Liechtenstein Disclosure Facility (LDF) Rules Tightened But Still Attractive for Most Taxpayers

The Liechtenstein Disclosure Facility (LDF) has been running for a number of years and appears to have been a successful initiative to encourage taxpayers to come forward over unpaid taxes.

The LDF gave a number of beneficial terms such as:

  • A 10% fixed penalty on qualifying underpayments (for periods to 5 April 2009).
  • Reduced reporting window to accounting periods/tax years commencing on or after 1 April 1999 only (rather than the usual 20 years)
  • The option to choose whether to use a single composite rate of 40% rather than calculate actual liability on an annual basis
  • Protection against criminal prosecution
  • A single point of contact for disclosures

HMRC have recently announced a tightening of the rules, which is designed to prevent abuse of the scheme from users of Employee Benefit Trusts with liabilities linked to existing enquiries.  The new rules could potentially catch other taxpayers however.

In situations where the following apply, the terms of the LDF will be restricted so that the 10% penalty, reduced reporting window and option to use the composite rate will be unavailable:

  • where no new information has been offered;
  • the issue is already subject to an intervention that began more than three months before the LDF application; and
  • there is no substantial connection between the liabilities being disclosed and the offshore asset held by the taxpayer on 1 September 2009.

We believe that despite these changes the LDF scheme will remain attractive to most taxpayers and is therefore worth considering where taxes have been underpaid.  Eaves and Co have successfully completed a number of disclosures under the LDF and would be happy to help anyone who might be affected.

HMRC Consultation on Unapproved Employee Share Schemes

A consultation is currently in progress relating to proposed changes to the rules on unapproved employee share schemes and employment-related securities.

The changes proposed could be quite radical and therefore advisors who deal with such schemes would be wise to consider responding to the consultation. Eaves and Co are currently preparing our own response to the proposals and we would welcome any further feedback that you may have, to be incorporated into our response.

The Proposals

The summary of the proposed changes is as follows:

  • Individuals would potentially be able to choose whether the tax charge on employee shares arises at the time they are acquired or, at the time at which they could be sold for their “unrestricted market value” (when they become ‘marketable’). Income tax and NICs would then be payable at this time.
  • The rules on marketable shares could potentially mean that shares in private companies (without an EBT) would not be treated as marketable until arrangements were put in place for a sale of the shares. This would potentially enable tax charges to be significantly deferred compared to the current rules, although an election could still be made to pay tax upfront.
  • Changes to the rules on readily convertible assets (RCAs) which determine when NICs are payable on employee shares. The proposals are that all such shares would be RCAs (with NICs payable at the point at which the shares became ‘marketable’ unless an election was made to pay tax upfront on similar terms to a current s.419 election.
  • Dividends and other income received from employee shares before they became ‘marketable’ would be taxed as employment income

Whilst the proposals seek to provide a simplification of the current rules, it remains to be seen whether this will be achievable bearing in mind the necessary anti-abuse clauses that will no doubt be required to prevent unforeseen uses for such rules. Our thoughts are that these proposals require detailed critical thought.

The consultation document proposes a ‘simplification’ in order to encourage the use of employee share ownership. Whilst there may be some cases where deferring an upfront tax charge might make such schemes more attractive, the fact that all of the uplift would be taxable as employment income might raise questions about what the purpose of entering into such schemes would be.

Similarly, one wonders what the policy thinking behind charging dividend income as employment income is, and how such a proposal would encourage the use of share schemes? If it is felt that dividends are taxed at the wrong rate, why are complicated rules like these proposed, rather than simply raising the tax rate on dividends?

As advisors, it will be important to ensure clients are fully aware of the pros and cons of making elections under these rules and the impact of paying tax at employment income rates on any profits and/or dividends arising on the shares if no elections were made.

Do you think these changes would improve the position for unapproved share schemes and encourage more use of such schemes, or would the new position with potentially increased amounts taxed as employment income have the opposite effect? Please let us know in the comments section below.

Unfortunately Exposed – No Figg Leaf of an Excuse! (Peter Figg v HMRC)

Tax unattended to is a recipe for disaster.  Peter Figg vs Commissioners for HMRC presents a sorry tale of taxpayer woe!

  1. Mr Figg was promised a new job with a tax free removal package offered by his employer as an incentive.
  2. He started his new job and immediately found it did not meet his expectations.  He complained, and after some time agreement was reached that the role was not really what had been promised, so it was agreed he should leave.
  3. He received a tax free lump sum (which was accepted as tax free compensation for loss of office by HMRC) but his employer put the cost of temporary living accommodation (paid in the interim whilst he was working for them) on his P11D.  This was against the original agreement in the job offer.
  4. Mr Figg realised he had to file an online tax return in January (before the 31st deadline) but did not receive the relevant access code from HMRC until after the filing deadline.  Like many people who have sought to represent themselves before courts in the past, Mr Figg found himself on the losing side.
  5. Whilst the courts found that the delay in filing may have been a ‘reasonable excuse’ it held it was not in this particular case, because the taxpayer did not act promptly when HMRC did send him the delayed access code.  Filing actually took place the following January .  No explanation was offered for the continuing delay.  Once the original excuse (no valid access code) ceased to be operative, the taxpayer had an obligation to file without further delay.
  6. The courts also found that, whilst the temporary accommodation expenses could have been tax free if associated with a permanent move of home to get a new job, Mr Figg did not actually move permanently.  He resigned and entered into a compromise agreement without making a permanent move.  Hence the statutory rules for tax free moving expenses were not met.

Like many tax stories ‘the Devil is in the Detail’.  The best course of action is not to leave tax matters unattended to.