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A Win-Win-Win Situation!
HM Revenue & Customs have completed a master stroke by finalising two ground breaking tax agreements with the Government of Liechtenstein. Firstly a new Tax Information Exchange Agreement has been put in place between the UK and Liechtenstein; and secondly a third tax disclosure facility (the Liechtenstein Disclosure Facility or LDF) was announced. The LDF is not only innovative but cleverly put together to consummate this most unlikely of alliances. HMRC has achieved an information disclosure programme which all but the most optimistic of tax commentators would have thought impossible. The Liechtenstein Government has successfully negotiated 6 years in which to restructure its financial services industry given that the LDF will run from 1 September 2009 to 31 March 2015. HMRC will have been forced into concessions because Liechtenstein banks have no presence or branches in the UK, meaning that the only means of extracting a legitimate flow of information was by consensual process. The coup de grace for the Liechtenstein authorities, however, is the fact that the terms of the tax disclosure programme would appear to allow individuals to move investments or assets into Liechtenstein in order to participate in the LDF (ie someone with a bank account in Guernsey may choose to ignore the option of making a disclosure under the New Disclosure Opportunity (“NDO”) or standard disclosure route, transfer the monies to Liechtenstein and from 1 December 2009 take part in the LDF making a disclosure for 10 years rather than 20 years – see below). Not only will this lead to a huge influx of monies into Liechtenstein from those who do wish to make a clean breast of “tainted” investments or assets but will also sustain Liechtenstein in the short term given the inevitable outflow of funds as a result of the tax disclosure programme. Will the real losers therefore be traditional low tax rate havens such as Jersey, Guernsey or the Isle of Man (or indeed Switzerland), and will Liechtenstein actually emerge a stronger and cleaner jurisdiction with a re-engineered business model? The other winners would appear to be those individuals who have sought to evade taxes by sheltering monies either in bank accounts or in tax structures utilising Liechtenstein Anstalts (a cross between a Company and a Trust). These individuals would seem to gain from the bargaining done on their behalf by the Liechtenstein authorities given that the recovery of earlier years’ tax lost is limited to a maximum of ten years up to 5 April 2009 whereas the parallel New Disclosure Opportunity being offered for people with offshore bank accounts may seek tax going back up to 20 years. Limiting any disclosure to 10 years not only halves the potential taxes due but amounts to a huge saving of interest which HMRC would normally seek as part of any settlement. Interest alone for liabilities going back between 10 and 20 years can add as much as 100-140% of the actual tax unpaid to the final bill. This presents a potential discrimination between those individuals who choose to proceed with a disclosure under the NDO, hence volunteering up to 20 years and those proceeding under the LDF who will only make declarations for up to 10 years. HMRC should therefore consider reducing the disclosure requirements under the NDO to 10 years maximum to align it with the provisions of the LDF in order to prevent the fairly pointless movement of monies to achieve a tax saving. Better create a level playing field, put a 10 year cap on ALL disclosures which will incentivise more people to come forward and in particular those groups who will be concerned that their “nest egg” will be wiped out by punitive interest charges, and choose to run the gauntlet instead. On top of this HMRC is offering a special Composite Rate of 40% for LDF disclosures to cover all taxes on an annual basis but should an individual select this simplified route he would not benefit from any reliefs or deductions that would normally be due. Such a move will significantly reduce the level of professional costs that would normally be incurred by accountants in preparing a disclosure report. However, whether a disclosure is to be made through the LDF or NDO, individuals should be aware that certain disclosures involving either significant sums of tax or heinous circumstances may not be suitable for a straightforward “form-filling” type disclosure. Some individuals will need special protection and immunity from prosecution which neither the LDF nor the NDO provides. This is why a tax investigations specialist should be consulted for all possible disclosures. The UK tax authorities and the Liechtenstein Government are indeed to be congratulated on an amazingly creative piece of tax diplomacy. Such ingenuity and innovation in overcoming seemingly insurmountable hurdles is rare indeed! For a free consultation regarding any tax issue you may have including making a disclosure under the LDF, please complete our enquiry form and one of our experts will contact you or alternatively call our helpline on 020 7842 7200. |
