TaxSource Total

Here you can access and search summaries of relevant Irish, UK and international case law written by Chartered Accountants Ireland

The case summaries are displayed per year, per month and by case title with links to the case source

The Liechtenstein Solution – LDF

By Andrew Walker

By Andrew Walker

Andrew Walker writes on the Liechtenstein Disclosure Facility and looks at the significant benefits the facility offers to those who currently have a Liechtenstein asset or those who acquire such an asset

In August 2009, a groundbreaking declaration between the UK and Liechtenstein opened the way for UK tax residents with a tax problem involving offshore (and onshore) matters to regularise their tax affairs in a very beneficial way.

More than a year on and, despite approximately a thousand registrations, several articles, numerous Q&As published online by HMRC and a recently announced Second Declaration, still many advisers are unaware of the significant benefits of the Liechtenstein Disclosure Facility (LDF), or that it could even apply to their client.

The facility is open to those who currently have a Liechtenstein asset or those who acquire such an asset – defined as relevant property. This unique opportunity offers the following benefits:

  • Disclosure is restricted to years from 6 April 1999 to date – rather than up to 20 years under normal rules
  • The penalty on unpaid tax is restricted to 10% (20% for years post 5 April 2009)
  • Criminal prosecution is avoided
  • Participants will not be ‘named and shamed’
  • An option to apply a Composite Rate of tax (CR) of 40% to cover all duties for the ten years to 5 April 2009
  • Direct access to a named HMRC officer allowing the resolution of technical issues such as: domicile, residency and the taxation of remittances from mixed capital and income offshore funds

The CR is particularly beneficial when a client's disclosure involves layers of taxation e.g. Company Tax, VAT, director's overdrawn loan account and offshore investment income, on the same sum. However, using the CR means that the full utilisation of losses, personal allowances and other reliefs are lost. Significantly, the CR route can remove any Inheritance Tax (IHT) consequences arising on the undisclosed funds.

Individuals under enquiry can participate in the LDF – as long as the enquiry is not a fraud enquiry under HMRC's Code of Practice 9 procedure (COP9). There will be practical implications but a reduction in the number of years included in the settlement and any penalty arising from 30% plus to 10% can be achieved.

The acquisition of Liechtenstein relevant property is a necessity for those who do not already hold a relevant asset. There has been much discussion as to what is required. The asset should be ‘meaningful and of sufficient value and permanence’ but to date there is no more detailed definition. In practice, it is left to the discretion of the Liechtenstein provider and is proving relatively straightforward and inexpensive.

How this Translates in Reality

Example 1

A sole trader based in Northern Ireland failed to include cash sales of £10,000 per year in his accounts since the early 1980s. There were intermittent cash sales after April 1999 totalling £15,000. The undeclared sales were lodged into a bank account opened in Monaghan. The money was lodged personally at the branch. The bank account has continued to receive investment income up to date. The balance on the account at 6 April 1990 was £100,000 and at 6 April 1999 £250,000. A Liechtenstein bank account is acquired enabling participation in the LDF.

  • Through the LDF the tax, interest and a 10% penalty arises on the undeclared sales of £15,000 and the investment income received on the account from 6 April 1999 to 5 April 2009. No tax is due on the £150,000 accumulated between 6 April 1990 and 6 April 1999.

Example 2

John inherited a significant offshore trust fund sited in the Isle of Man, from his late father Denis. It was set up by Denis through an overseas bank and trustees. John has received distributions from the trust since 1985 onwards and has not declared any of the monies received. All the income and gains should be declared by John on his tax return. On the death of his father, the offshore trust was not included in his father's estate so no IHT issues were addressed.

  • Outside of the LDF, John would be exposed to a 20 year tax bill with a penalty of 30% plus arising. Additionally, HMRC would pursue the IHT issue outside the 20 years, because there is no time restriction on their ability to pursue such liabilities.
  • If John acquired relevant property in Liechtenstein, not only would he qualify for the LDF, benefitting from the limited disclosure from 1999 onwards and the 10% penalty, but the IHT issue would be ignored if the CRO was utilised.

Future Offshore Developments

The LDF is a “too good to be true” opportunity to put right undisclosed offshore (and indeed onshore) tax liabilities on beneficial terms.

When considering the benefits of the LDF, a thought should be given to the current economic climate we find ourselves:

  • Increased global cooperation to achieve transparency and disclosure of information to catch tax evaders
  • A doubling of the penalty in the UK for tax evasion involving offshore matters from 2011
  • HMRC aggressively looking for an offshore tax evader to prosecute and then publicise that success
  • HMRC, in cases of tax evasion, publicly ‘Name and Shame’ those individuals
  • HMRC obtained a large amount of offshore bank account data, which has been well publicised, and this is now resulting in an increase in COP9 enquiries

On 25 October 2010 the UK and Swiss governments announced they would be discussing the regularisation of existing untaxed assets in Switzerland. Additionally, Switzerland is in discussion with Ireland in respect of access to the details of Irish Swiss bank account holders.

Current information suggests for individuals with untaxed Swiss assets:

  • They will be given the opportunity to regularise their tax affairs by means of a one-off flat-rate payment covering all forms of tax, or
  • They will be able to choose a Voluntary Disclosure option to HMRC.
  • For future years a fixed flat rate (withholding) tax will apply to interest income, dividends, investment income, capital gains and assets.

Those choosing the flat rate option will uniquely retain their anonymity. The Swiss bank will calculate the flat rate tax and pay it over to the Swiss Federal Tax Administration who will in turn pass it over to the UK Treasury.

Where are we now?

Overall, the pursuit of UK tax residents with an offshore tax problem continues. We await the details but the Swiss initiative potentially offers an alternative to the LDF – or does it?

The LDF is a very flexible opportunity to resolve all tax matters whilst the Swiss initiative involves only Swiss assets. So individuals with:

  • undisclosed offshore and onshore tax problems,
  • complicated and messy offshore trust structures looking to enjoy that money but are currently unable to do so because the funds have become indistinguishable in terms of capital and income,
  • offshore funds who want to gift the money to their family without passing on a legacy tax problem,

should grab this opportunity with both hands as soon as possible.

Experience is showing that through the LDF, individuals lose roughly 20% of their capital whereas the same individual subject to a COP9 tax enquiry will lose 60-80% by comparison.

The LDF allows these problems to be solved. The remaining funds can be enjoyed and a lengthy intrusive tax enquiry can be avoided. It makes sense to act now.

Andrew Walker is a Director with BTG Tax.

BTG Tax
43 Thomas St, Dungannon,
Co Tyrone, Nothern Ireland
Tel: +44 (0)28 87720410

BTG Tax
340 Deansgate, Manchester, M3 4LY
UK
Tel: +44 (0)161 837 1870
Offices across the UK and overseas. BTG Tax is the tax division of Begbies Traynor Group