With HMRC entering into a long succession of information exchange agreements, the chances of the tax man finding out about your offshore assets - whether in Liechtenstein, Switzerland or anywhere else - is now extremely high. When you are found out, HMRC can be expected to come down hard with significant penalties and criminal prosecution a very real possibility. If you have undeclared UK tax liabilities you have two choices: to wait until your turn comes (and it will come) or to get in first with a disclosure of relevant income and gains. If you are going to disclose, it usually makes sense to take advantage of the very generous terms of the Liechtenstein Disclosure Facility (LDF).

WHAT IS THE LDF?

The LDF is the result of an agreement between the UK and Liechtenstein governments aimed at 'cleaning up' Liechtenstein's reputation as a haven for tax evaders. Despite the name, however, the LDF is open to almost anyone with undeclared tax liabilities associated with any offshore assets. All that is needed is that you establish a 'meaningful relationship' with a Liechtenstein financial intermediary (see below).

The LDF goes a good deal further than previous tax 'amnesties' and it is generous to an extent that is unlikely ever to be repeated. Key features are:

  • A fixed starting point: no looking back at periods prior to April 1999.
  • Penalties capped at 10% for periods up to 2008/9 (with no penalty at all in cases of 'innocent error').
  • Guaranteed immunity from criminal prosecution for tax offences in return for full, accurate, and unprompted disclosure.
  • A streamlined and assisted process aimed at getting your affairs in order, including an HMRC helpdesk comprised of dedicated experts who will provide assistance with disclosures on an anonymous basis if desired.
  • A composite rate option for years up to 2008/9 under which liabilities to various taxes can be covered by accepting a flat rate of 40% on income and gains.
  • The possibility of payment by instalments if you have trouble paying in full.

IS IT FOR REAL?

The completion of the forms and the underlying computations can be laborious, but the April 1999 cut-off date is a wonderful provision (particularly since so many offshore institutions do not retain old records). The attitude of HMRC, particularly their willingness to discuss problem areas and to compromise where necessary, is refreshing (although it has taken some getting used to for those accustomed to a rather more confrontational approach). Clients are clearly benefiting – not just in terms of peace of mind and a clean slate going forward, but from the agreement of tax liabilities considerably lower than they might otherwise have been (savings of up to 75% are quite possible).

The LDF has in practice proved so attractive that HMRC have had to take steps to prevent what they see as abuse. The benefits of the LDF are now restricted where:

  • HMRC are already aware of the liabilities being settled; or
  • the issue being disclosed is already the subject of a Revenue enquiry or investigation that has been running for more than three months; or
  • there is no substantial connection between the liabilities being disclosed and the offshore asset held at 1 September 2009.

Even in these cases, however, the immunity from prosecution is still offered and for many tax payers the 'full deal' will still be available.

WHAT SITUATIONS ARE COVERED BY THE LDF?

Typical scenarios that we have seen, include:

  • Funds retained abroad, either in their own names or via a trust or foundation, by those who have come to this country and gone on to acquire UK residence and domicile (the concern usually being with unpaid income and capital gains tax).
  • Savings that UK residents have transferred overseas, again held either in the names of the individuals concerned or a trust or foundation (again unpaid income and capital gains tax).
  • Income of a UK individual or company that has been diverted offshore without ever being declared (unpaid income or corporation tax on the original receipt and possible unpaid National Insurance and VAT as well, plus income and capital gains tax in respect of subsequent movements).
  • Proceeds from the sale of an asset, either in the UK or offshore, that have been placed in an offshore account without being declared (capital gains tax on the original disposal plus income and capital gains tax in respect of subsequent movements).
  • Funds as above that have been inherited by the next generation but remain undeclared (unpaid Inheritance Tax on top of everything else).

In a number of cases we have been contacted by family members on behalf of elderly relatives. We are happy to give initial advice on that basis, although ultimately it is the person with the tax liability (or their properly appointed attorney) who must make the disclosure.

HOW DO I MAKE A DISCLOSURE?

Once you are sure that a liability exists and that the LDF is the right approach for you, the starting point in most cases is to transfer sufficient funds to a Liechtenstein financial institution for a 'meaningful relationship' to be established. We can guide you through these requirements. You can then register for the LDF and proceed with gathering together the relevant information and completing the disclosure forms.

Although it is in theory possible to submit a disclosure personally, completion of the forms is generally the last stage of a complex and time-consuming computational exercise. More importantly, when the forms are submitted they will be risk-assessed by HMRC before they decide whether to enquire further into your financial affairs. Significant elements in that risk-assessment will be the content of any accompanying report and whether the forms have been prepared by an adviser in whom HMRC already has confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.