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Changes to the LDF

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HMRC has restricted the availability of the Liechtenstein disclosure facility (LDF). The restrictions are subject to three key exclusions; these are not as clear cut as one might think, writes Simon Airey, head of tax investigations, DLA Piper.

Earlier this month, the Fourth Joint Declaration (the declaration) was signed by the Government of Liechtenstein and HMRC. The declaration introduces a number of changes which will restrict access by certain participants to the more favourable terms of the Liechtenstein disclosure facility (LDF). Those terms include significantly reduced penalties and no liability to tax for any period prior to April 1999. Other features of the LDF, such as a guarantee of no prosecution and access to the ‘bespoke service‘, will continue to be available. However there are three key exclusions, namely where:

  • the relevant person enters the LDF to settle liabilities that HMRC is already aware of;
  • the issue being disclosed has already been the subject of an intervention that started more than three months before the date of the application; and
  • there is no substantial connection between the liabilities being disclosed and the offshore asset held by the relevant person as at 1 September 2009.

Potential ambiguities exist in the wording of these exclusions that would benefit from clarification. For instance, what constitutes HMRC already being ‘aware‘ of a liability? And what is a ‘liability‘? Is it a crystallised, undisputed liability to tax; or is it just a potential liability of which HMRC has some general knowledge or suspicion?

If the liability is a crystallised liability, it is difficult to see how it would not also be covered by the very broad definition of ‘intervention‘ relating to the second exclusion - so how are the exclusions different, or are they? If the exclusion does not refer only to a crystallised liability, then does this mean that any matter of which HMRC is already aware relating to a potential liability excludes that matter from the more favourable terms of the LDF?

The latest answers to the frequently asked questions (FAQs) published by HMRC offer some assistance. FAQ A5, relating to the first exclusion, refers to the example of matters known about as a result of registration under the disclosure of tax avoidance scheme (DOTAS). This is an obvious example but further clarity would be welcome to dispel the concern that the exclusion refers to any kind of general awareness on the part of HMRC which has not yet resulted in an ‘intervention‘ (e.g. previously unchallenged or unprocessed data sitting on HMRC’s files somewhere). It is expected that HMRC will issue further FAQs in due course but in the meantime the exclusion should be treated as relating only to issues disclosed under DOTAS .

FAQ A8 seeks to define what is meant by an ‘intervention‘ as including ‘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‘.

Significantly, there is a three month window to opt for the LDF once an intervention has been initiated so that taxpayers are not precluded from the more favourable terms. Taxpayers will therefore need to seek advice quickly during that period where liabilities relating to offshore assets are concerned.

The third exclusion seeks to restrict access to the LDF where there is no ‘substantial connection‘ between the tax liabilities being disclosed and the offshore asset. FAQ A14 now requires that at least 20% of the liabilities should be related to the offshore asset. This is a notable departure from HMRC’s previous stance but is not considered likely to exclude many people in practice. However, once again, the question arises of what constitutes ‘liabilities‘ - and when are they to be valued? Recent enquiries of HMRC have resulted in confirmation that only the tax and NIC contributions constitute the ‘liability‘ and associated interest and penalties should be excluded; and that the calculation should only include tax years after 1999, as though the full favourable terms of the LDF applied.

Forthcoming FAQs will provide further clarity on the application of the 20% test including that a ‘good faith‘ basis can be used for performing a valuation of the tax liability and the assets based on the information available, as at the time of registration.

Where concerns exist in the meantime, HMRC will of course provide guidance, anonymously if necessary, as part of the bespoke service provided by the LDF desk.

During 2013, a significant increase was noted in the number of LDF registrations from taxpayers wishing to link their LDF disclosure to existing enquiries being made by HMRC into employee benefit trusts (EBTs) with which they had an undisclosed tax liability. The declaration precludes the inclusion of EBT liabilities for new registrations. The trustees of an EBT may have the ability to disclose and settle any outstanding liability with HMRC under the EBT settlement facility. However, HMRC have recently confirmed that this opportunity will cease to be available after 31 March 2015.

Importantly, the provision of immunity from criminal prosecution for anybody disclosing under the LDF remains unchanged. This is an important feature, bearing in mind that HMRC is consulting on proposals to make the failure to declare taxable income and gains arising offshore a ‘strict-liability’ criminal offence.

A well-constructed combination of legal and operational initiatives, specialist resources and anticipated access to data from numerous sources will soon perfect HMRC’s ability to aggressively target offshore tax evaders. As time begins to run out to register under the LDF, recent research suggesting that only a fraction of tax advisers have knowledge or expertise in relation to the LDF does not bode well for those with undeclared liabilities.

A future article will explore these issues in more detail.