UK-Lichtenstein tax disclosure deal agreed

Liechtenstein Disclosure Facility: The “last chance” for favourable tax repayment before HMRC clampdown begins

Tax authorities in the UK (Her Majesty’s Revenue and Customs) have approved an incentive called the Liechtenstein Disclosure Facility (LDF) to encourage tax evaders to pay due tax under favourable conditions as a “last chance” before it wages a more targeted and public campaign against individuals and their tax structures.

The LDF is a voluntary tax disclosure mechanism, being advocated by HMRC, which those with interests in Liechtenstein can use to claim their liabilities up to March 2015. Despite the distant expiry date, law firm DLA Piper is urging clients to consider the LDF now. Otherwise, individuals with tax liabilities face being named and shamed, or having to repay tax under less favourable conditions, the firm claims.

HMRC is planning to raise the stakes with regard to people’s tax affairs by highlighting some of the worst examples and going after well-known names. The agency’s methods of gathering information are becoming increasingly sophisticated, with the use of informants, an HMRC hotline for informants, whistleblowers at companies and information acquired from banks on accounts, Trusts and other assets.

The LDF essentially provides a guaranteed exemption from the naming and shaming process. HMRC is so keen to promote the disclosure facility that it has created a dedicated Liechtenstein anonymous advisory service, to help guide those fearful of being exposed through the process.

Penalties applied through the LDF are minimal when compared with repayment demanded as a result of an HMRC investigation. The amount is fixed at 10% (plus interest on taxes unpaid) under LDF, whereas penalties of up to 200% will be imposed by the authority over the next few months as it ramps up its pursuit of individuals suspected of evasion, DLA Piper says.

The real benefit of using the LDF is that individuals can arrange their repayment in a way that suits them. They can opt either to pay at a single composite rate of 40% (until April 2010), or calculate their actual liability using previously applicable tax rates (although the rate chosen must be applied to all years). The “look-back” period for undeclared tax is just 10 years.

For HMRC, the benefits are that it can recoup money owed quicker than it would be able to via prolonged and expensive investigation. It is also attempting a step change in the culture of tax evasion, with the belief that individuals will cease to evade due payments in future once they have entered the process of LDF.

HMRC’s aim is to recoup cash, not prosecute, says Simon Airey, Partner at DLA Piper. Its reason for waging an aggressive campaign against tax evaders is purely fiscal and not to vilify individuals prepared to open up about their tax affairs. Should a person continue to opt for evasion however, they face potential public humiliation and the loss of all their assets if the agency finds them first.

A distinct political factor is at work. Due to Liechtenstein’s history as a haven for assets from elsewhere, and the damage that has caused to the jurisdiction’s reputation in the past, it is keen to clean up its act. As referred to in this month’s feature on Jersey finds new role for Foundations, Liechtenstein has made a concerted effort to improve its image of compliance with varying degrees of success. Building on that, it signed a Memorandum of Understanding (MoU) with the UK on 11 August 2009 establishing the LDF which allows the jurisdiction to appear cooperative.

Liechtenstein aims through the process to improve its image and pick up fresh inwards investment. The LDF compels the individual to establish a “meaningful relationship” with the jurisdiction. Broadly, interests do not have to be specifically located in Liechtenstein but can be transferred from elsewhere (as long as they existed before the MoU). The LDF is open to any eligible UK taxpayer willing to invest in Liechtenstein before the disclosure facility terminates.

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