HMRC tax disclosure facilities


Author: John Forde


The UK Government has recently announced that the beneficial terms of the Liechtenstein Disclosure Facility (LDF) will cease on 31 December 2015 (the facility had previously been due to run until April 2016). The LDF is a tax disclosure process through which individuals can bring their tax affairs up to date with HMRC on favourable terms and in particular benefit from reduced penalties and full immunity from criminal prosecution.

The LDF, and a number of other current disclosure opportunities, will instead be replaced by a new “last chance” disclosure facility that will run until mid-2017 but will offer much less favourable terms. It is anticipated that the penalties imposed will be higher and there will be no guarantee of immunity from criminal prosecution.

The UK Government has also recently announced its intention to increase compliance efforts in relation to undeclared foreign assets. The introduction of this new, less favourable facility will therefore coincide with an anticipated increase in HMRC’s investigation and compliance activity in the coming years.

Information exchange

HMRC’s future efforts to scrutinise the tax affairs of those with potential UK tax liabilities will be greatly assisted by the introduction of a raft of information exchange initiatives (primarily focusing on financial information and tax compliance) with other countries within Europe and throughout the world.

By September 2016 HMRC is due to receive the first tranche of information relating to accounts and structures from financial institutions in the British Crown Dependencies (Jersey, Guernsey and the Isle of Man) and British Overseas Territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands) via the intergovernmental agreements reached with these jurisdictions.

An even more significant development is that, approximately 12 months later, HMRC will start receiving similar information from jurisdictions that are “early adopters” of the new international Common Reporting Standard (CRS). The CRS is a new global standard for the automatic exchange of account information between tax authorities around the world. The UK is one of the “early adopters” which also include jurisdictions such as Cyprus, Liechtenstein, San Marino and the Seychelles. In total, over 90 jurisdictions have pledged to adopt the CRS in due course.

The CRS has a much wider scope than the agreement with the British Crown Dependencies and Overseas Territories as it makes no distinction between UK domiciled and non-UK domiciled individuals. For example, foreign jurisdictions will gather information on all bank accounts and trust assets controlled by non-UK domiciled individuals to share with HMRC (not just in relation to income remitted to the UK).

Finally, in May 2015 the EU agreed an automatic exchange of information agreement with Switzerland. This agreement will come into force on 1 January 2017. The EU is also currently negotiating similar agreements with Andorra, Liechtenstein, Monaco and San Marino.

Put simply, there has never been a better time to take advantage of the beneficial terms of the LDF in order to regularise your UK tax affairs should they have failed to keep pace with UK reporting obligations.

The LDF

Since 2006, HMRC has offered a series of disclosure facilities to encourage individuals to declare unpaid taxes connected with overseas bank accounts or structures. The current disclosure opportunities include the LDF and similar facilities for the Crown Dependencies of Jersey, Guernsey and the Isle of Man. The LDF is the most well-known of these and justifiably so.

It offers very advantageous terms to those who need to resolve their tax affairs and most importantly it is not restricted to assets held in Liechtenstein (it can be used to regularise the UK tax affairs of those with assets in other offshore jurisdictions and to a certain extent irregularities in relation to UK assets).

Outside the terms of such a disclosure facility, if HMRC is able to demonstrate that a taxpayer has deliberately not paid the correct amount of tax, it can assess unpaid tax from as far back as 20 years (in fact it can “look back” indefinitely in relation to some undeclared Inheritance Tax liabilities). Moreover, where non-compliance has been deliberate, HMRC would generally seek a penalty somewhere between 30% and 100% in addition to the tax and interest (in fact the penalty can in theory be up to 200% if certain offshore jurisdictions are involved). Criminal prosecutions and “naming and shaming” are also a possibility.

The potential benefits of approaching HMRC first and making a disclosure under the LDF are substantial and include:

  • no liability for any period before 6 April 1999;
  • a fixed 10% penalty for periods from 6 April 1999 to 5 April 2009;
  • the potential to use an alternative “composite rate” method of calculating the tax liabilities which in suitable circumstances can reduce the overall tax liability (for example, where various types of charges could arise in relation to the same account, such as Income Tax and Inheritance Tax, there is a possibility to ensure that tax is only payable once at a 40% rate);
  • a single point of contact for disclosures and the possibility of having an initial “no names” discussion with HMRC prior to making a disclosure;
  • immunity from prosecution;
  • no “naming and shaming”; and
  • the process can also sometimes be used to achieve clarity on areas of uncertainty, such as domicile, which can be useful to the taxpayer in the future.

The most important criteria to be eligible to partake in the LDF are that the taxpayer must:

  • have had some form of offshore asset that has a substantial connection to the liabilities being disclosed at 1 September 2009 (which was not opened through a UK branch or agency); and
  • have a Liechtenstein connection or “footprint” at the date they register for the LDF. If the taxpayer does not currently have a bank account, investment or structure in Liechtenstein, it is usually possible to qualify for the LDF by for example opening a bank account in Liechtenstein.

It should be noted that there are also other conditions to be eligible for the LDF (and in particular the full range of benefits mentioned above) and these would need to be considered on a case by case basis. HMRC will not accept any new registrations from the end of 2015.

Summary

With the increasing sources of information available to HMRC, and ever more sophisticated search facilities available in this digital age, it is expected that HMRC’s compliance activity will markedly increase in scope and efficiency going forward. In the current political climate it is also anticipated that HMRC will seek to make greater use of criminal prosecutions where it uncovers undeclared tax liabilities.

It is telling to note that in 2013, after the Swiss authorities passed information to HMRC in relation to Swiss accounts held by UK residents, HMRC swiftly dispatched 6,500 letters to the individual account holders. These letters threatened that the individuals concerned had six weeks in which to respond to HMRC (with HMRC suggesting the taxpayers register for the LDF if they had any undeclared liabilities) or they would face further action.

John Forde, Partner, Fladgate LLP (jforde@fladgate.com)

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