Two disclosure opportunities

Thursday, 01 October 2009
A review of the two new disclosure opportunities launched by HMRC, highlighting the important considerations for advisors.

We have a saying: you wait ages for a London bus and then two arrive together! Well, we now have two Disclosure Opportunities launched in quick succession by HMRC and running simultaneously – a good opportunity for anyone with a potential UK tax problem to come forward.

The government needs to raise tax revenues, and the international focus on so-called ‘tax havens’ has motivated HMRC to take action. Dealing with offshore tax evasion is part of HMRC’s new vision to tackle non-compliance by ‘relentlessly pursuing those who choose to bend or break the rules’.

The ‘New Disclosure Opportunity’ (NDO) was announced in this year’s Budget. HMRC has now published full details of the facility, which runs from 1 September 2009 to 12 March 2010. It is described by Dave Hartnett, HMRC Permanent Secretary for Tax, as the ‘last opportunity of its kind’. It is a ‘last chance saloon’ for people to disclose and settle their tax irregularities under favourable terms. This facilty and the previous Offshore Disclosure Facility are widely described as tax amnesties; however the full amount of tax plus late payment interest still has to be paid.

A separate disclosure facility for accounts held in Liechtenstein – the Liechtenstein Disclosure Facility (LDF) – will run alongside the NDO. However, the LDF differs from the NDO in several ways, including the active participation of the Liechtenstein government and financial intermediaries in bringing about the disclosure of undeclared amounts.

Information gathering from banks

The NDO and LDF shine the spotlight on banks – particularly, private banks. HMRC has spent recent years assimilating information on banks that offer offshore accounts and investments to UK residents, and has recently succeeded in obtaining information on the offshore accounts operated by most UK-based banks.

The ‘New Disclosure Opportunity’

The terms of the NDO are shown below:

NDO – terms and deadlines

  • The disclosure facility is focusing on people with previously undeclared offshore assets such as bank accounts, property, trusts and companies.
  • Those who have not been contacted by HMRC before will have to pay the tax going back for up to 20 years and late payment interest they owe plus a 10 per cent fixed penalty charge.
  • Those who have already been contacted by HMRC will be charged a penalty of 20 per cent.
  • Those who fail to declare overseas interests who are later tracked down by HMRC face significantly higher penalties of up to 100 per cent of the tax and could face criminal prosecution.
  • Notification of intention to disclose must be made between 1 September and 30 November 2009.
  • Those making an offshore disclosure on paper must return it to HMRC by 31 January 2010 while those completing an online disclosure must do so before 12 March 2010.
  • The facility will allow agents to notify and disclose on behalf on their clients.

 

The 10 per cent or even 20 per cent penalty is beneficial in comparison with the new penalty regime. In future, deliberate tax understatements that are discovered by HMRC will attract a minimum 35 per cent penalty and maximum 100 per cent penalty.

Advisors should also be aware of the new ‘naming and shaming’ legislation from April 2010. The names of deliberate tax evaders will be published by HMRC, which is another incentive for people to come forward voluntarily within the coming months.

Advisors need to take special care if their clients’ circumstances include:

  • Monies held in an offshore account where the source of funds is unclear
  • A claim to non-UK domicile
  • Trust and/or company structures
  • Offshore bank accounts used in tax avoidance schemes
  • An incomplete or incorrect disclosure made in a previous tax enquiry
  • Hardship, where the payment of tax, interest and penalty as a lump sum is not possible.

The message to anyone who has unpaid tax connected to an offshore bank account or asset is to give the NDO serious consideration.

The NDO it is not a ‘one size fits all’ facility. However, the fixed 10 per cent penalty is helpful to minimise the cost. Advisors who are approached by individuals concerned about their tax affairs need to consider all the options and risks. Those failing to come forward under the NDO could face much harsher treatment under HMRC’s enhanced powers and penalties.

Liechtenstein Disclosure Facility

On 11 August 2009, HMRC launched a new disclosure facility specifically for accounts held in Liechtenstein. This follows an agreement for the formal exchange of information between the UK and the Principality of Liechtenstein.

The main terms of the Liechtenstein Disclosure Facility (LDF) are shown below:

LDF – terms and deadlines

  • The LDF runs from 1 September 2009 to 31 March 2015.
  • The penalty on unpaid tax will be limited to 10 per cent in most cases.
  • Liechtenstein financial intermediaries will review all clients identifying those who need to confirm their tax position with HMRC, and advise them to do so within a specific time frame.
  • Where a UK investor cannot confirm that they are cooperating with HMRC the financial intermediary must withdraw financial services in Liechtenstein or apply various sanctions.
  • The Liechtenstein Government will introduce new laws to ensure audit of the process.
  • The recovery of earlier years’ tax lost will only go back to April 1999 (10 years rather than the statutory limit of 20 years).
  • Taxpayers can elect to apply a special Composite Rate of 40 per cent to cover all taxes on an annual basis without the benefit of any relief or deduction.
  • Immunity from prosecution for anyone who makes a full, accurate and unprompted disclosure to HMRC.
  • The LDF allows people to move assets to be managed by a Liechtenstein intermediary and take advantage of these favourable terms with HMRC.

 

The LDF is a ‘disclose or close’ deal forcing account holders to reveal their accounts. HMRC has stated: ‘Those who make the mistake of ignoring the Liechtenstein Disclosure Facility will have their accounts in Liechtenstein closed and face penalties of up to 100 per cent when HMRC catches up with them.’ Dave Hartnett also said: ‘Those who have been evading UK tax on assets held in Liechtenstein banks must now settle with us. There are no alternatives.’

The LDF will cover not just individuals, companies, partnerships, and trusts, but also other entities commonly used in Liechtenstein – Foundations, Anstalts and Stiftungs.

Anyone thinking of simply moving their accounts further afield, for example to Asia, may well find the transfer reported under the money laundering provisions.

The limitation of earlier years’ tax losses to a maximum period of ten years is a genuine, albeit still only partial, amnesty which, together with the limitation of a penalty to 10 per cent, makes the LDF even more attractive than the NDO.

Anyone with investments or assets held in Liechtenstein on 1 August 2009 can participate in the LDF from the start of the facility from 1 September 2009. Anyone moving investments or assets into Liechtenstein after 1 August 2009 can participate from 1 December 2009.

It is essential that anyone with investments or assets in Liechtenstein or anyone looking to move investments or assets into Liechtenstein wanting to use the LDF seeks expert advice. All disclosures will be dealt with by the Specialist Investigations department within HMRC, which is its elite investigative force.

The NDO and LDF may be particularly attractive to non-domiciled UK residents who do not want to pay the GBP30,000 annual ‘remittance basis charge’, or second generations who inherited family monies, enabling such individuals to regularise their tax affairs and move forward. In some cases, people holding substantial assets abroad have been afraid of touching these in case HMRC finds out. These disclosure opportunities will allow people to sort out their financial affairs and at last enjoy their savings and inheritances.

Who’s next?

If, as HMRC anticipates, it manages to recover tax of some GBP500 million as a result of the LDF, it will no doubt seek similar cooperation from other former ‘tax havens’ such as Andorra and Monaco.

Another possible target is Switzerland, a favoured location for international investors for decades, due partly to its banking secrecy laws. The first chink in Switzerland’s armour has appeared, with an agreement between UBS bank and the US Justice Department to disclose details of a limited number of Swiss depositors. So for HMRC and British offshore account holders it may be ‘today Liechtenstein – tomorrow Switzerland’.

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Dawn Register, Michael Fernandopulle

Dawn Register is a Senior Manager at BDO Stoy Hayward LLP.
Michael Fernandopulle TEP is a Tax Director at BDO Stoy Hayward LLP.

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