rate still applies at the end of each tax year up to 31 March 2015. The composite rate may be attractive in certain trust scenarios where you could have incurred tax up to a rate of 64% or in some company situations where you may have both corporate and overdrawn director’s loan account liabilities.
HMRC expect a detailed report to be submitted with the disclosure. The report must explain how the tax has arisen, any decisions taken in respect of technical matters and the reasons for them. The report will also need to state what information was available to help the tax adviser calculate the tax liability and whether any estimates or assumptions have been made. We can expect HMRC to be reasonable and flexible in consideration of the estimates used, having regard to the actual evidence available in preparing the report.
Once the disclosure has been made, HMRC have six months to either enquire into the disclosure or confirm that they have accepted the disclosure as complete. So peace of mind may be confirmed within a relatively short period of time.
One final benefit to bear in mind is that HMRC will give due consideration to time to pay requests where this may be required.
To conclude, HMRC are starting to receive and process information on overseas bank accounts in respect of UK taxpayers, from the 308 information notices they sent to banks last year. The LDF really could be the last opportunity to disclose any tax irregularities and obtain a beneficial basis of settlement with HMRC. It is very unlikely there will ever be another disclosure opportunity as favourable to the taxpayer and anyone investigated in the future can expect little sympathy from Revenue officers but plenty of intrusive enquiries and a hefty penalty bill at the end of it.
The LDF gives people with complicated offshore arrangements, who are currently afraid to remit offshore money to the UK the opportunity to re-structure their affairs so that they are tax efficient. More importantly they can then access and use the balance of the monies available as they see fit and possibly pass it on to the younger generations within their family, without the fear of a future large tax liability and a long and drawn out enquiry from HMRC for those beneficiaries.
Jeff Millington - jeff.millington@btg-tax.com