UK: Disclosure Of Offshore Assets

Last Updated: 17 November 2009
Article by Mark J. Summers, Graeme Kleiner and Deborah Pennington

Following on from the 2007 Offshore Disclosure Facility, clients who have undisclosed offshore funds only have two further possible opportunities to provide details to HMRC and benefit from beneficial interest and penalty arrangements.

The New Disclosure Opportunity (NDO) opened on 1 September and tax payers will have to notify HMRC that they wish to use it by 30 November 2009 with full disclosure and payment of tax, interest and penalties due by 12 March 2010 (although in exceptional and complex cases there may be scope to agree extensions with HMRC, provided disclosure has substantially started to occur by that date). In addition, a further disclosure facility has been announced, called the Liechtenstein Disclosure Facility (LDF), which for structures and assets in Liechtenstein prior to 1 September 2009 and opened on that date and for those with assets thereafter opens on 1 December 2009. The LDF will last until April 2015. These represent the last chance for clients to make a voluntary disclosure to HMRC of any undeclared foreign assets with historic UK tax liabilities and to take advantage of the restricted penalties and interest provisions. If these opportunities are not taken and HMRC investigate a client's affairs where there are undisclosed offshore funds, the client may be subject to interest and also penalties (potentially of up to 100% of the undeclared tax) going back a maximum of 20 years for income and capital gains taxes or indefinitely for inheritance tax.

If a client takes part in the NDO the tax due on the funds in question will be computed for the previous 20 years and interest applied. Taxpayers will have to provide records going back 20 years or agreement as to estimated tax due will have to be agreed with HMRC where records are lost or unavailable.

Penalties can be capped at 10% of the tax due. However, that penalty rate will only be available if the taxpayer is not already under investigation or is not deemed to have had "an opportunity" to disclose during the previous NDO in 2007. If the taxpayer had that "opportunity" then penalties will be at 20%. It is not entirely clear what HMRC mean by a taxpayer having a previous opportunity. It covers anyone who was written to in respect of the previous NDO by HMRC but also UK resident customers of the offshore branches of the five high street banks who were subjected to orders (Section 20 Notices) to disclose details of the accounts of such customers to HMRC in 2007. Any disclosure must be a full, complete and honest disclosure of all past UK tax liabilities on foreign assets for the 20 year period otherwise HMRC can reverse any settlement and impose more draconian penalties.

The advantage of the LDF is that it is restricted to a ten year disclosure period from 6 April 2009 (or six years if there has been an innocent error), which means that any tax and interest applied may be considerably reduced in comparison to the NDO. It is also more likely that the taxpayer's financial institutions will have records for the entire period. Penalties applied under the LDF will usually be restricted to 10% (or no penalties where an innocent error has been made) and the client will receive a guarantee that they will not be criminally investigated by HMRC in relation to the undisclosed funds (so long as the funds in question did not arise from criminal activities). These advantages make it more attractive to disclose under the LDF rather than the NDO.

However, in order to qualify for the LDF, the taxpayer must have a "footprint" in Liechtenstein and must not be currently under investigation by HMRC. In order to benefit from the more generous penalty regime they must not have opened any of the accounts to be declared through a UK branch or agency in the UK of the bank or institution.

A "footprint" does not mean that all of the undisclosed assets need to be custodied in Liechtenstein. Whilst it is not entirely clear what is meant by "an asset or an interest in an asset" in Liechtenstein, it is likely to mean that the taxpayer has some undeclared assets custodied there or that he has a Liechtenstein structure (such as a foundation or establishment) as part of the undeclared assets. Other non-Liechtenstein assets can then also be disclosed under the more generous terms of the LDF. It is even possible to move some assets into Liechtenstein before making the disclosure so as to qualify for the LDF, although advice should be taken before attempting this route. So, even where the undisclosed funds are not currently situated in Liechtenstein, it still may be possible to take advantage of the LDF if your client takes advice.

A unique feature of the LDF is the "bespoke service" at HMRC. This allows professional advisers to call a dedicated Liechtenstein desk at HMRC and discuss specific client situations on a no names basis before notifying HMRC that the client wishes to use the LDF.

The LDF also allows the taxpayer to elect to pay a flat "composite" rate of tax of 40% irrespective of which taxes are due. This may be a preferred approach where records are incomplete or the facts so complex in relation to the tax at stake that the professional fees involved in dealing with HMRC would be disproportionate.

Once a disclosure is made the taxpayer can expect closure within ten months or seven months where the composite rate is elected. If HMRC accept the disclosure and all tax, interest and penalties are paid up, then the tax payer will receive a certificate from HMRC that the assets have been fully declared and are compliant under the facility.

The deadlines for the NDO are imminent and taxpayers should take action immediately. If those affected do not take part in the NDO or the LDF, they run a real risk of unlimited penalties and higher interest charges. HMRC has obtained an information notice which requires more than 300 UK and foreign banks and institutions to disclose the names of UK account holders to HMRC. In addition, it was announced in the 2009 Budget that the government plans to introduce a "name and shame" list of tax payers who have undisclosed tax liabilities who failed to take advantage of the NDO and the LDF.

We can provide advice on how clients can make a disclosure under the advantageous LDF when they do not currently have funds held in Liechtenstein, but they need to act fast. Any disclosure should always be a collaborative approach between a taxpayer's accountants and lawyers. However, taxpayers should consider initiating the exercise with solicitors at the earliest stages as any legal advice received will be covered by legal professional privilege so that advice and communications between solicitor and client will not be disclosed to HMRC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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