Disclosing time
“The phone doesn’t stop ringing at the moment,” says Dawn Register, a tax director at BDO. “In 2012 we're expecting even more interest in our work.”
Register specialises in disclosures to HMRC. Since the introduction of the Liechtenstein Disclosure Facility (LDF), she and her colleagues have seen an unprecedented level of activity.
“Litigators often call us when they unearth a tax problem in a client's affairs,” she explains. “There are all sorts of contexts in which this can happen, from a business dispute, to a divorce, to a contested estate. In trying to get a clear picture of the financial position, they find that there is a pot of money hidden away offshore out of view of the tax authorities. But once this is out in the open and there's a possibility of a tax irregularity having occurred, reporting requirements and professional integrity mean the lawyers are obliged to recommend a disclosure to HMRC. If nothing is done to mitigate the situation, an investigation will inevitably take place.”
An unwelcome, time-consuming and potentially hugely costly investigation can be avoided if a voluntary disclosure is made. And this is where the LDF comes in – along with a guarantee of no criminal proceedings being launched, providing you held an interest in an offshore asset in August 2009.
“The LDF was introduced in September 2009 and will remain open until March 2015,” Register says. “It's a very attractive arrangement geared towards leniency for those making voluntary disclosures. The basic principle is that a financial ‘footprint’ of some kind is established in Liechtenstein – this could be anything from a bank account to a trust or a company – and this connection means that all unpaid taxes are disclosed to HMRC under the favourable terms of the LDF.”
But the real advantage comes with the settlement. Register continues: “Participants in the LDF will qualify for a fixed penalty of 10% of the tax due, compared to the maximum penalty of 100%, which has in fact risen to 200% from April this year depending on the country concerned. And unpaid taxes are only due from April 1999, rather than the statutory limit of up to 20 years. In this sense, the LDF is a genuine amnesty, albeit a partial one.”
It's a win-win situation, in fact. Quite apart from the relative financial benefits, the person paying the tax doesn't need to have any contact with HMRC – the LDF is entirely managed by accountants like BDO – and thus avoids the stress and anxiety an investigation can bring. At the same time, HMRC are spared the time and expense of mounting an investigation, while still generating good income for the Crown.
A tax agreement has also recently been reached with Switzerland, which allows HMRC to tax undeclared funds in Swiss accounts with a one-off payment to cover all unpaid liabilities, in return for account-holders retaining their anonymity. The level of deduction is determined by a complicated formula, but it will be considerably lower than a punitive witholding tax which will be introduced in 2013.
“This is another sign of the growing coordination of international efforts to crack down on tax evasion,” says Register. “Five years ago no one would have believed something like this would be put in place with Switzerland, but the OECD are spearheading efforts to increase information exchange. Ultimately, if money is currently hidden, it's more than likely that governments will find out about it one day. With that in mind, we'd urge people to get their affairs in order – and while a scheme like the LDF is available, there's never been a better time.”
