13 June 2018
UK disclosure facilities – background
HM Revenue & Customs (HMRC) has offered several opportunities over the past seven years to encourage errant tax payers to come forward in order to regularise their tax affairs on relatively benign terms. In 2007 HMRC offered the Offshore Disclosure Facility (ODF) which afforded taxpayers the opportunity to make a disclosure of all (the look back period was the statutory 20 years) outstanding tax liabilities (plus interest) with a guaranteed fixed penalty of 10% of the tax unpaid. The opportunity to take part in this facility was very limited, it was announced on 17 April 2007 and a taxpayer would only be able to partake in the ODF if he registered by 22 June of that year. This was heralded as a great success by HMRC which raised £400 million in tax from 45,000 disclosures.
The success of the ODF clearly whetted the appetite of HMRC for disclosure facilities. Two years later in 2009, with the backdrop of a global financial melt down and governments throughout the world struggling to think of ways of plugging the huge gap in their finances, HMRC announced the New Disclosure Opportunity (NDO) which was heralded as the last opportunity for taxpayers with offshore assets and undisclosed tax liabilities to bring their affairs into order. The terms were similar to that of the ODF and HMRC raised £85 million from 5,500 disclosures. This did not have quite the same impact as the ODF, probably because it was quickly overshadowed by the announcement of the last opportunity for people to put their tax affairs in order under the ground breaking Liechtenstein Disclosure Facility (LDF) which was announced on 1 September 2009.
The LDF has run since 1 September 2009 and will expire on 5 April 2016. As of July 2014 the LDF has yielded £833 million from 4585 disclosures (with a further £182 million paid to HMRC in cases not yet settled).
Once registered for the LDF the principal benefits are as follows:
- The taxpayer need only look back as far as 1 April 1999 – any irregularities prior to this date are essentially forgiven;
- Interest on unpaid tax is payable at the normal rates, but penalties are capped at 10% up to April 2009 and 20% (unprompted disclosure of deliberate behaviour) or 30% (unprompted disclosure of deliberate and concealed behaviour) thereafter (i.e the minimum penalty applicable to the relevant behaviour under UK legislation);
- There is protection from criminal prosecution; and
- There is potential to wipe out any inheritance tax liability completely (that means no tax, interest or penalties).
When the LDF was introduced, it was extremely easy to access the beneficial terms. As long as the taxpayer had an offshore asset as at 1 September 2009 (not opened via a UK branch or agency) and was not subject to an ongoing criminal or Code of Practice 9 investigation, then the facility was in theory open to him. All he need do was acquire a Liechtenstein ‘footprint’. In the early days this was easily achievable, opening an account at a friendly Liechtenstein bank with EUR 2,000 would have been sufficient (in some banks’ eyes this was enough to meet the requisite ‘meaningful connection’ with Liechtenstein).
It did not, however, take long for the powers that be in Liechtenstein to realise that they were not experiencing the huge capital in flows that they had anticipated. Consequently the Government of Liechtenstein passed an Ordinance dated 10 July 2012, effective as of 1 September 2012, stipulating that ‘meaningful connection’ was achieved only if:
- In the case of banks: 20% of the worldwide affected bankable assets or CHF 3 million – whichever is the lower – was transferred to a Liechtenstein Financial Institution (‘FI’).
- In the case of trust companies: 10% of undisclosed, worldwide bankable assets or CHF 1 million (which ever is lower) was managed by at least one trustee resident in Liechtenstein;
- In the case of a Legal Entity ‘domiciled’ abroad but managed in Liechtenstein: 15% of undisclosed worldwide bankable assets or CHF 1 million was booked in a bank account in Liechtenstein.
Once these requirements had been met to the satisfaction of the FI it would issue a ‘confirmation of relevance’, meaning that, subject to the other requirements having been met, the taxpayer was free to register for the LDF.
On 14 August 2014 HMRC issued a letter which changed the accessibility of the LDF with immediate effect.
HMRC’s reasoning was that a number of taxpayers had registered for the LDF in order to disclose liabilities relating to Employee Benefit Trusts already under enquiry by HMRC. HMRC took the view that the purpose of the LDF was not to enable taxpayers to disclose liabilities that HMRC was already aware of and which were not connected to the offshore asset held on 1 September 2009.
Consequently access to the full favourable terms of the LDF has been restricted – they will now no longer be available where:
- No disclosure of new information has been made;
- The issue being disclosed is already subject to an intervention that began more than three months before the application to enter the LDF; and
- There is no substantial connection between the liabilities being disclosed and the offshore asset held by the tax payer on 1 September 2009.
People who fall within these categories will still be able to make a disclosure under the LDF but the benefit of doing so will be limited to an assurance that they will not be criminally prosecuted (a not insubstantial assurance in some cases). The other benefits associated with the LDF and listed above will not be available to them.
These changes do not affect those already registered for the LDF as of 14 August 2014.
HMRC states in the amended FAQs that it is impossible to provide a definitive list of interventions but an intervention would include:
- Any issue that is the subject of litigation
- Any civil enquiry of any kind that is supported by statutory information or investigation powers and is carried out for the purpose of ascertaining whether the UK tax liabilities of the relevant person are correct and up-to-date, such as:
- Formal enquiries opened under TMA 1970 and any deemed subsequent enquiries (covers individual, trust and partnership returns).
- Formal enquiries opened under Sch 18 FA 1998 (company tax returns).
- Formal enquiries opened under Part 3 Sch 10 FA 2003 (Stamp Duty Land Tax returns)
- Cases where returns for earlier years have been issued but not returned
- Cases where determinations or assessments have been issued.
- Investigations that are underpinned by the ability to raise an assessment under s.29 TMA 1970 or equivalent legislation (discovery provisions).
- Compliance checks that are underpinned by the powers contained at Sch 36 FA 2008 or its predecessors (Includes PAYE, CIS and VAT where the officer must notify the taxpayer that a compliance check is being commenced, or that there is an intention to visit the premises. Also includes ATED compliance checks which are brought into Sch 36 FA 2008 via Sch 34 FA 2013.)
- Enquiries into tax-advantaged share schemes embedded in each of Schedules 2 to 5 of ITEPA 2003 (these powers apply with effect from 6 April 2014).
Any co-ordinated, project-based enquiries by the competent authority of the UK into multiple identified or suspected taxpayers stemming from specific third party information.”
It is recommended that those taxpayers who are considering making a disclosure, and who are still eligible, come forward and register for the LDF without delay, before the terms of the LDF are restricted any further.