Benefits of Liechtenstein Disclosure Facility (LDF) to be restricted, says HMRC

Reg Day, a tax expert at Pinsent Masons, the law firm behind Out-law.com said, that although the changes would make the LDF less beneficial to some of those seeking to settle outstanding tax liabilities, immunity from prosecution would still be available in most cases, meaning the LDF would remain "an attractive way to resolve past tax irregularities".

The LDF allows those with UK tax irregularities to make a disclosure to HMRC on a voluntary basis in return for a reduced penalty in most years. In addition the disclosures only need to go back to April 1999 rather than the normal 20 year period. The LDF also offers immunity from prosecution and a single point of contact with HMRC.

Subject to conditions, anyone without an existing bank account, investment or structure in Liechtenstein, can bring themselves within the LDF by acquiring a Liechtenstein bank account, before formally registering for the process.

The full favourable terms of the LDF will now only be available to the extent that the disclosures are "substantially linked" to an offshore asset held at 1 September 2009. The full benefit of the LDF will also only apply to irregularities of which HMRC was not previously aware and where the liability is linked to a significant enquiry by HMRC, that enquiry must be less than three months old.  

If the full favourable terms are not available, the limited favourable terms of assurance of immunity from prosecution and a single point of contact with HMRC will continue to be available to users of the LDF.

Reg Day said that it was previously possible to make a disclosure under the LDF and obtain all of the favourable terms "even if the disclosures were not connected to assets in Liechtenstein, or indeed to any other offshore location".

The change in the terms of the LDF means that the offshore asset must now be "substantially" linked to the disclosure being made. HMRC's definition of substantially is 20%. Where the disclosure is not substantially linked to the offshore asset, then only the assurance about criminal prosecution and the single point of contact for disclosures will be available.

HMRC said "access to the favourable terms has been restricted to ensure that the criteria reflect the purpose of the LDF". HMRC said "In some cases, the disclosure has been related to wholly onshore matters. Such disclosures, whilst encouraged, are not within the spirit of the LDF".

HMRC said it is restricting the most favourable terms of the LDF to "new" disclosures because "people have entered the LDF to settle liabilities that HMRC is already aware of. HMRC wants to encourage settlement of these liabilities, but does not believe it is within the spirit of the LDF for the shorter limitation period, fixed penalty or the composite rate option to apply."

HMRC confirms that where the use of a Disclosure of Tax Avoidance Schemes (DOTAS) scheme by a taxpayer has or should have been disclosed to HMRC by the taxpayer on a tax return this will be regarded as a disclosure of something HMRC already knows about and will not qualify for the full benefits of the LDF .

Day said "Even where only the limited favourable terms are available, taxpayers should consider making disclosures under the LDF as the guarantee of immunity from prosecution is still unique to the LDF process".

The changes do not apply to taxpayers whose disclosure has already been agreed and settled by HMRC, or who are already registered under the LDF, but have not completed the disclosure process.

One of the unique aspects of the LDF is the single charge rate, which was previously available for 2010/11). This allowed taxpayers to settle multiple tax liabilities using one inclusive rate. HMRC have now confirmed that the single charge rate will also be available for 2011/12 and 2012/13.

From 30 September 2016 the Crown Dependencies and Overseas Territories will be exchanging information with HMRC about assets hold offshore by UK residents under the so-called 'UK FATCA' regulations.

Reg Day said "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 5 April 2016 and could be used to resolve any issues before the first information exchange takes place".