NEWS
Sep-30-2009 Liechtenstein Disclosure Facility
Introduction
The global trend towards international tax transparency gathered further momentum on 11 August 2009 following the announcement that the Government of Liechtenstein and the UK tax authority (‘HMRC’) signed a Memorandum of Understanding relating to cooperation in tax matters. In the Memorandum of Understanding, Liechtenstein and HMRC agreed to the introduction of a 5-year ‘taxpayer assistance and compliance program’. As part of the program, Liechtenstein financial intermediaries will be under a duty to identify clients who may have a liability to UK tax and, if a client cannot provide evidence of his or her compliance with UK tax, the financial intermediary will have to cease acting for the client. In return, HMRC has offered a special disclosure facility with reduced penalties (‘LDF’).
HMRC and Liechtenstein have agreed to continue to consider procedures over the 5-year period, such as fines or retention taxes on property in Liechtenstein to provide incentives and sanctions to encourage disclosure to HMRC.
The UK and Liechtenstein have also entered into a tax information exchange agreement.
Thus, this development offers new opportunities for banks and trusts to acquire new clients.
Scope of the agreement
The LDF is available to a person with UK tax liabilities in respect of financial interests in Liechtenstein structures, which includes bank accounts, companies, trusts and foundations, which are formed, administered, or managed in Liechtenstein.
Do note that he could have his assets in a bank account in Switzerland, administered through a foundation in Liechtenstein to avail of the LDF. The bank account can stay outside Liechtensein as long as a Liechtenstein Foundation, Trust, or a Liechtenstein Company is used to hold the account.
All foundations that are set-up after 1st September 2009 are allowed to avail of the LDF by registering after 1st December 2009.
With regard to the treatment of specific Liechtenstein structures such as trust enterprises (“Treuhandschaften”), foundations (“Stiftungen”) and establishments (“Anstalt”), HMRC have committed to providing detailed guidance to Liechtenstein financial intermediaries by 11 November 2009 to assist them with the identification of relevant persons that fall within the LDF. It is expected that any UK based person that is either a settlor, beneficiary, trustee or has any other connection with these structures will come under scrutiny and will be expected to either demonstrate that they are in compliance with UK tax law or that they have contacted HMRC with a view to making a disclosure.
Penalties
In most cases a penalty of 10% (normally 20%) will be applied (in addition to the unpaid tax and interest) for a period of up to 10 years (normally 20 years).
Under the LDF, the client is free to choose a flat tax of 40% (which also covers potential inheritance tax and other other taxes) or use the effective tax rate after calculations of deductions, etc.)
A person who was contacted in relation to the Offshore Disclosure Facility in 2007 or the New Disclosure Opportunity starting in September this year (‘NDO’), will be able to use the LDF, but will have the penalties of the NDO applied.
HMRC has agreed that a person who makes a full disclosure will not be subject to criminal investigation by HMRC, unless the source of the funds constitutes criminal property (other than from illegal tax evasion).
Timing
The LDF will start from 1 September 2009 and end in March 2015.
Comparison with the NDO
In contrast to the NDO, the LDF offers assurance against criminal prosecution and confirmation as to how HMRC will tax certain entities (e.g. foundations), for the purposes of the LDF only. These factors, in addition to the shorter limitation period of 10 years, make the LDF a more attractive regime under which to disclose and pay UK tax liabilities.
In the light of this fact, where a person has an interest in a Liechtenstein entity and other undeclared assets, there may be an advantage to utilising the LDF and the NDO, rather than only the NDO.
HMRC has stated that taxpayers who do not make use of the NDO or LDF will face a penalty of 30% (rising to 100%), and/or possibly criminal prosecution. HMRC’s ability to identify taxpayers with offshore accounts has been strengthened after it succeeded last week in obtaining approval from the courts to issue a ‘blanket’ information notice, requiring more than 300 UK and foreign banks and financial institutions to disclose information to HMRC about clients who have offshore accounts. HMRC is now expected to obtain details of over 500,000 account holders.
AFP can coordinate an approach to HMRC under the LDF and/or NDO and the responses to any queries posed by them in conjunction with clients’ UK accountants or other professional advisers thereby ensuring that the collation of the information and evidence needed to deal with HMRC is carried out in a manner which preserves legal professional privilege to the fullest extent possible.