Success of LDF sees fall in HMRC information requests to foreign tax authorities

Phil Berwick of Pinsent Masons, the law firm behind Out-Law.com, said that many potential targets could be coming forward voluntarily through amnesty arrangements such as the Liechtenstein Disclosure Facility (LDF). The LDF, which was signed in August 2009, is currently scheduled to run until 2016 and is now expected to bring in as much as three times more than the £1 billion in undeclared tax HMRC had originally estimated it would recover under the scheme.

"HMRC has begun investigations into thousands of individuals with overseas assets in the last few years, and will probably have picked off most of the low-hanging fruit," Berwick said.

"HMRC teams have built up a very extensive picture of the assets they think are undeclared, so they will now be able to adopt a targeted approach. Many potential targets might also be coming forward voluntarily through the LDF, saving HMRC from launching an investigation. HMRC's recent tough approach has prompted people onto the straight and narrow," he said.

However, Berwick also warned that recent cutbacks at the department could be affecting the number of cases it is able to handle.

"It may also be the case that HMRC's heavy workload is catching up with it," he said. "The recent NAO report on HMRC's compliance performance revealed that HMRC had 41,000 open avoidance investigations. HMRC has pushed very hard on compliance recently and may be hitting capacity."

The new figures, obtained by Pinsent Masons through a freedom of information (FOI) request, show that the department made 640 requests for information on UK taxpayers' affairs to overseas governments during the 2011/12 tax year. It made 857 requests in 2010/11. These requests were made under HMRC's network of double taxation agreements.

Berwick said that the figures showed HMRC was continuing its pursuit of those it suspected were evading or avoiding taxes. In 2012, the department signed new agreements with countries including Barbados, Liberia, Brazil and Grenada.

"Taxpayers hiding assets from HMRC overseas are running out of places to hide," Berwick said. "HMRC will use every tool in its arsenal to find out where people have assets and will come down very heavily on those it suspects are hiding assets."

"It is far better to get on the front foot and tell HMRC about an undisclosed offshore asset or other problem before HMRC finds out and begins an investigation. There are various mechanisms people can use to report their undeclared overseas funds and assets to HMRC so there is really no excuse not to. Taking a pro-active approach and using facilities such as the LDF to declare any offshore assets could help limit the risk of a criminal prosecution."

Double taxation agreements are designed to prevent an individual from having to pay tax in two different countries on the same income or assets. However, they also allow tax authorities to find out the value of assets an individual has declared overseas. This can help them assess the tax liability of that individual in their home country. The UK has one of the world's largest networks of double taxation agreements, which includes arrangements with over 100 countries.

The LDF enables taxpayers with UK tax irregularities connected to a bank account, investment or structure in Liechtenstein to settle their tax affairs on favourable terms. Those who do not currently have an account in Liechtenstein, but have an offshore account located elsewhere, can now bring themselves within the LDF by acquiring a bank account or similar connection in Liechtenstein.

Berwick also pointed out that HMRC was making more use of 'whistleblowers' and other sources of information about potential missing taxes. In November, the department received a list of more than 4,000 HSBC customers with offshore accounts in Jersey given to it by a whistleblower.

"The use of whistleblowers and other forms of covert intelligence shows the lengths to which HMRC is going in order to recover missing taxes," Berwick said. "HMRC offers rewards to those that provide tip-offs or information about suspected tax evasion. With whistleblowing cases in the headlines, these types of leaks might become more common as potential whistleblowers follow the example set by others."