The Liechtenstein disclosure facility is good for your clients

Attitudes to the new Liechtenstein disclosure facility (LDF) appear to be largely clouded by concerns about its availability and the ramifications of entering into a procedure the end of result of which will be a negotiated contract to settle unpaid tax with HM Revenue & Customs (HMRC).

My experience is that by concentrating on the favourable terms offered and following prescriptively the disclosure items to ensure complete disclosure, it is possible to provide clients with a clean slate for their past and future tax affairs and, most importantly, peace of mind.

HMRC launched the LDF to help UK taxpayers make a disclosure, where appropriate. Under the facility, the government of Liechtenstein has committed to introducing a five-year taxpayer assistance and compliance programme, until March 2015, under which financial intermediaries in Liechtenstein will need to be satisfied that, where appropriate, clients are declaring Liechtenstein investments to HMRC.

By coming forward under the LDF, taxpayers will be able to take advantage of a number of favourable terms, such as a 10 per cent fixed penalty on underpaid liabilities (plus full interest), no penalty where an innocent error has been made, the option to use a composite rate or calculate actual liability on an annual basis, and assurances about criminal prosecution.

Is the LDF right for your clients?

For your client to qualify they must hold relevant property or have an interest in relevant property which, broadly, means a bank or financial (portfolio) account in Liechtenstein or an entity with a connection to Liechtenstein.

Initially you can approach the helpdesk for advice on matters connected with the disclosure on a no-names basis. However, registration and disclosure must, of course, name the relevant person.

There is a misconception that the LDF will lead to criminal investigation. HMRC will not start a criminal investigation for a tax-related offence if your client makes a full and accurate disclosure and the source of the funds is not from criminal activity, which in this instance does not include tax evasion.

The timetable is reasonable; it is not a long, drawn-out affair, spanning years. Your client must tell HMRC that they have received a notice from the financial intermediary and that they intend to apply to take part in the LDF. HMRC will issue your client with a registration certificate within 60 days of them contacting it.

The client should send this certificate to the financial intermediary within 30 days of receiving it and the full disclosure to HMRC within seven months (for the composite rate) or ten months (for the actual basis) of the registration certificate date.

HMRC will send your client a disclosure certificate within 30 days of receiving the disclosure providing it is complete. Lastly, the disclosure certificate should be sent to the financial intermediary within 30 days of receiving it.

HMRC will process applications for registration under the LDF as soon as possible. Provided your client qualifies at the point their application was received, HMRC will deem the date of registration to be the date that it received the application (rather than the date when the registration certificate is issued).

There is a good deal of concern about how the information disclosed will be used. HMRC will only use the disclosure to determine the tax liability of your client, but it may also use the information with regard to UK tax liabilities of third parties. Where HMRC receives a formal request under an exchange of information agreement it may disclose where it is obliged to do so.

The extent of disclosure

Understandably the extent of disclosure depends on circumstances, but where deliberate 'behaviours' are demonstrated, payment of UK tax liabilities under the LDF goes back, broadly, 20 full tax years from the beginning of the tax year in which the full disclosure is made. Where, less often, 'behaviours' are not considered deliberate the range is four to six full tax years.

The disclosure certificate itself allows your client to satisfy the financial intermediary that they have complied with LDF so their investments can remain in Liechtenstein. This is very different to agreement of the disclosure. HMRC will write to your client separately to either confirm the offer has been accepted or to ask for further information if this is needed. It will aim to do this within six months of receiving your client's disclosure.

HMRC expect disclosures to be made within the LDF time limit but if further time is needed to make disclosure, you should contact the helpdesk as soon as possible with an achievable timetable.

Tax payable

The composite rate is a single rate of 40 per cent which can be used as a means of calculating an amount which HMRC will accept in satisfaction of past tax liabilities. The amount will cover all UK taxes (including income tax, corporation tax, capital gains tax, stamp duty and VAT and, without limitation, national insurance contributions). The rate will be applied to all income, profits, gains and other sums chargeable with no reliefs or other deductions to be allowed (for example, the transferable nil rate band between spouses for inheritance tax). Interest and penalties will be due, in addition to the composite rate.

Your client does not have to use the composite rate. They can choose to calculate their liability using the normal rules, which will mean they are able to claim any reliefs and deductions due.

So why would a client use the composite rate at 40 per cent? First, it allows a simple and quick method of calculation of liability. Second, certain transactions may attract tax on more than one class of duty and hence the effective rate may be greater than 40 per cent. The composite rate may also be effective where there are issues regarding record keeping and, particularly, the necessary split between capital and income in clients' offshore accounts. The composite rate can be applied to the growth over the given period which means that records do not need to be reconstituted.

Following the disclosure items prescriptively

As of 1 April 2013, HMRC will be adopting a much tougher stance in relation to whether a disclosure certificate is issued. Disclosures which do not comply with the required items will be regarded as incomplete and as a result the certificate will remain unissued.

HMRC will send notifications which will highlight the deficiencies but if these are not rectified within a reasonable timeframe this will be interpreted as non co-operation and consideration may be made to withdrawal of the favourable terms, with the ultimate sanction of recovery action by HMRC.