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Tony Wickenden: With love from Liechtenstein

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Tax avoidance hit the front pages again earlier this month. This time, it was HSBC and Swiss bank accounts grabbing the headlines.

What we are talking here is essentially tax evasion. However, we must be clear: having an offshore bank account is not illegal and does not imply the holder intends to evade tax. It would be perfectly reasonable to have an offshore bank account if you had a property or business in the country in which the account is situated.

You would want the convenience of transacting easily in that country and in its currency. If the account holder is a UK tax resident, however, they have an obligation to disclose any interest generated by the account regardless of whatever secrecy laws exist in the country in which it is situated.

Apparently, investigations following the leaking of information by ex-HSBC employee Herve Falciani about those with Swiss HSBC accounts have yielded the UK authorities around £135m in settlements.

In recent years, HMRC has encouraged, through various means, individuals with offshore accounts that have generated income that should have been taxed in the UK but has not to disclose this and pay the tax with the benefit of lower tax penalties. For example, under the Liechtenstein Disclosure Facility you can (if you qualify) secure some very favourable terms in relation to previously undeclared income.

Apparently, many Swiss bank account holders and others have already come forward to settle unpaid UK tax bills and avoid costly tax penalties using the LDF.

The LDF was launched in 2009 and continues to be available until 5 April 2016.  It allows people with unpaid tax linked to investments or assets held overseas as at 1 September 2009 to settle their tax liability under favourable terms.

It seems the LDF has been particularly useful where the taxpayer has a Swiss bank account and needs to become UK tax compliant owing to the UK-Swiss agreement, which came into force on 1 January 2013.

Swiss bank account holders caught by the UK-Swiss agreement were faced with a choice to either:

  • Maintain anonymity from HMRC and suffer a one-off deduction from the Swiss account on 31 May 2013 in respect of undeclared tax in the past and an annual deduction to meet ongoing tax obligations.
  • Avoid the deductions by agreeing to make a disclosure of unpaid taxes in relation to the account (if any) and sacrifice the right to anonymity.

Swiss banks provided details to the tax authorities in Switzerland of those account holders who agreed to make a disclosure. The Swiss tax authorities, in turn, have now written to HMRC with the identities and account details of UK taxpayers from whom disclosures are expected. This has triggered HMRC to write to those UK residents to check where they are up to with regard to coming forward.

As it continues until next year, the LDF can still be used provided a “meaningful relationship” with a Liechtenstein financial intermediary is established. Key features are as such:

  • It offers a fixed starting point: no looking back at periods prior to April 1999.
  • Penalties are capped at 10 per cent up to 2008/2009 and 20 per cent for later years (with no penalty at all in cases of “innocent error”).
  • It provides guaranteed immunity from criminal prosecution for tax offences in return for legitimate full, accurate and unprompted disclosure.
  • There is a streamlined and assisted process aimed at getting a taxpayer’s affairs in order, including a HMRC helpdesk comprised of dedicated experts who will provide assistance with disclosures on an anonymous basis if desired.
  • There is a composite rate option under which liabilities to various taxes can be covered by accepting a flat rate of 40 per cent of income and gains.
  • There is the possibility of payment by instalments if a taxpayer has trouble paying in full.

Once a taxpayer is sure a liability exists and that the LDF is the right approach for them, the starting point in most cases is to transfer sufficient funds to a Liechtenstein financial intermediary for a “meaningful relationship” to be established. The taxpayer can then register for the LDF and proceed with gathering together the relevant information and completing the disclosure forms either themselves or, more likely, with the help of an adviser.

For the overwhelming majority of UK financial advisers, stories of exotic tax avoidance and evasion will be just that – stories. However, there is a very real risk that even completely innocent and effective planning founded on anything “offshore” may be seen in the same (detrimental) light as non-declaration.  Advisers have an important role to play in providing the clarity and reassurance their clients need to make the most of relevant planning strategies with no risk or fear of HMRC attack.

Tony Wickenden is joint managing director of Technical Connection 

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