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The principality of Liechtenstein has several attractive provisions for investors |
In the UK, innovations such as CRS reflect a fundamental change in policy towards tax evasion on the part of HM Revenue & Customs (HMRC), the country’s tax collection agency. Until around 2016, HMRC pursued a largely successful strategy of encouraging compliance through various voluntary disclosure programmes and other incentives. But the mood music has recently changed. CRS will result in data being exchanged between the tax agencies of more than 100 countries, some of which has already started to flow and the remainder of which will take place by September 2018. This has significantly strengthened HMRC’s hand, hence the hardening in attitude. Going forward, UK taxpayers face the combined threat of a vastly increased risk of detection and very significantly increased financial penalties. In addition, HMRC will extend its current campaign of “naming and shaming” individuals found to have evaded more than £25,000 ($35,000) in tax.
The legal basis for HMRC’s recently-introduced ‘get tough’ regime was enactment of the UK Parliament’s Finance (No 2) Act 2017 (the Act). Schedule 18 of the Act introduces a positive requirement on UK taxpayers to inform HMRC of any outstanding omissions regarding their offshore tax liabilities. Although the Act came into force on November 16 2017, the ‘requirement to correct’ is imposed where tax non-compliance occurred before April 6 2017.
The legislation allows HMRC to take an expansive approach regarding what might been deemed as offshore taxable income: so long as the revenue-raising activity occurs wholly, or mainly, outside the UK, any unpaid tax through non-compliance should be declared and paid in full.
In order to escape the higher penalty regime introduced by the Act, UK taxpayers have until September 30 2018 to declare their outstanding offshore tax liabilities. Any declaration made before this date will still attract penalties on top of the taxes due plus interest. However, those penalties will typically be far lower than provided for under the new regime. Declarations made on or before September 30 2018 will generally result in penalties of between 0-50% of the tax due. After this date, a standard penalty of 200% will apply. This penalty can be reduced if a disclosure is made voluntarily and the taxpayer co-operates in the inquiry, but it cannot be reduced to less than 100% of the tax due.
It should be stressed that the September 30 2018 is the final deadline for coming forward to make a full disclosure to HMRC. Anything less than this would not amount to a “correction” and leaves the taxpayer vulnerable to the new penalty. Conducting a thorough review of offshore tax liabilities, and making the necessary disclosure to HMRC, typically takes several months to complete – or even longer, if an individual’s affairs are complex. It is therefore essential for anyone who believes that they have outstanding liabilities to instigate a review as quickly as possible.
Realistically, it will be all-but impossible for UK taxpayers to escape liability for failing to correct. While Schedule 18 of the Act includes a ‘reasonable excuse’ defence, several commonplace excuses are explicitly excluded. For example, even if tax advice was obtained, it will not be regarded as a reasonable excuse to rely on that guidance if “the person who gave the advice did not have appropriate expertise for giving the advice”.
There is also a strong possibility that continuing to rely on historical tax planning may not amount to a reasonable excuse. Even if an offshore investment or structure did not give rise to any UK tax liabilities when first created, changes in the law and HMRC treatment may mean that this is no longer the case. In such circumstances, the requirement to correct will apply. It may therefore be useful for a taxpayer with longstanding interests offshore to undertake a tax liability ‘health check’ well ahead of the September deadline.
Offshore investing continues to offer many advantages, including innovative products, good returns and strict data protection and confidentiality laws, but of increasing importance is a reputation for tax compliance. On the assumption that offshore tax liabilities are likely to be disclosed to an investor’s home state sooner or later and by one means or another, it makes sense to focus investment strategies on locations where such a disclosure will not increase the likelihood of costly investigations or harsh financial penalties. Indeed, given that cross-border tax transparency is now a fact of life, the stage has inevitably been reached where ease of disclosure and tax compliance have become distinct selling points for a jurisdiction’s financial sector.
One jurisdiction that has recently made compliance-friendly investing particularly straightforward is Liechtenstein. In 2017, the financial services sector there adopted a number of mechanisms which are intended to ensure that a wide range of investment products and services are UK tax compliant. Indeed, all of the professional associations that oversee the principality’s banking, trustee and insurance sectors introduced new measures which apply to facilities offered to UK investors, significantly reducing the compliance burden for both them and their professional advisers.
While Liechtenstein’s products and services are not officially ‘kite-marked’ as being compliant by HMRC, the UK’s former Ambassador to Liechtenstein, David Moran, recently stated that it was safe to say that the new developments had the support of HMRC and “deserve recognition”.
As investors become more savvy and the need to be seen as ‘whiter than white’ increases, the old order is under threat. For some, the fallout from a range of current global tax initiatives will be painful but, for others, significant opportunities exist. In the meantime, the requirement to correct by September 30 is a milestone that should not be missed.
This article was prepared by Simon Airey of law firm Paul Hastings and consultant Andy Cole, former Director of Specialist Investigations at HMRC. The duo advised the government of Liechtenstein on the mechanisms referred to above.
