Turn a new leaf

Time is running out to use an advantageous way of regularising past international tax problems; the Liechtenstein Disclosure Facility (LDF).

The LDF allows those with UK tax liabilities from overseas assets to make HMRC aware of their position, in return for a lower tax bill, reduced penalties and where appropriate, with a guarantee of no prosecution.

But this all comes to an end on 31 December 2015.

Nowhere to run, nowhere to hide

Throughout the developed world, we have seen a diminishing tolerance for tax evasion, and so it continues. In a further turn of the screw, the government intends to make not declaring an offshore asset a criminal offence, with no room for excuses.

Meanwhile international agreements will soon start to see tax authorities, including HMRC, routinely sharing information on individuals.

It begins in earnest next year when Guernsey, Jersey and the Isle of Man, all begin collaborating with HMRC. Formal data collaboration between 94 countries will then follow in 2017.

But the process has already begun. Financial institutions, trust companies and family offices are starting to collect personal information on UK residents holding offshore assets, to be shared with HMRC.

This makes the next few months a very good time to sort out any problems. The consequences of not doing so are about to become more punitive, with the options available to reduce the risks, becoming far less favourable.

The LDF guarantee of no prosecution extends to all tax offences, save those linked to organised crime.

HMRC have said they will introduce a less lenient facility for the period 2016/17, but they have also said that after that point, all bets are off.

They will continue to undertake some investigation work on the information they hold already from offshore banks, and where this happens, the person will potentially be excluded from the opportunity to make a disclosure. HMRC may also publish the person's name.

HMRC have already prosecuted one person holding offshore accounts and are preparing to follow this up with more.

Seize the opportunity

Not surprisingly, the LDF has proved popular since it was established in 2009, yielding £1.1bn from 5,633 disclosures up to June this year.

From our experience, the majority of clients using the LDF are what you might call accidental evaders; people with historical liabilities, but simply did not realise this. This is particularly the case of settlors and beneficiaries of offshore trusts. There are also families who have never properly managed inheritance tax issues resulting from funds passing down the generations.

Those making a disclosure under the LDF only have to pay tax going back to 1999 rather than the stricter 20 years, and face a penalty set at 10 per cent of what is owed up to 2009. From 2009 the penalty is still much lower than normal at 20 per cent and from 2011, it is 30 per cent - again still lower. Under the current tax penalty legislation, HMRC can charge penalties up to 200 per cent.

The new disclosure facility promised from the treasury is expected to be tougher with a minimum penalty of 30 per cent, and eligibility rules will be harder to meet. Any immunity from prosecution or opportunity to clear away past inheritance tax issues are unlikely.

The LDF is also useful because it allows assets held worldwide to be declared. The only requirement is that an account has been opened in the principality of Liechtenstein, prior to disclosure.

The new era of collaboration between tax authorities not only has profound implications for UK residents with irregularities, but also for those not resident here, and resident non domiciliaries.

The increased sharing of financial information could catch, for example, non-UK domiciled clients of Swiss financial institutions who opted out of the many obligations under the UK/Switzerland tax co-operation agreement of 2011. Many will have undeclared assets that may soon be revealed.

The political climate following the economic downturn has blurred the boundary between avoidance and evasion. The best advice for those who may now be on the wrong side of what is acceptable is to use the small window of opportunity left to resolve any difficulties before it closes.

Glen Atchison and Gary Ashford are partners and tax specialists at law firm Harbottle & Lewis