Act now to take advantage of Liechtenstein Disclosure Facility, expert warns taxpayers

The Liechtenstein Disclosure Facility (LDF) has given thousands of taxpayers with UK tax irregularities the opportunity to disclose these to HMRC in return for a reduced penalty and immunity from prosecution in many cases. The LDF was due to end in April 2016, but a surprise Budget announcement in March brought forward the end of all of HMRC's preferential disclosure programmes to 31 December 2015.

The LDF offers significant opportunities for those with tax irregularities, particularly around undisclosed inheritance tax (IHT) liabilities. Those who would usually wait until the traditional self assessment deadline of 31 January to self-certify income and gains to HMRC must act now.

Who can use the LDF?

The LDF can be used in a wide range of tax scenarios, although the full benefits of the scheme are only available to the extent that the disclosures are substantially linked to an offshore asset held at 1 September 2009. However, even where full favourable terms are not available, taxpayers can still take advantage of immunity from prosecution and a single point of contact with HMRC under the scheme - indeed, in our experience, only around 85% of those planning an LDF disclosure have had an existing offshore presence.

Those wishing to take advantage of the LDF but who don't already have a bank account, investment or other structure in Liechtenstein, can acquire a bank account within the country in order to become eligible for the scheme, subject to some conditions. This must be done before formally registering for the process.

Scenarios in which taxpayers could potentially benefit from the LDF include:

• those with bank accounts, investments or property overseas;
• beneficiaries of overseas trusts or those that have been left money overseas;
• UK-resident taxpayers that have disposed of an overseas asset but have kept the proceeds overseas.

Approximately 25% of the cases that we have dealt with have involved issues inherited from parents or other family members.

Taxpayers who meet the above criteria should check if they could benefit from the LDF in advance of the disclosure deadline, even if they believe that all of their affairs are in order. Disclosure was only prompted by existing HMRC enquiries in around 40% of the cases that we have handled to date, although taxpayers should note that they cannot take advantage of the LDF if HMRC has already begun a formal investigation into their tax affairs.

What are the benefits of the LDF?

Taxpayers eligible for the full favourable terms of the LDF can benefit from:

• immunity from prosecution;
• a single point of contact with HMRC;
• reduced tax, interest and penalties which HMRC will only seek for the period from 6 April 1999, rather than the normal 20-year period.

Taxpayers can also opt for HMRC to use a simplified composite rate option (CRO) to calculate their outstanding tax liability. The CRO applies to income tax, capital gains tax, IHT, corporation tax, stamp duty and VAT and applies to liabilities between 6 April 1999 and 5 April 2009. It is charged at a flat rate of 40% with no reliefs or deductions allowed.

Although the CRO may not look like a beneficial rate at first glance, it can result in significant tax savings particularly in relation to IHT liabilities.

How much will it cost to settle under the LDF?

Of the LDF cases that we have handled to date:

• approximately 25% were settled with HMRC for less than £100,000;
• approximately 45% were settled for between £100,000 and £500,000;
• the remaining 30% settled for over £500,000.

What happens if I miss the disclosure deadline?

The government intends to introduce a new disclosure facility in January 2016 to replace the LDF and other disclosure facilities subject to early closure, including the Crown Dependencies Disclosure Facility. This 'last chance' disclosure facility is expected to remain available until mid-2017. The new facility will include penalties of at least 30% in addition to tax owed and interest, and will not guarantee immunity from criminal prosecution.

Paul Noble is a tax expert at Pinsent Masons, the law firm behind Out-Law.com.