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May 2, 2013
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The Isle of Man Disclosure Facility – Initial Thoughts

The governments of the UK and Isle of Man have signed a Memorandum of Understanding, known as the IoM Disclosure Facility or the Manx Disclosure Facility.

From 6 April 2013 up to 30 September 2016 UK tax residents with Isle of Man assets will be able to disclose unpaid UK tax liabilities in respect of worldwide income and gains through the facility.

Key Benefits

The benefits to UK Taxpayers that meet the terms of the agreement are:-

  • Guaranteed reduced rates of penalties; and
  • A restriction on UK liabilities to periods post 6/4/99 only

There are additional benefits where the bespoke service is utilised (broadly speaking this applies where a professional adviser is appointed to deal with the disclosure).

There is no guarantee against criminal prosecution for participants but the Memorandum makes it clear that full disclosure under the IoM Disclosure Facility will guard effectively against this.

The penalty rates under the IoM Facility are:-

-          10% for  the tax years 1999/00 to 2007/08

-          20% for  the tax years 2008/09 and 2009/10

-          20%-40% for the tax year 2010/11 onwards depending on the country in which the income/gains arose.

Excluded Persons

Strictly speaking, the agreement prevents ‘relevant persons’ under the terms of the UK-Swiss Tax Treaty from benefiting from the IoM Disclosure Facility; however HM Revenue and Customs guidance suggests that the IoM Disclosure Facility is available to those with Swiss assets but cannot be utilised in relation to assets that are subject to the UK-Swiss Treaty.

There are also restrictions preventing those with ongoing or previously closed HM Revenue and Customs ‘investigations’ and taxpayers that have been personally contacted about or utilised a previous disclosure facility, from benefitting from the terms of the facility.

In this context, the terms investigation is very wide as it includes criminal investigations and civil enquiries., although HM Revenue and Customs have suggested that only those subject to ‘in depth investigations’ will be excluded from benefitting.

Analysis & Key Considerations

UK residents with existing Isle of Man assets can utilise the facility.

It also appears that UK tax payers without existing IoM assets could acquire IoM assets prior to 31 December 2013 and benefit from the terms of the facility.

If they did so they could benefit from the terms of the facility in relation to undeclared income and gains on their worldwide assets, apart from Switzerland (see above).

There is no test at present as to how long the IoM assets have to be held for, or how significant they need to be in order to qualify for the facility.

Therefore this latest Memorandum signed by the UK government with other countries does form a viable option for disclosure.

That said, a key feature of the IoM facility is the requirement to make a ‘financial commitment’ by paying the estimated tax liability within 30 days of applying for the facility or where this is not possible making a payment on account and providing a proposal for settling the estimated liabilities.  Where the final tax liability is significantly higher than the initial tax paid, HM Revenue and Customs may withdraw the beneficial terms of the facility.

Therefore taxpayers will need to be in a position to make a reliable computation of the tax at stake prior to registration under the IoM facility.  Care should be taken to balance the need to have reliable estimates with the risk of an enquiry being opened by HM Revenue and Customs and thus preventing the taxpayer from qualifying for the IoM Disclosure Facility.

The calculation of the tax liability may be relaxed where the taxpayer utilises the bespoke service, such that where information is not available HM Revenue and Customs will consider accepting an estimate of the tax liability provided the estimates can be justified.

A comparison with existing treaties/amnesties will follow.

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