In particular, it seems advisers with clients who may have undeclared assets on the Isle of Man, Jersey and Guernsey are keen to know how these schemes will compare with the Liechtenstein Disclosure Facility.
The LDF, of course, was set up in 2009 to enable UK taxpayers with undeclared assets anywhere in the world to “come in from the cold” by moving a “significant” percentage of them to Liechtenstein, and then declaring the full amount to HM Revenue & Customs.
Revolutionary at the time it was introduced, the LDF has remained popular among tax professionals and their clients for being easy to use and not unduly persecutory.
But if a comparable scheme were to be set up in the Channel Islands or Isle of Man, the thinking recently has been, it could be just that little bit more appealing than the LDF to those with undeclared accounts in these jurisdictions, who might be reluctant to move as much as 20% of their assets to Liechtenstein, even temporarily. (20% is the minimum usually cited as necessary under the LDF.)
And so the envelope, please…
Having studied the matter at length, we at Crowe Clark Whitehill, in London, are of the opinion that for now, at least, the LDF remains the preferred option for most individuals considering making a disclosure.
One reason we are able to say this without hesitation is because the Manx Disclosure Facility (IOMDF), as it is being called – the first of the three Crown Dependency jurisdictions to have got to the stage of considering how it would structure a disclosure facility – is actually different to the official memorandum of understanding (MoU) between HMRC and the Isle of Man government, as well as not being in synch either with the LDF.
For example, the LDF considers someone as being under investigation only when they are the target of a “serious investigation”; whereas under the IoM’s MoU with HMRC, the definition of being “under investigation” is interpreted in a very general sense, to include any enquiry whatsoever.
Under the MoU, for example, one is considered to be under investigation if they are subject to nothing more than what we call a “small aspect enquiry”, which is when HMRC asks to look at a single, specific area of someone’s tax return, rather than the full document or set of documents.
This matters because, under the IoM MoU, anyone who was “under investigation” by HMRC on 6 April 2013 cannot use the Manx disclosure facility, full stop.
However, HMRC has confirmed to us that it uses a far more narrow interpretation of what constitutes being under investigation than the MoU’s. To those in the field of tax investigations, this degree of inconsistency is off-putting.
There is a similar lack of agreement on the definition of eligibility.
The MoU between the UK and the IoM states (in schedule 2, paragraph 2) that a person is “eligible to participate in the facility” if he is not under investigation on 6 April 2013.
Paragraph 5 of the MoU then states that “persons who may participate in the facility” do not include those under investigation either before or after 6 April 2013. HMRC clarified that this means:
- Those under enquiry as of 6 April 2013 cannot use the IOMDF at all;
- Those whose enquiries ended by 6 April 2013, or which started after that date, may use the Manx Disclosure Facility, but they will not qualify for its beneficial terms. These beneficial terms include the option to use a start date of 6 April 1999, rather than earlier (thus resulting in fewer tax years to be brought into play), and a lower penalty than usual, fixed at 10%/20%.(That is, 10% or 20% of the previously undeclared tax that is now being declared.)
Other considerations
There are other considerations as well, which reinforce our belief that for now, at least, the LDF remains the way to go.
For example – again looking at the MoU between the UK and the Isle of Man – schedule 2, paragraph 3 states that a full disclosure and full payment of the liabilities must be made at the time of registration. The LDF, meanwhile, gives the disclosing individual seven to 10 months’ time following registration to do the same thing, depending on whether something called “the composite rate option” is chosen or not.
HMRC has stated, however, that the more logical process will apply, ie register first then the taxpayer will have six months to disclose. This means that in practice, as regards the time frame individuals are given to make their full disclosure, the LDF remains more generous, with seven – or more commonly, 10 months –in which to make one’s disclosure.
Then there is the matter of possible penalties. The wording of the penalty clause in the Isle of Man/UK MoU refers only to “Schedule 24 FA [Finance Act] 2007” penalties, ie, incorrect tax return penalties.
The LDF penalty clause, by comparison, covers all misdemeanours.
HMRC has confirmed that other possible penalties, such as late notification/filing/payment, will be levied at the same rates for those making an Isle of Man disclosure, and from talking to HMRC, it appears that under all three MOUs more than one penalty can be charged (subject to any double jeopardy rule in the legislation), and but that they would all be at the same rates.
Like the Liechtenstein and Swiss agreements, the IOMDF stipulates that the island’s banks and other financial institutions must write to all their customers, informing them of the requirements to disclose, if they have unreported assets.
However, unlike the Liechtenstein and Switzerland agreements, there is no specific consequence for a customer who simply ignores these letters.
Meaningful relationship
Finally, there is the matter of the “meaningful relationship”, though if the assets in question are already in the Isle of Man, this is unlikely to be a concern. Unlike the LDF, the IOMDF does not specify the need to establish a “meaningful relationship” with the island by depositing a minimum amount in an Isle of Man institution. In fact, the IOMDF’s FAQs confirm this (see FAQ 5.3). Exactly what is required to establish a meaningful relationship, however, is not completely clear: for example, FAQ 5.17 states that a simple share in an IoM public company is sufficient, but, HMRC has now confirmed to me that this is not correct. For now, then, we await clarification.
To see the Frequently Asked Questions about the IOMDF on HMRC’s website, click here.
To see the Memorandum of Understanding between the Isle of Man’s government and HM Revenue & Customs, click here.
To see Frequently Asked Questions about the LDF on HMRC’s website, click here.
John Cassidy is a partner in the London office of Crowe Clark Whitehill LLP, the UK-member firm of Crowe Horwath International.
