Schedule 2 (definition of “beneficial interest”) was deliberately kept short (barely more than a page), as was the definition of “relevant person” in Schedule 1. It was accepted that some fish might slip through the net as a result of having these fairly simple tests but the priority was to have something workable and not too bureaucratic.
Those receiving the ultimatum have 18 months in which to reply. This is a generous time limit to allow families in particular to agree between themselves on a course of action. If they are tax compliant, the simplest way of showing this is to provide a letter from their (professionally qualified) UK tax advisers to the effect that the Liechtenstein account/entity has been properly dealt with in their tax returns.
If they are non-domiciled and claiming the remittance basis of taxation, the Liechtenstein bank account may not have been reported at all on their tax returns. This will have been entirely correct providing they made no remittances to the UK from that account.
If they are not tax compliant and they have taken up the LDF, they will have received a registration certificate from HMRC which they should provide to the Liechtenstein intermediary.
Coming Forward Under the LDF
Those with Liechtenstein bank accounts or legal entities do not have to wait until they receive the ultimatum next year – they can take up the LDF now.
There is a good reason for acting straightaway as to do so will minimise penalties. For example, someone who has not yet submitted their tax return for 2008/9 should now include the income from the undeclared account from that year and, by submitting the return by 31 January 2010, avoid the interest and the 10 per cent penalty. At the same time they would register for the LDF for the period prior to 6 April 2008 only – a maximum of nine years.
It goes without saying that anyone taking up the LDF has, of course, to disclose all their undeclared accounts, not just the ones in Liechtenstein or those held through Liechtenstein entities!
I am often asked what would happen if Liechtenstein does not enact the necessary legislation. Does this mean that the LDF becomes void and of no effect? My answer is no. The MOU only sets out what will be HMRC’s practice; it is not a treaty between two countries which relies on both sides enacting the necessary legislation. HMRC may well suspend the LDF if the Liechtenstein parliament votes against the legislation, but those who have already come forward under the LDF are entitled to rely on its terms.
Anyone already under investigation by HMRC cannot take up the LDF. The term “under investigation” is limited to cases where there has been a suspicion of serious tax fraud and the person has been formally notified by HMRC that an investigation has commenced or where they have been arrested for a criminal tax offence.
Any person previously under investigation by HMRC and who did not disclose the Liechtenstein account or Liechtenstein entity at the time, can take up the facility but will not have their penalty capped at 10 per cent. They can, however, benefit from the 10 year time limit.
Finally, anyone contacted by HMRC under the first Offshore Disclosure Facility (in 2007) or the NDO, and who did not make disclosure, can take up the LDF, but their penalty cap will be raised from 10 per cent to 20 per cent.
How Can Someone with No Present Links to Liechtenstein Become Eligible for the LDF?
They can do so by establishing the necessary links now. To do this they can either:
1) Open a Liechtenstein bank account and transfer some funds there; or
2) Set up a Liechtenstein foundation or other Liechtenstein legal entity to hold funds abroad.
This is all they have to do. It is a widespread myth that they must transfer all funds in undeclared offshore accounts to Liechtenstein if they are all to benefit from the LDF. Providing they establish the necessary links, as set out above, all undeclared funds – wherever they may be – will qualify for the LDF terms.
This is subject to one important exception. An offshore account will not qualify if it was:
a) held in his own name and
b) opened through a UK branch of the bank in question.
This is best illustrated by some examples.
X, who until now had no links with Liechtenstein, opened an account in his own name with a Swiss bank in Geneva through its London branch 18 years ago. The income and gains on the account were never declared for tax. Although X may be eligible for the LDF benefits in relation to other undisclosed accounts he may have, he will not be eligible for those benefits in relation to this account. Tax is payable for the full 18 years and there will be no 10 per cent penalty cap.
The facts are as in Example 1, but the account was opened in the name of X’s BVI company. The account will qualify for the LDF benefits.
The facts are as in Example 1, but the account was opened by X going directly to the bank in Geneva. The account will qualify for the LDF benefits.
The reason for excluding the bank accounts in Example 1, is that HMRC could have found out about them through information disclosure notices that they have been serving in recent months on over three hundred banks with UK branches.
Another widespread myth is that being able to climb on the LDF bandwagon in the way I have described is a ‘loophole’ of which HMRC was unaware. This is not so. Throughout negotiations, the UK and HMRC were happy that new business should flow to Liechtenstein banks and intermediaries in order to take advantage of the favourable LDF terms. This was to compensate Liechtenstein for the loss of undeclared funds which might leave the Principality. Dave Hartnett of HMRC was quoted recently (in the 19 November issue of Taxation) as saying:
“We certainly went into it with our eyes open on that issue. What it was really about was trying to play fair by Liechtenstein. They were going a million miles beyond the OECD standard, they were losing customers, they wanted this as part of a design so that they might get some new customers. Interestingly, they are being phenomenally selective about who they are taking on – you can’t just hop in from the Caymans and get them to take you on; we were already seeing that they are refusing to take some people.”
Conclusion: the Outcome for Liechtenstein
As Dave Hartnett has stated, the Principality of Liechtenstein has positioned itself well ahead of offshore financial centres which have just been executing Tax Information Exchange Agreements (TIEAs). And it has done so without betraying banking and professional secrecy (unlike a neighbouring jurisdiction). It is not providing any information on UK taxpayers’ accounts to HMRC and nor are its banks and professional intermediaries doing so. On the day it signed the MOU it also signed a TIEA with the UK, but the TIEA protects those with undeclared money in Liechtenstein – at any rate until 2015, by which time they should have left the Principality.