If undisclosed offshore accounts are playing on your conscience, now’s the time to come clean — the government has never been in a more forgiving mood, say Charles Gothard and Sangna Chauhan
ARE YOU A UK taxpayer with a secret nest egg in an offshore account on which you should have paid tax? This causes pangs of guilt for many, but the British government has very generously provided a discreet and cost-effective way of ‘regularising’ the situation. Although this solution has already prevented sleepless nights for some, for those who don’t take advantage of it there could be many more.
As many readers will be aware, September 2009 heralded the appearance of a new kind of UK tax agreement: the Liechtenstein Disclosure Facility (LDF), which is a (partial) amnesty mechanism extraordinaire. For those UK taxpayers (whether they are trustees, individuals or companies) who qualify for the maximum LDF benefits, disclosure brings with it a reduced fixed penalty (10 per cent of the overdue tax), a limited disclosure period (so HMRC only looks at undeclared tax from April 1999), immunity from prosecution and a chance to avoid certain historic inheritance tax liabilities completely.
And the most intriguing part of the LDF? At present, the link to Liechtenstein need be no more than an after-thought. As long as the UK taxpayer held an offshore asset on 1 September 2009, he now only needs to open a Liechtenstein account to qualify for the maximum LDF benefits.
Why is the British government encouraging this? Simple — it’s desperate for cash and the Liechtenstein government wants to change its country’s somewhat tarnished image for facilitating tax evasion.
Meanwhile David Gauke, exchequer secretary to the UK Treasury, said in February that ‘the game is up for those going offshore to evade tax’ when he announced the additional HMRC budget of £900 million to tackle tax cheats, with penalties from 6 April for tax evasion increasing to up to 200 per cent of the outstanding tax. In a world where tax evasion is increasingly difficult to get away with, the LDF is an easy escape route for many.
The official statistics are not earth-shattering so far — by 30 September 2010, HMRC had received only 876 LDF registrations — but anecdotal evidence (and our experience) indicate that as word spreads this is rapidly changing. It’s no wonder, given the generosity of the LDF, which typically results in a ‘loss’ of only 7–12 per cent of the capital value of the offshore account. This is far more generous than so-called amnesties in lots of other countries.
Perhaps it’s therefore no surprise that the UK and Swiss governments are negotiating a new tax deal. Initial indications are that UK holders of undeclared Swiss accounts will suffer ongoing withholding tax and there is speculation about a one-off penalty payment on the capital value, but the rates of tax remain unknown.
THE KEY MESSAGE to UK taxpayers with undeclared Swiss accounts is not to wait for the outcome of the UK-Swiss negotiations before registering for the LDF, as our impression from HMRC is that it was surprised by how generous the LDF has proved to be and it is therefore highly unlikely that the UK-Swiss deal will be more generous. As Harold Macmillan once said, ‘Let us be frank about it: most of our people have never had it so good.’
Even though registration for the LDF is open until March 2015, the risk is that HMRC will wise up and tighten up the process (eg by requiring a taxpayer’s connection with Liechtenstein to be more meaningful). The LDF is often referred to as the ‘carrot’ that leads taxpayers to full compliance and the risk of being caught out is the ‘stick’. But, with the stick being wielded so forcefully, HMRC may realise that its carrots need not be so sweet.
One possibility is that any UK-Swiss deal will take precedence over the LDF, so that if a taxpayer qualifies for a Swiss disclosure facility he may be forbidden from registering for the LDF.
Most LDF applications are made by UK-resident and domiciled taxpayers, and once the taxpayer has completed the LDF he will be fully tax-compliant and can then undertake ‘conventional’ tax and estate planning, for example by making tax-free gifts to children or establishing trusts for them. In these difficult economic times it is often the children who are acting as the catalyst for disclosure, as they do not want to inherit a tax nightmare and may want their parents (or themselves!) to benefit from the secret funds in the meantime, which hitherto no one has dared touch for fear of being found out.
If the funds have been hidden in a secret foundation or other structure being declared in the LDF, advice is needed on whether there are different ways of analysing it from a UK tax perspective (which there often are), so that it gets classified by HMRC in the most tax beneficial way for the long term.
See the IFC Index for more on Liechtenstein and Switzerland