What is the LDF?
The LDF is a disclosure process for taxpayers with UK tax irregularities connected to a bank account, investment or structure (for example, a trust, foundation or company) in Liechtenstein. Tax, interest and a penalty will be charged, but HM Revenue & Customs (HMRC) is only seeking tax for the period from 6 April 1999 (from 1 April 1999 for companies), rather than the normal 20-year period. These conditions represent very favourable terms, particularly when combined with the offer of immunity from prosecution for tax offences under the LDF.
The LDF can also be used by taxpayers without an existing connection to Liechtenstein, including those without an offshore asset or bank account. If you do not have an existing account, etc in Liechtenstein you will not qualify for all the benefits of the LDF, but you will, for example, still receive immunity from prosecution.
The terms of the LDF were changed slightly in August 2014. The effect of these changes is that all the favourable benefits of the LDF will not be available unless:
- The disclosures constitute 'new' information. HMRC defines new information as being things that they were not previously aware of. So, where a taxpayer registers for the LDF, each element of the disclosure being made will need to be looked at to determine if HMRC were already aware of the irregularity or not.
- If the disclosure is linked to an HMRC 'intervention', that intervention is less than three months old. Intervention here refers (broadly) to any significant tax enquiry undertaken by HMRC. If there have been any past enquires, even if those enquiries are now closed, that are more than three months old when the taxpayer wants to make an LDF disclosure, specialist guidance should be sought to determine whether the full favourable terms will apply or not.
- The disclosure is 'substantially linked' to an offshore asset held at 1 September 2009, HMRC's definition of substantially is at least 20%.
However, disclosures which do not satisfy these new conditions should still qualify for immunity from prosecution and the facility to have a single point of contact within HMRC to deal with the disclosure so using the LDF is still likely to be advantageous.
In the 2015 Budget it was announced that the LDF will end on 31 December 2015 – rather than 5 April 2016 as was the original position. It is intended that there will be a new time limited disclosure facility after this time, but it will have tougher terms than the LDF with penalties of at least 30% and no guarantees around criminal investigation.
How can I participate in the LDF?
If you do not currently have a bank account, investment or structure in Liechtenstein, you may be able to bring yourself within the LDF by now acquiring a bank account in that country. This is not a "loophole" - this feature of the LDF was fully intended by HMRC.
To qualify for the LDF in this way, you must have an offshore bank account which was not opened through a UK branch or agency. For example, if you went to Guernsey and opened an account in that jurisdiction you can now acquire a bank account in Liechtenstein to bring yourself within the LDF. If, however, you opened a bank account in Guernsey through a UK branch of the bank you can still use the LDF, but you would not qualify for all its terms.
If you have a qualifying offshore bank account, you should note that you will not be able to participate if you were "under investigation" by HMRC on 11 August 2009. For this purpose that means either you had been sent a copy of HMRC's Code of Practice 9 (Suspected Serious Fraud cases) or were arrested as part of a criminal investigation.
In addition, there are circumstances where variations to the standard terms will apply:
- HMRC has written to you in connection with the Offshore Disclosure Facility or the New Disclosure Opportunity (previous HMRC disclosure facilities);
- you also have an offshore bank account opened through a UK branch or agency;
- your tax affairs have previously been "under investigation" (same definition as above), and you did not make a full disclosure at that time.
If you want to register for the LDF you must now provide HMRC with a confirmation of relevance issued by a Liechtenstein financial intermediary. A Liechtenstein financial intermediary can issue a confirmation of relevance when it deems the business relationship with you to be "material". If you open a bank account after 1 September 2012 a material business relationship will exist if 20% or more of your undisclosed worldwide bankable assets are held in a bank account or bank deposit in Liechtenstein or more than CHF 3 million of your undisclosed worldwide bankable assets are held in a bank account or bank deposit in Liechtenstein. .
If you do not have an offshore bank account, the amount required to open a bank account in Liechtenstein will depend on the particular bank’s requirements.
How much tax will I pay?
HMRC allows taxpayers to pay on the basis of a single charge rate as an alternative to the actual calculation of liability to UK taxes on the statutory basis. A composite rate of 40% is available for tax years up to and including 2008-09. There is no single charge rate for 2009-10, but for 2010-11, 2011/12 and 2012/13 there is a rate of 50%, subject to conditions. After the expiration of the return filing date for each of the tax years 2013/14 to 2015/16, HMRC will consider whether a composite rate will be made available as an alternative to the statutory basis of taxation for that year. Penalties and interest will be payable in addition to the tax.
What level of penalty will be charged?
The standard level of penalty is 10% of the tax due, for years up to and including 2008/09. There are certain exceptions to this, including taxpayers who HMRC wrote to in connection with the Offshore Disclosure Facility or the New Disclosure Opportunity. The normal penalty rules apply for subsequent years.
Where income or capital gains have not been declared to HMRC due to an "innocent error", a penalty will not be charged and the disclosure period is restricted to the last four tax years.
Can I be prosecuted?
There is immunity from prosecution under the LDF (unlike other HMRC initiatives) for tax-related offences. If the funds in your Liechtenstein bank account are connected to criminal activity other than tax evasion (this includes, but is not limited to, corruption, bribery, failing to disclose assets under divorce proceedings, commercial fraud) there is no immunity from prosecution (for the tax offence or the wider criminality) and you should take legal advice immediately.
If you register under the LDF and submit a disclosure which is not correct or complete, you risk prosecution.
How do I open an account in Liechtenstein, and do I need to go there?
Each institution has its own procedures for new clients, and not all require you to travel to Liechtenstein.
When do I need to open the bank account in Liechtenstein?
As soon as possible. The LDF now closes on 31 December 2015. However, qualifying taxpayers should not wait until then to open a bank account in Liechtenstein. Registration under the LDF sooner rather than later gives you peace of mind, certainty, and the opportunity to re-structure your affairs in a tax-efficient way on very favourable terms.
What about liabilities regarding non-Liechtenstein irregularities, bank accounts or assets?
These need to be included in your disclosure. If you have more than one bank account or structure with irregularities, different disclosure rules may apply to each account and structure.
I have an offshore trust – do the trust and assets need to be transferred to Liechtenstein?
As a general rule, you do not need to ask the trustees to transfer the trust's assets to Liechtenstein – it may be sufficient to move the management of the trust there or for the trust to open a bank account there.
What if I do not have all of the bank statements or other records?
Where it is not possible to obtain copy documents, it may be appropriate to use estimates in the computations of tax due. We can advise you on the way forward, based on your specific circumstances.
What about inherited funds?
Under normal rules, there is no time limit for the recovery of inheritance tax from a deceased person's estate. Under the LDF, inheritance tax (IHT) liabilities will be restricted to the period from April 1999. So, if the deceased passed away before then no IHT will be payable. Where there are potential IHT liabilities, the composite rate option, if available, can be used to remove them.
Income tax and capital gains tax liabilities in relation to a deceased person can, generally, only be recovered for the four years prior to the date of death. Also, HMRC cannot impose a penalty on the executors of a deceased person for an offence committed by that person.
Why should I come forward now?
The LDF runs only until 31 December 2015, and the planned replacement disclosure facility will be much tougher, with higher penalties and with no guarantee that criminal investigations will not be pursued.
What if I decide not to make a disclosure?
If you have a disclosure to make, but do not come forward, you will face an intrusive investigation and much higher penalty (potentially up to a maximum of 200%) when HMRC catches up with you. In the more serious cases, HMRC may decide to prosecute. In addition, you may be subject to the "naming and shaming" provisions, and have your details published on HMRC's website.
Also HMRC is signing information exchange agreements with overseas jurisdictions on a regular basis. In addition the UK has entered into agreements, sometimes referred to as 'UK FATCA' with the Crown Dependencies and Overseas Territories, which will mean that from September 2016 HMRC will be provided with information about bank accounts held by UK residents from financial institutions in those territories. From 2017 HMRC will automatically receive information about accounts held in other jurisdictions. The information to be exchanged in relation to UK resident individuals and companies with assets offshore will bring those assets held offshore that were previously invisible to HMRC to their attention. The LDF is available up to 31 December 2015 and could be used to resolve any issues before the first information exchange takes place. The replacement disclosure facility that the Government plans to introduce will have higher penalties and no guarantee that criminal investigations will not be pursued. It is therefore strongly recommended that any disclosures be made as soon as possible, under the LDF.
What should my next action be?
You should contact a specialist for advice on your particular circumstances, or to guide you through the disclosure process.
Is what I discuss with my adviser disclosable to HMRC or any other authority?
This depends on whether "legal professional privilege" (LPP) applies. If you consult a law firm, either in relation to your tax affairs or wider criminality, LPP applies. If LPP applies, communications between you and the law firm are protected from disclosure without your consent. In October 2009, the High Court confirmed that LPP does not apply to accountancy firms.
For more information see HMRC's Frequently Asked Questions on the Liechtenstein Disclosure Facility.