Various groundbreaking developments over recent weeks have revealed a huge increase in momentum to detect and prevent tax evasion and to enhance co-operation between governments worldwide in order to create greater tax transparency. Building on the success of the Liechtenstein disclosure facility, the UK government has introduced a number of other voluntary disclosure facilities, allowing those with undisclosed UK tax liabilities to regularise their affairs in advance of related information exchange initiatives. The terms of the VDFs are the same in each territory; however, they differ from those of the LDF in several respects. It is essential that those considering either route understand and have evaluated all the available options.
The UK government has significantly increased the resources at its disposal to detect and pursue tax evaders, both in terms of systems and investigations capability. HMRC published a report on 20 March 2013 titled No Safe Havens that outlines the UK’s offshore strategy to target those not paying the proper amount of tax. Just a few weeks earlier, the government of the Isle of Man (IoM) announced that it had signed a memorandum of understanding (MOU) with the UK government relating to cooperation in tax matters, including tax information exchange, establishing a voluntary disclosure facility for ‘relevant persons’ with undeclared UK tax liabilities. On 20 March, the States of Jersey and Guernsey followed suit, announcing that they had each signed an MOU with the UK, based on similar terms and timeframes to those of the IoM agreement.
The voluntary disclosure facilities (VDFs) for each of the Crown Dependencies (CDs) will allow UK taxpayers to regularise their affairs in advance of the proposed information exchange. The current intention is for these VDFs to be available until 30 September 2016. However, if UK taxpayers do not regularise their affairs before they are contacted by HMRC using the data provided by the CDs, they are likely to face formal investigation. This may result in significantly greater tax liabilities and penalties, and may even result in prosecution. In order to promote the VDFs, the MOUs require specified financial intermediaries to identify clients who are ‘relevant persons’ and notify them before 31 December 2013 of the existence of the VDF.
Offering VDFs in relation to undeclared offshore assets is not a new concept. In August 2009, the governments of the UK and Liechtenstein announced the introduction of the Liechtenstein disclosure facility (LDF). More recently, on 1 January 2013, an agreement came into force between the UK and Switzerland, which provides an opportunity for individuals to clear their tax liabilities by either opting for a withholding tax on past and future income and gains, or to have their details disclosed to HMRC. The withholding tax option allows individuals to retain their anonymity but has a number of restrictions and only applies to Swiss assets. The election must be made by 31 May 2013, after which withholding will be applied automatically at rates of up to 43%.
The trend towards greater transparency has been followed in the British Overseas Territories. On 25 April 2013, the Cayman Islands announced their intention to exchange information with both the UK and the US. This announcement was followed on 2 May by Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands who also confirmed their agreement to much greater levels of transparency. The announcement piloted the automatic bi-lateral exchange of information with the UK and multi-laterally with the UK, France, Germany, Italy and Spain. Gibraltar also announced the same commitments on 2 May, though they have already implemented the transparency directives as they are part of the EU.
A review of the CD MOUs and the FAQs published by HMRC on 8 April 2013 reveals that the terms of the VDFs are the same in each territory. However, they differ from those of the LDF in several respects. A comparison of the terms of each facility and a careful assessment of each client’s circumstances will determine what action needs to be taken and which facility is preferable.
Timeframes: The LDF is available from 1 September 2009 to 5 April 2016 for those who held an undisclosed asset offshore as at 1 September 2009. The VDFs are available from 6 April 2013 to 30 September 2016 for those who have had a beneficial interest in relevant property in the appropriate Crown Dependency at some point during the period from 6 April 1999 to 31 December 2013.
Criminal prosecution: The LDF provides a guarantee of protection from criminal prosecution, as long as a full, accurate and unprompted disclosure is made and the source of the funds is not from ‘criminal activity’ (not including the tax evasion itself). The VDFs contain no such guarantee. However, a prior discussion with HMRC should reveal whether HMRC will accept any mitigating proposals or would be likely to prosecute based on the facts described. Those unsure of their position should appoint a professional adviser to conduct discussions on their behalf.
‘Relevant person’: Eligibility criteria for the VDFs contains a provision that the ‘relevant person’ must not be the subject of an investigation by HMRC that is still open as at 6 April 2013. The definition of what constitutes an investigation is very wide and includes ‘a civil enquiry of any kind that is supported by statutory information powers’. This more stringent than under the LDF.
Definitions: The CD MOUs refer to ‘relevant property’ held by ‘the account owner’ (in the singular). HMRC will undoubtedly wish to clarify that this is intended to refer to joint accounts and possibly even accounts where there is more than one signatory. The MOUs also refer to the identification of ‘relevant persons’ who are described as beneficial owners in ‘forms’ provided to the financial intermediary for money laundering purposes. This language seems to refer to paper records but it is to be anticipated that future guidance will require FIs to search electronic records also when seeking to identify relevant persons.
The definition of ‘relevant property’ under the CD MOUs is broader than under the LDF and includes an annuity contract or cash value insurance contract issued or maintained by a financial institution in the territory. This will accommodate the types of financial account that are likely to be specified in the intergovernmental agreements to implement the US FATCA.
The VDFs are stated not to be available in respect of tax liabilities relating to ‘an account with a bank or other financial institution held outside the UK or Jersey which was opened through a UK branch or agency of a bank’ whereas the corresponding language relating to the LDF refers to a UK branch or agency of ‘that’ bank. It is assumed that this is a drafting error and that FAQs will adopt the latter interpretation.
Assessment period: The assessment period for the LDF and the VDFs is for accounting periods or tax years commencing on or after 1 or 6 April 1999 (for companies and persons respectively). Liabilities prior to April 1999 will be ignored. However, HMRC will go back 20 years in relation to a bank account outside the UK or that VDF territory if it was opened through a UK branch or agency of [that] bank. The benefit to the taxpayer under the VDF is the entitlement to lower penalties than would otherwise apply for that period. Under the LDF, HMRC can also go back 20 years where the UK taxpayer did not hold an offshore account or asset at 1 September 2009.
Under the LDF and the VDFs where it can be demonstrated that, despite reasonable care, an incorrect tax return has been submitted and/or a reasonable excuse exists for the failure to notify, liability will be restricted to four years from the end of the tax year in which the disclosure is made. Where merely careless behaviour is demonstrated, HMRC will go back six tax years (four years in relation to VAT).
Tax calculation: Under the LDF, if a Liechtenstein asset was held on or before 1 September 2009, the taxpayer can elect for a single rate option rather than calculate actual liability. The single rate is aligned to the UK additional rate of tax which reduced from 50% in 2012/13 to 45% from 6 April 2013. Advisers need to perform the tax calculations to determine whether this is worthwhile. At present, no such provision is contained in the VDFs.
Penalties: Under the LDF, a fixed penalty of 10% is levied on the underpaid liabilities for periods up to 2008/09. Thereafter, the penalty will be the minimum level appropriate under UK law, usually 20%, but increasing where there has been ‘deliberate concealment’ (e.g. where a taxpayer has not disclosed offshore tax liabilities as part of a previous investigation that was settled before the LDF was available). Under the VDFs, a 10% penalty applies to liabilities for years up to and including 2007/08 and, thereafter, a 20%, 30% or 40% penalty applies, according to the country in which the income or gain arises. There are three penalty bandings, contained in FA 2010 Sch 10: where the income or gain arises in a territory in ‘category’ 1, 2 or 3, the penalty rate is respectively (1) the same as the standard penalty; (2) 1.5 times the standard penalty – up to 150% of the tax; or (3) double the standard penalty – up to 200%. The categories are determined by the tax transparency of the country. At present, Guernsey and the Isle of Man are in ‘category 1’ and Jersey is in ‘category 2’. By way of example, if the income from a Jersey bank account is disclosed, the penalty will be 30%. A similar disclosure of income from bank accounts in Guernsey or the Isle of Man will attract a penalty of 20%. However, if a Guernsey trust account has investments in Barbados, a ‘category 3’ territory, it will be subject to a 40% penalty. To this extent, the LDF will be a more attractive option for some, particularly in relation to larger disclosures.
In November 2010, a second joint declaration concerning the MOU was signed between Liechtenstein and HMRC. This provided for the introduction by the government of Liechtenstein of a five-year taxpayer assistance and compliance programme (TACP) anticipating that financial intermediaries would terminate the provision of services to those where tax compliance is not demonstrated. The TACP is prescriptive regarding the notification, certification, review and audit and compliance procedures that need to be adopted by financial intermediaries (FIs). At present, the CD MOUs are not as prescriptive, although they do outline the obligations on FIs in relation to notifications that they must send to ‘relevant persons’. A review of the legal, practical and reputational issues that are likely to arise in connection with complying with those obligations is required.
Given the increase in international tax transparency, the increased opportunities for UK taxpayers with undeclared assets to regularise their affairs are welcome. However, traps can still exist. It is essential that those considering either route understand and have evaluated all the available options. In addition, a proper review of the facts will enable HMRC to consider the specific circumstances of the client when determining any behaviourally-based penalties.
Simon Airey is head of investigations & compliance at DLA Piper
