Liechtenstein amnesty: a £3bn+ success story

IT SEEMS AS though the Liechtenstein Disclosure Facility is working. The figures obtained by Accountancy Age from a freedom of information request show that the average disclosure yields £300,000.

To put this into context, HM Revenue & Customs originally predicted that the initiative would bring in £1bn from 5,000 predicted disclosures at an average of £200,000 each. Having seen the initial success, it revised this figure to around £3bn. But how likely is it that it will reach this target?

The facility offers individuals the chance to regularise their tax affairs. For people with overseas bank accounts, it offers penalties as low as 10% of their tax liabilities over the past 10 years and immunity to prosecution if they establish a link with Liechtenstein.

Despite the favourable terms on offer, the bald figures so far suggest that, at the current rate, HMRC will not reach its target. HMRC said it had made £140m by March this year from 475 completed disclosures. It had already announced that there had been 1,351 registrations in the first 18 months of the scheme up to March 2011.

The number of registrations has showed a steady increase – there were 876 in September 2010, up from 419 in March 2010. If this continues then there will be around 5,000-5,500 registrations by 2015, which was the Taxman’s original target.

This will bring in an overall yield of around £1.5bn. Even if this were the total sum, it would still count as a success. “It is still an effective use of HMRC resources,” says Frank Strachan, head of tax at Lass Salt Garvin. Importantly, he adds, “a lot of elderly clients know their tax affairs are regularised”.

This figure, although very welcome to the Exchequer, obviously falls short of the £3bn that HMRC is now publicly touting.

HMRC could do more to hit the £3bn figure, says Sean Wakeman, tax investigations partner at Crowe Clark Whitehill. Although the £300,000 is the “median figure for cases we have been dealing with”, Wakeman is “surprised” that the 475 figure is so low. “There was an initial rush as you will always expect,” he says, and the taxman would have been hoping for more completed disclosures.

The Revenue could attract far more individuals if the scheme were publicised more, he says, adding: “The number of registrations is meaningless because we don’t know how big the market is. HMRC is very coy about publicising the amnesty. It can easily triple and quadruple the number of disclosures if it were publicised.” It is a “political hot potato,” he adds, because the public are not happy about tax evaders being given an amnesty.

This slow but steady increase is misleading for two interlinked reasons. First, individuals are waiting for the deal with Switzerland to be finalised before entering the LDF. HMRC announced in October last year that a deal was being discussed. It has claimed throughout that any Swiss deal will not offer terms as favourable as those on offer.

An announcement is expected imminently. There are still issues over privacy, which the banks are determined to uphold, but it looks as though there will be a withholding tax under which Swiss banks will charge 50% tax on the interest of account holders.

Whatever happens, the consensus now is that holding out for a Swiss deal is folly. John Cassidy, tax investigations partner at PKF, says that “even Swiss banks are advising customers to enter the LDF now”. The deal will not be an amnesty in any form and will be highly unlikely to offer immunity to prosecution or even the chance to regularise tax affairs and, importantly, create easier access to their money. Indeed, it would not be comparable with the LDF; if rumours are true, there will be no disclosure element.

This has not stopped people taking a wait-and-see approach, though. When the Swiss deal is announced, the consensus states, there is likely to be a spike in the number of registrations for the LDF.

The second reason, which is connected to the Swiss deal and even more important, is that the main thrust of the LDF has not yet begun: the Liechtenstein banks investigating their customers.

Under the original agreement that created the Liechtenstein Disclosure Facility, Liechtenstein banks must contact customers to see if they have links to the UK by October this year. Their customers must either declare themselves to be UK tax compliant or they must join the LDF within 18 months of the initial contact. If they fail to do so, the Liechtenstein banks must refuse to keep their custom under the terms of the agreement.

Cassidy says that Liechtenstein banks have not begun the process yet because of uncertainty over Switzerland. Liechtenstein banks are unconcerned about favourable terms for Switzerland but have concerns that their customers are still hedging their bets.

Because of this, it is more than likely that HMRC will extend the deadline for Liechtenstein banks, Cassidy says. This will likely happen at the same time as a Swiss deal is announced, Accountancy Age understands.

When the Liechtenstein banks start reviewing their customers, we should expect not only an increase in the numbers of registrations but an increase in the average of an individual disclosure.

Gary Ashford, national head of tax risk at RSM Tenon, said the sums of money in Liechtenstein accountants are historically high. “The LDF is continuing to gather steam. The phase we are just entering is almost going to be the real part of the LDF.”

Cassidy echoes this sentiment. Current registrations “are the trickle” and “the tap will be turned on” when this phase starts.

The LDF is that rarest of beasts – an initiative that brings taxpayers, advisors and the taxman together. Taken in this context, the £3bn looks almost conservative.