HM REVENUE & CUSTOMS has restricted the situations in which taxpayers can use the Liechtenstein Disclosure Facility for offshore liabilities, amid concerns the system is open to abuse.
The LDF enables Britons to obtain a generous settlement with HMRC on any undisclosed tax liabilities held in offshore bank accounts, by rerouting funds through the tiny European principality. Originally due to end to end in March 2015, strong demand for the scheme saw it extended until 5 April 2016.
HMRC believes the facility has been increasingly abused by employers who use Employee Benefit Trusts (EBT) as a means of avoiding tax. The new agreement will now result in restricted access to some of the favourable terms offered by the facility.
In a letter sent to advisers, HMRC said: "The changes being made as a result of this review will make no difference to the vast majority of people who wish to participate in the LDF but will bring a greater degree of fairness to the facility and ensure that it operates as it was originally intended."
There is no change to the categories of people prevented from using the facility, which includes taxpayers under criminal investigation, either under Code of Practice 9 investigation or where HMRC suspects the funds disclosed comprise criminal property.
However, access to some of the favourable terms offered by the LDF is being restricted in certain circumstances, the taxman said in its letter.
Under the full favourable terms, successful LDF applicants pay a 10% fixed penalty on the underpaid liabilities for periods to 5 April 2009. In addition, assessment is limited to accounting periods or tax years from 1 April 1999 and there is an option to choose a single composite rate of 40% rather than calculate actual liability on an annual basis.
Access to the full favourable terms will not be available to taxpayers whose offshore liabilities have not been disclosed in full to HMRC. Cases where disclosures are already subject to an intervention that began more than three months prior to the LDF application, such as those under Disclosure of Tax Avoidance Scheme (DOTAS) rules, will also be exempt from the LDF. Cases with no substantial connection between the liabilities being disclosed and the offshore asset held by the taxpayer as of 1st September 2009 will no longer qualify for the scheme.
CIoT council member Gary Ashford, who represents the instute on HMRC's Compliance Reform Forum, said the LDF allowed some companies "to settle tax liabilities in a way that was not intended". The changes present "a level playing field", restricting the use of the LDF by many UK tax avoidance scheme users, he said.
"Ultimately, this is a statement of intent by HMRC to let people know that the LDF is available but there is a necessary tightening up of who is entitled to its provisions. As we wait to hear from HMRC about their next steps on accelerated payment notices and follower notices, we see the Revenue setting out a new, tougher approach to avoidance," Ashford said.
In addition to restricting use of the LDF, HMRC has announced its intention to close its EBT Settlement Opportunity from March 2015.
Watt Busfield founding partner Rebecca Busfield said anyone with historial EBT issues should consider using the EBT Settlement Opportunity "while it is still available".
"HMRC feels strongly that EBTs do not work in practice and will continue to pursue them. It is a shame HMRC are tightening up the LDF to exclude some EBT cases as it did encourage some taxpayers who were undecided to settle quickly," she added.
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