In recent months, numerous news stories on tax evasion have hit the headlines. It is quite clear that HM Revenue & Customs (HMRC) is stepping up its efforts to stop UK taxpayers illegally evading tax. HMRC is seeking to raise an additional £7 billion in unpaid tax each year by 2014/2015 and intends to increase criminal prosecutions five-fold.
For UK taxpayers suffering sleepless nights on account of outstanding tax liabilities arising from offshore assets, the Liechtenstein Disclosure Facility (LDF) or UK/Switzerland Tax Co-operation Agreement (UK-Swiss Agreement) could be the answer. In most cases, tax evasion is not the taxpayer’s primary motive. Some use offshore arrangements to maintain confidentiality while others benefit from structures set up by their parents or grandparents to protect assets from persecution and war. However, failure to disclose tax liabilities arising from these assets is, of course, still illegal.
In this issue we focus on the LDF. We will be discussing the UK-Swiss Agreement in the next Private Client update.
What is the LDF?
The LDF was agreed by the UK and Liechtenstein on 11 August 2009 and has since been supplemented by two further joint declarations signed on 11 October 2010 and 11 June 2012. It is underpinned by a tax information exchange agreement also signed in August 2009 and a revised double tax treaty which will come into force on 1 January 2013.
The aim of the LDF is to 'regularise past offshore tax non-compliance'. Liechtenstein’s financial institutions are now required to provide HMRC with details of Liechtenstein assets held by or for UK residents. However, under the LDF, UK residents with unreported tax liabilities arising from beneficial interests in Liechtenstein bank accounts, companies and trusts can voluntarily disclose these interests to HMRC and settle their past tax affairs on favourable terms. UK residents who fail to report liabilities from Liechtenstein assets are at risk of incurring penalties of up to 150% and, in the most serious cases, facing criminal prosecution for tax offences and being publicly ‘named and shamed’ by HMRC.
The main features of the LDF are as follows:
- the window for disclosures opened on 1 September 2009 and is now scheduled to remain open until 5 April 2016 (the previous deadline was 31 March 2015).
- for liabilities arising in the tax years 1999/2000 to 2008/2009 inclusive, the usual UK tax rates apply unless the taxpayer elects to apply a single composite rate (CRO) of 40%.
- for liabilities arising in the tax year 2010/2011, a single charge rate (SCR) of 50% will apply and operate in a similar way to the CRO. HMRC will consider the availability of a SCR for the tax years 2011/2012 to 2015/2016 inclusive.
- for liabilities arising in the tax years up to and including 2008/2009, penalties are capped at 10% and are reduced to nil for innocent errors.
- any tax liabilities arising prior to the tax year 1999/2000 will not need to be reported.
- provided assets were not obtained from criminal activity, taxpayers who co-operate and provide full disclosure are protected from criminal tax proceedings and from being ‘named and shamed’ by HMRC.
Another attractive feature of the LDF is that taxpayers with potential tax liabilities arising from offshore assets held outside Liechtenstein can also bring themselves within its scope (but they may not benefit from all its preferential terms).
Beneficial facility for dealing with undisclosed offshore tax liabilities
The LDF is widely regarded as the most beneficial facility for UK taxpayers to deal with undisclosed offshore tax liabilities and HMRC has declared it an 'overwhelming success'. On 11 June 2012, HMRC confirmed that, to date, more than 2,400 people have registered to make disclosures, with £363 million already paid in tax bills. HMRC estimate that the LDF will have brought in up to £3 billion of unpaid tax by 2016 and it is expected that, by then, all UK taxpayers holding assets in Liechtenstein will be fully compliant with their obligations under UK tax law.