Liechtenstein Disclosure Facility - better to act now!

21 February 2012

Hot on the heels of an announcement from HMRC that the closure date for the Liechtenstein Disclosure Facility (LDF) has been extended to 5 April 2016 has come speculation that the local banks are pushing for much higher transfers of funds into Liechtenstein and a minimum period for which any account must be kept open.

Anyone who wishes to take advantage of the LDF who does not already have assets in Liechtenstein can do so by establishing a ‘meaningful relationship’ with a Liechtenstein financial intermediary. There is no fixed definition of ’meaningful relationship' but it is typically interpreted as a transfer of at least £50,000 to a Liechtenstein bank account that is then kept open until the disclosure has been agreed. The speculation – which according to our sources is well-founded – is that the Liechtenstein authorities will shortly set a minimum transfer of 30% of a taxpayer’s overseas assets and require that these remain on deposit for at least two years.

Therefore, on the one hand, HMRC are giving those with undeclared liabilities a little more time to get their affairs in order but on the other the Liechtensteiners are (perhaps understandably) asking for a little more in return for their role in the process. While there may be nothing wrong in principle with making a larger transfer of assets to a Liechtenstein institution, this is likely to involve more of an upheaval and any requirement that the funds should stay on deposit for a fixed two-year period could hinder the ability of those who have been through the LDF to re-structure their affairs. Our advice is therefore to take advantage of the LDF now before these proposed changes come into effect.

The LDF continues to offer very generous terms that are available to those with undeclared offshore liabilities regardless of any existing link with the Principality of Liechtenstein. It remains the nearest thing to an amnesty for those who wish to regularise their tax affairs and for many represents a very attractive proposition (particularly in the light of an agreement with Switzerland that is going to be unattractive to the majority of Swiss account holders).  More than 2,000 UK taxpayers have registered for the LDF to date and those that we have taken through the process have emerged with a clean slate at a very modest cost.

What is the LDF?

The LDF was created as a result of two factors –

  1. a desire on the part of HM Revenue & Customs to bring within the tax net a significant number of people holding funds with banks that have no UK connection; and (2)
  2. the pressure that was being placed on the Liechtenstein authorities to end their status as tax pariahs. The LDF is part of a much wider arrangement that includes a Memorandum of Understanding between the two governments, a Tax Information Exchange Agreement (“TIEA”) and the Liechtenstein Taxpayer Assistance & Compliance Programme (“TACP”).

For those who have deposits or investments in Liechtenstein pressure will be applied under the TACP to encourage them to demonstrate that they are UK-tax compliant. Those who fail to do so will eventually be forced to move their funds away from Liechtenstein or will find their income and gains subject to a penal rate of withholding tax.

What does it offer?

Key features are:

  • No looking back at periods prior to April 1999. Tax liabilities are calculated by reference to income, gains etc arising since this date and the ‘all-clear’ will be given following payment of the tax associated with this period.
  • Penalties capped at 10% for years up to 5 April 2009 (with no penalty at all in cases of ’innocent error’) unless you have been contacted by the Revenue in respect of previous disclosure opportunities (in which case a 20% cap applies) or have previously been the subject of investigation or arrest for tax offences and knowingly failed to disclose the assets in question.
  • A streamlined and assisted process aimed at getting your affairs in order.
  • Immunity from criminal prosecution in return for full, accurate and unprompted disclosures unless the source of the funds was the result of criminal activity other than tax evasion.
  • The ability to elect to pay tax on income and gains at a composite rate of 40% rather than calculating the liability in respect of all applicable taxes.
  • The possibility of payment by instalments if you have trouble paying in full.
  • Exemption from the Revenue’s recently-announced ‘naming and shaming’ provisions.

HM Revenue & Customs are determined that the LDF will work and they have put together a helpdesk consisting of a dedicated team of experts. Those experts will provide assistance with disclosures, on an anonymous basis if desired, and will provide guidance in terms of what is acceptable (for example, the estimating of income where full records are not available). They may also in certain circumstances grant an extension to the period for filing a disclosure.

Can I benefit?

The obvious candidates for the LDF are those who have held assets in Liechtenstein for many years, whether held directly or via trusts or foundations and the like, and have associated undeclared tax liabilities. The terms of the facility are such, however, that it is actually open to anyone who transfers funds or assets to Liechtenstein sufficient to establish a “meaningful relationship” and as a result it is effectively available to anyone with undeclared tax liabilities associated with offshore assets. The key features won’t apply, however, if you opened a non-Liechtenstein offshore account in your name via a UK branch or agency of the bank in question.

Those who are currently under investigation for serious fraud or have been arrested for a criminal tax offence are excluded.

Why should I act now?

HM Revenue & Customs already hold a wealth of information in respect of UK residents with offshore accounts. They have already made use of some of this – witness the bulk mailing of warning letters to holders of accounts with HSBC Geneva – and it is only lack of manpower that is stopping them from doing more. That manpower is now being increased; at the same time, formal agreements with other jurisdictions (and information obtained informally, by whatever means) are adding to their knowledge base. The chances are high, therefore, that whether your account is in Liechtenstein, Switzerland or somewhere on the other side of the world, sooner or later the taxman is going to find out about it. When he does he is going to come down hard. Those who have evaded tax and not made a voluntary disclosure may face criminal prosecution, penalties that could be as much as 200% of the tax at stake, and the possibility of ‘naming and shaming’ in addition to the rigours of a detailed investigation of their financial affairs.

What about the UK-Swiss agreement?

Many holders of accounts in Switzerland were holding back on disclosure pending the UK-Swiss agreement that was finally announced in October 2011. However, most will have been disappointed. The Swiss agreement works in a very different way to the LDF and for the majority of cases it is not looking like an attractive option.

What do I have to do?

The first step is to ensure that you have the necessary “meaningful relationship” with a Liechtenstein financial institution. Subject to one or two restrictions, there is a general willingness within the principality to open accounts, accept transfers of assets and to create structures so that UK taxpayers can partake in the LDF. Having dealt with this step, you can then register with HM Revenue & Customs before making a start on a detailed disclosure of tax liabilities and assets held outside the UK. When the disclosure is filed you will need to pay all outstanding tax together with the associated interest and penalties. Following receipt of the disclosure the Revenue aim to either confirm that it has been accepted or raise any questions within six months.

Why come to UHY Hacker Young?

The LDF has now been running for over two years. During that time we have taken a significant number of cases through the procedure from start to finish and seen them emerge with a clean slate for tax purposes at a surprisingly low cost. We have also developed a good working relationship with HMRC – who really do want the LDF to succeed – and with a number of institutions in Liechtenstein. We have built up a great deal of expertise and are ideally placed to assist you through the process as painlessly as possible, to prepare your disclosure such that you achieve finality in respect of your undeclared liabilities at the minimum cost in terms of tax, interest and penalties, and to do so in an efficient and cost-effective manner.

Time is running out for those who have sought to evade UK tax by depositing funds offshore. There will no doubt be some who decide to take their chances on the basis that they will deal with an approach from the taxman as and when it comes. If you want to reduce your exposure to penalties and the possibility of criminal prosecution, however, the LDF offers a wonderful opportunity to secure piece of mind at a reasonable price. For an initial conversation or meeting (if you prefer, on an anonymous basis) contact:

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