We issued an E-alert in January outlining the terms of the LDF and we thought it would be useful to share some of our experience since then.
In summary, the LDF can be utilised if a client has previously undisclosed offshore tax liabilities arising in respect of bank accounts not opened via the UK, overseas trusts or other overseas assets. Assuming they acquire a Liechtenstein asset now (such as a bank account), the effect of a disclosure under the LDF will be to cap the tax liabilities to a 10 year period. This is even though the historic income, gains or IHT charges arose in relation to assets which were at the time not in Liechtenstein.
The facility covers Inheritance Tax, Income Tax, Corporation Tax, Capital Gains Tax, Stamp Duty, Value Added Tax and National Insurance contributions.
An added advantage of the LDF is the availability of a "Composite Rate Option". As certain transactions may attract tax under more than one head of duty the effective tax rate can be extremely high in some cases; however, the composite rate is a single capped tax rate of 40% which can be used as a means of calculating an amount which HMRC will accept in satisfaction of past tax liabilities.
As an example, consider an individual who diverts profits of £100,000 from his company via an overseas bank account. Under normal HMRC terms the tax arising may be £28,000 in corporation tax, £17,500 in VAT and £29,375 in section 419 tax - an effective tax rate of 64%. However, by using the composite rate of tax the liability would be limited to 40% (£47,000).
Another scenario that may arise is a client with undeclared personal income settled into a discretionary trust. Under normal HMRC terms the tax liability arising may be 40% income tax on the sums previously undeclared plus a further 20% lifetime inheritance tax charge when the funds are settled into trust if his nil rate band has been exhausted. However the composite rate option could apply to reduce the effective tax rate from 60% to 40%.
Given both the 10 year cap and Composite Rate Option, one can begin to imagine the tax savings that can be achieved via the LDF. Indeed, this opportunity, which runs until 2015, has already proved to be of significant value to several of our clients. For example, HMRC have agreed one client's liabilities at less than £150,000, whereas the liabilities under a standard disclosure (which would cover a 20 year period) would have been £1.4m. In addition, the LDF is proving much less stressful for our clients than a standard disclosure as it avoids the need for a detailed enquiry into their tax affairs if approached correctly.
We have established excellent links with a Financial Institution in Liechtenstein meaning it is very straight forward for clients to open bank accounts or establish other Liechtenstein based assets.
The LDF also offers a bespoke service with direct contact to a particular Inspector who will provide assistance in clarifying any areas of doubt before a disclosure is made. This can include discussions on a no names basis. We have developed a good relationship with the specific Inspector who deals with all of our LDF cases, who is adopting a very pragmatic attitude to the majority of cases we present to him.
If you have any clients that might benefit from making a disclosure to HMRC then the LDF may well provide the most tax efficient platform for them to disclose. If you have any clients who would be interested in using the LDF please do not hesitate to contact us.