In his piece at the top of this week’s brief George Bull uses the Hamilton case as an example of an offshore structure used for reasons other than tax avoidance. I want here to consider another aspect of the case, which I think has potentially wide relevance.
Once the existence of the Liechtenstein foundation came to light, after Mr Hamilton’s death there was a need to regularise the tax position because some income from the foundation was chargeable to UK tax. This income was declared under the Liechtenstein disclosure facility (LDF) and tax, interest and (on some income only) penalties were paid.
But the effect of this disclosure was, in the words of the judge 'astonishing'. The LDF worked by applying a single composite rate of tax of 40 per cent on the undisclosed income. In this case the income was about £400K (the exact figure is not available) with tax interest and penalties of about £200K. But it is the consequence of this which led to the judge’s comment. The composite rate covered all taxes, including inheritance tax. Inheritance tax had not been paid on the value of the foundation on Mr Hamilton’s death, IHT of some £1.3m would have been due on his estate, but because the composite rate used in the LDF included all taxes this £1.3m disappeared into thin air and was never payable. It must be stressed that there was nothing underhand here - proper disclosure was made and the position agreed with HMRC.
The Judge was not happy. He said 'I made it clear more than once during the hearing that I regarded this as a most unsatisfactory result, from the point of view of the general body of taxpayers'. He concluded his judgement by saying 'I propose to direct that the papers in the case be referred to HMRC for them to consider whether there are any useful lessons to be learned from the operation of the LDF in this case, albeit that the LDF itself has now been discontinued'.
What are those lessons likely to be? This is a classic case of carrot v stick. There are two conflicting policy agendas here. One is that people who have not paid the tax they should have done should be required to pay in full. The other is that if people with arrears can be persuaded to come forward voluntarily they will contribute to the exchequer and will pay their taxes properly in future, so it makes sense to offer them an incentive to disclose.
HMRC policy over the last few years tended toward the latter but the position is hardening and the judge’s comments will add to the pressure to ensure that a hard line is taken in any future disclosure opportunities. I understand this and don’t disagree with the principle: but there is still a need to find some mechanism to bring non-compliant taxpayers into the fold. We have been expecting HMRC to announce its latest disclosure opportunity for some time: will it be all 'stick' or will it have room for at least a miniature carrot?
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