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Make a clean break

John Cassidy, tax investigations partner at PKF (UK) LLP, explains the benefits of using the ground-breaking agreement between HMRC and Liechtenstein to come clean on tax arrears

It is a fact of life that every professional adviser or firm may have one or two clients who have not fully disclosed their overseas assets to the UK tax authorities despite the various tax amnesties offered in recent years. Take-up of the Offshore Disclosure Facility (2007) and the New Disclosure Opportunity (2009-2010) was hardly overwhelming.

Fortunately, a separate facility currently exists for those with accounts or other assets held in Liechtenstein (including new assets). While it also involves a disclosure that brings the person’s tax affairs up to date, its generous terms provide a huge opportunity for legitimate tax savings in certain circum-stances. The bespoke terms of the facility were negotiated directly between Liechtenstein and HM Revenue & Customs with a mem-orandum of understanding signed in August 2009. This created the Liechtenstein Disclosure Facility.

Key principles of the LDF
Liechtenstein banks and other financial intermediaries (for example, fiduciary and trust businesses) must identify “relevant persons”. Any of the bank’s clients who may have a tax liability in the UK (for example, if a UK address is somehow linked to the account in question) is a relevant person.

The financial institutions must then write to all relevant persons (starting in autumn 2010) and ask them to provide a certificate to confirm that they are fully UK tax compliant. If they cannot provide such a certificate, the account holder must register for the LDF to resolve any UK tax issues, which again results in the issuing of a certificate. If the financial institution is not provided with the certificate for either route, they are obliged to close that individual’s account and cease acting entirely.

If there is a UK tax problem
The account holders identified must register for the LDF and provide the Liechtenstein bank with the original of the registration certificate received from HMRC. The individual then has up to 10 months to make a full disclosure and settle the outstanding tax, interest and penalties.

If there is no UK tax problem
Some relevant account holders might argue that no action is required if he or she is fully UK tax-compliant. However, if an LDF registration certificate is not provided, the relevant person must provide the Liechtenstein institution with an accountant’s certifi-cate that he or she is fully UK tax compliant or be forced to close his or her account.

Offshore assets outside Liechtenstein
There is no need to have had a link with Liechtenstein before. Anyone who moves offshore funds into Liechtenstein by 2015 or obtains an interest in an appropriate Liechtenstein asset, can use the LDF. There are various comp-lexities to consider before ascertaining if the beneficial terms of the LDF will be avail-able but, in principle, a Liech-tenstein presence can be validly created to make a disclosure under the LDF.

Potential benefits of the LDF
The terms of the LDF offer some interesting outcomes and mean significant savings can be made compared with settlements under normal disclosure routes or previous offshore amnesties – as illus-trated in the table above:

A limited period
First, an LDF disclosure needs to cover only 10 years from April 6, 1999 rather than up to 20 years under normal routes or the other general amnesties. Clearly, this could cut the tax bill drastically – interest on outstanding tax liabilities was extremely high in the 1990s. For example:

Undeclared business profits
£1m was siphoned off the profits of a UK self-employed person into a Swiss bank account opened in Geneva in the 1970s. This went on for many years until 1998. Between 1989 and that date, the amount of undeclared business profits deposited was £600,000.

Under other disclosure routes, the tax due is 40 per cent of everything deposited in the Swiss account in the 20 years to April 5, 2009, that is, tax due of £240,000 plus interest (again, including high interest from the early 1990s) and a penalty (30 per cent minimum).

Under the LDF, the only tax due arises on the interest earned since 1999 – all the undeclared business profits escape tax, interest and penalties forever.

Undeclared inheritance tax
There is no limit on how far back HMRC can look for inheritance tax. Hence, HMRC can still collect undeclared IHT if the death occurred in, say, 1986. In one case, the taxable estate included a Swiss account with £1m in it, no IHT was paid on that asset.

Normally, £400,000 of IHT would be due plus interest (which will be huge since 1986) and penalties. Under the LDF, the tax due is again nil. The MOU with Liechtenstein removes everything, even IHT, pre-April 1999 so £400,000 plus interest and penalties is saved forever.

Conclusion
The LDF is good for individuals, Liechtenstein financial institutions and HMRC. There are three possible scenarios:

  • Clients with assets in Liechtenstein can use the LDF if there is a UK tax problem.
  • Clients with offshore assets elsewhere can now create a link with Liechtenstein to use the LDF.
  • Clients with assets in Liechtenstein who have already declared all relevant income and gains will still need to obtain an accountant’s certification of their position.
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