Opportunity or amnesty: the New Disclosure Opportunity and the Liechtenstein Disclosure Facility

By Nicole Aubin-Parvu, Lawrence Graham LLP (04/10/2009)

In July this year, after months of speculation as to its likely terms, HMRC published initial details of the ‘New Disclosure Opportunity’ (NDO), a limited opportunity for undisclosed offshore tax liabilities to be reported and paid at a reduced penalty.  These were followed up on 1 September with detailed information regarding the facility.

The NDO is, in fact, the second such facility HMRC has operated to enable individuals, businesses, trusts, partnerships and companies to disclose outstanding tax liabilities at a fixed penalty.  The first, known as the Offshore Disclosure Facility (ODF) was run by HMRC in 2007 after it had obtained orders from the Special Commissioners against five High Street banks requiring them to disclose information in relation to customers with UK addresses holding offshore accounts and credit cards.  However, as there was no publicity campaign by HMRC, people were unlikely to hear of the ODF unless they read about it in the press or received letters as account holders at the banks concerned.  As a result, the response to the ODF was less comprehensive than it might otherwise have been, although it did raise in the region of £400 million.

This time, HMRC have been much more forthright, obtaining orders from the recently formed Tax Tribunal against over 300 financial institutions requiring them to comply with information notices issued by HMRC requesting information on customers with UK addresses who hold offshore accounts.  With the large number of orders obtained by HMRC this time, and the fact that it has been publicising the NDO and its success against the financial institutions, it may be that many more people take the opportunity (stated by HMRC to be the last such opportunity) to disclose any tax irregularities they may have.

The scheme provides participants with the opportunity to notify their intention to disclose unpaid tax liabilities between 1 September 2009 and 30 November 2009 if notifying on paper, or from 1 October 2009 until 30 November 2009 if notifying electronically.  The participant then has until 31 January 2010 to disclose and pay the outstanding liabilities (as well as interest and penalties) if disclosing on paper and until 12 March 2010 to do so if disclosing electronically.  Disclosure and payment should be made for every year liabilities have not been paid for up to 20 years, except in the case of inheritance tax for which there is no limitation period for disclosure.

The NDO does not only apply to liabilities on offshore bank accounts but also to any liabilities arising in respect of other offshore assets, including bonds or other financial products, land/property, trusts, business interests, yachts and vehicles, etc.  In addition, any undeclared UK tax liabilities in respect of UK accounts or assets must also be disclosed and included in the tax, interest and penalties paid.

Penalties under the NDO are fixed at either 10% or 20% for any liability of £1000 or more – less than that and there is no penalty.  The 10% rate should apply to most people disclosing under the new arrangement.  The 20% rate is only applicable to those to whom HMRC wrote in 2007 offering the 10% rate but who did not complete the Offshore Disclosure Facility.

Although the NDO covers tax liabilities in respect of onshore assets where a taxpayer also has outstanding offshore liabilities, it will not be available to anyone who only has onshore assets.  HMRC have indicated, however, that someone who makes a full and voluntary disclosure of liabilities on such onshore assets can expect a lower penalty than HMRC would seek if they were to raise an enquiry or compliance check without the disclosure. 

The NDO will not provide immunity against prosecution, although HMRC indicate that anyone making a full and accurate disclosure is unlikely to be subject to prosecution except in unusual circumstances, for example, where the liability relates to income derived from a very serious crime.  However, they also warn that anyone not coming forward and subsequently found to have unpaid tax liabilities will face penalties of between 30% and 100% and may also be liable to prosecution.


Liechtenstein Disclosure Facility

Whilst setting up the NDO, HMRC has also entered into an agreement with the Liechtenstein Government in relation to tax cooperation, a ‘Tax Information Exchange Agreement’ and a disclosure facility, the ‘Liechtenstein Disclosure Facility’ (LDF), agreed in a Memorandum of Understanding, which will relate exclusively to those who have unpaid tax liabilities in respect of Liechtenstein accounts or other relevant Liechtenstein property, including companies, partnerships, foundations, establishments, trusts and insurance policies, in which they have a beneficial interest, which includes being a settlor or founder. 

The LDF differs significantly in its terms from the NDO, although the penalties payable will be the same as under the NDO, set at 10% generally and, where the person concerned had been contacted by HMRC under the terms of the ODF in 2007 or the NDO, the relevant penalty will be no higher than that provided for under the NDO.

The advantages of participating in the LDF, where a person qualifies to do so, include the period for which outstanding liabilities, interest and penalties must be paid being limited to UK tax years commencing on and after 6 April 1999 for natural persons (or the six tax years preceding disclosure without penalties in the case of ‘innocent error’) and accounting periods commencing on or after 1 April 1999 for legal persons.  This limited period compares favourably with 20 years under the NDO and applies to inheritance tax as well as other UK taxes.

Furthermore, the LDF will run for five years, which again compares favourably with the short period for which the NDO will run.

Unlike the NDO, there is an assurance under the LDF against criminal investigation, provided the relevant person makes a full, accurate and unprompted disclosure to HMRC and unless the source of funds from which the person has benefited or may benefit constitutes ‘criminal property’ (other than solely as a result of illegal tax evasion) under the relevant money laundering legislation.

There is also a ‘Bespoke Service’ to be provided by HMRC for any person participating in the disclosure facility providing, amongst other advantages, an opportunity for initial discussions on a ‘no-names’ basis, the option of a single point of contact within HMRC and due consideration and acceptance by HMRC of an estimated tax liability where the estimate can be backed up with evidence to justify it.

For anyone participating in the LDF, there is an option either to calculate the actual tax liability due for any tax year or to pay a single composite rate of tax (to cover all UK taxes with no reliefs or deductions for that year) at 40%.

Anyone with assets or investments in Liechtenstein who is considering whether or not to disclose under the LDF should be aware that a ‘financial intermediary’ in Liechtenstein, that is a person subject to supervision by Liechtenstein's Financial Market Authority, which provides a relevant service to a person with a beneficial interest in relevant property in Liechtenstein, is under an obligation under the Memorandum of Understanding to identify and notify any such person the financial intermediary knows or has reason to know may be liable to taxation in the UK.  Within 18 months of receiving notification, the person notified must provide evidence and certification to show they are not liable to UK taxation, are fully compliant with their UK tax obligations or are participating in another HMRC disclosure facility, or provide a registration certificate in relation to the LDF from HMRC and within a specified additional time period provide a disclosure certificate confirming they have complied with the LDF.  If the person notified fails to do so, the financial intermediary must either cease to provide relevant services to them or, if not able to do so for any reason, comply with any other directions agreed by HMRC and the Government of Liechtenstein.  These might include the imposition of fines or deduction or retention taxes, or other economic sanctions.


Comparison of the NDO and LDF

Given the advantages mentioned above, people with investments in Liechtenstein on which they have unpaid tax liabilities may prefer to disclose under the LDF rather than the NDO, even though either facility may be available to them.  Since it is still possible to come within the terms of the LDF by opening a Liechtenstein account or acquiring an asset or interest in an asset in Liechtenstein even if the person involved did not own one as of 1 September 2009, some people who might otherwise have chosen to disclose under the NDO may choose to move their assets to Liechtenstein in order to bring themselves within the LDF.  In this situation, they will only be able to participate in the LDF from 1 December 2009 (rather than from 1 September 2009). 

Care must be taken, however, as bank accounts, including financial (portfolio) accounts, held outside the UK or Liechtenstein which were opened through a UK branch or agency of the same bank will not be eligible for the shorter limitation period, fixed penalty and composite rate option of the LDF.  Neither will it be possible to move such accounts to Liechtenstein in order to bring them within the favourable terms of the LDF.  As such and depending upon individual circumstances, people who have such accounts may choose to disclose through the NDO.

Similarly, people who have been investigated in the past and did not make full disclosure of any relevant property in Liechtenstein may, in appropriate circumstances, find that they are better off disclosing under the NDO rather than under the LDF. 

Decisions such as these, however, should only be made after taking specialist advice.  It should also be borne in mind, of course, that the deadline for making any decision involving the NDO is the notification deadline of 30 November 2009.


Further considerations

At first sight it seems strange that HMRC are running effectively parallel facilities for those holding assets in one particular jurisdiction and those with assets elsewhere, particularly when, in most cases, the LDF appears to provide significant advantages over the NDO for those disclosing.  It is likely, however, that these differences reflect the specific difficulties for HMRC inherent in obtaining information regarding assets in Liechtenstein.  This may also explain why the advantageous terms of the facility do not apply to bank accounts which were opened outside the UK and Liechtenstein but though a UK branch or agency of the bank.

This arrangement with Liechtenstein may simply be the first of a number of similar arrangements with other jurisdictions from which information might otherwise be difficult for HMRC to obtain, particularly in relation to financial institutions which do not hold offshore records in the UK.  Other such jurisdictions which have been suggested include Monaco and Andorra, but Switzerland is considered even more likely to be a favoured target of HMRC for such an arrangement in the future.

 This article will be freely available until 2nd October 2009, after which time you will need to be a registered user to view it. To register for 3 months unlimited access to the IFC Review website, click here.