UK: The UK/Switzerland Tax Agreement

Last Updated: 1 November 2011
Article by Sue Holmes and Ian Walker

HMRC is convinced that the long-awaited UK/Switzerland Tax Treaty will enable it to collect the billions of pounds it considers due in respect of hidden Swiss money.

The UK and Swiss Governments have now signed the long-awaited Tax Treaty (the Agreement).

The Agreement, which was signed on 6 October, still needs to be ratified before coming into effect, but is expected to be fully effective from January 2013.

HMRC is of the opinion that approximately 80% of UK resident Swiss bank account holders are linked to unreported taxation liabilities. The Agreement represents another step forward in HMRC's fight against tax evasion.

This Agreement will not only result in substantial funds being received by the Treasury on account of tax liabilities, the Swiss authorities are also required to make an initial payment to the Treasury of 500m Swiss Francs in 2013, on account of the tax that will be deducted from UK account holders.

The Agreement will, rather more importantly, enable HMRC to obtain information from the Swiss authorities of investments held by named UK residents for potentially a ten-year period.

Who is affected?

The Agreement will apply to all holders of Swiss accounts with a principal address in the UK. In addition, where the account belongs to a UK passport holder they will be treated as UK resident, unless a certificate of tax residence issued by another jurisdiction is provided.

Non-UK domiciliaries will also be caught by the Agreement, unless they can prove, by way of a certification by a lawyer or tax agent, that they have claimed the remittance basis of taxation for the year in question, and given notice of optout. Great care needs to be exercised before opt-out is made, as any tax that is subsequently found to be due in relation to remittances to the UK by a non-UK domiciliary could result in penalty charges of up to 200%, and possible prosecution.

What assets are affected?

The Agreement provides for a tax deduction to be applied in respect of any banking assets, including cash balances, precious metals accounts, all forms of stocks, shares and securities, options, debts and forward contracts, and other structured products.

Excluded assets are the contents of safety deposit boxes, real property, chattels and some insurance contracts.

How will withholding taxes be applied?

The Agreement provides for a significant deduction of between 19% and 34% of the capital held at 31 December 2010. The actual rate will be computed in accordance with a complex formula, which includes the length of time that the funds have been held.

This one-off deduction will be treated as full settlement of prior years' tax, interest and penalties arising on the assets concerned. The tax withheld by the Swiss authorities will be handed over to the UK Treasury without identification of the account holders.

Where funds have been withdrawn from Swiss accounts prior to 31 December 2010, those funds will not have suffered withholding. As such, any liabilities flowing from those funds will remain reportable, and in addition will include interest and penalties.

Future withholding taxes

After the one-off deduction in 2013, annual withholding taxes will be deducted from Swiss accounts at specified rates. These are:

  • 48% on interest and other non-dividend income
  • 40% on dividends
  • 27% on capital gains.

Again, payment to the UK Exchequer of these taxes will be made without identification of the account holders.

Disclosure or withholding?

Where the account holder authorises the Swiss authorities to disclose their accounts to HMRC, no withholding tax will be deducted.

Non-UK domiciled individuals who have been taxed on the remittance basis can choose to self-assess previously unreported remittances. That self-assessment of taxable remittances has to be given to the Swiss bank, which will then make a deduction and payment of 34% of the remittances to the Swiss paying agent. The funds deducted will, again, be paid to the UK Exchequer on an anonymised basis.

Where a non-UK domiciled person who has been taxed on the remittance basis is satisfied that they have no unreported liabilities, they can give notice of opt-out.

Options available for previous non-disclosure

Where liabilities have not previously been disclosed, there are three possible courses of action.

Disclose past liabilities?

There is no specific disclosure facility contained within the Agreement, so HMRC will levy penalties at normal rates on any liabilities disclosed. HMRC can assess such tax liabilities for up to 20 years, so the total cost of tax, interest and penalties could be very high.

A much more advantageous settlement may well be achieved through use of the Liechtenstein Disclosure Facility (LDF), which also includes various built-in guarantees. Disclosure under the LDF will often result in total settlement being significantly less than 34% of the capital. The LDF provides certainty of settling past tax issues, with liabilities being limited to those arising after April 1999, and with a set 10% penalty rate for years up to 5 April 2009. More importantly, the LDF provides immunity from prosecution.

Do not disclose?

Withholding taxes will be applied, but anonymity will be retained for the moment. The cost of the withholding taxes is likely to exceed the cost of disclosure under the LDF. While the one-off withholding taxes will be accepted as having settled past liabilities on those funds held as at 31 December 2012, the risks of an HMRC investigation will remain in respect of any funds moved from the account between 31 December 2002 and 31 December 2012.

Move funds to another jurisdiction?

Under this agreement, HMRC has been given the power to require the Swiss authorities to provide information in respect of named taxpayers that it suspects of having failed to disclose liabilities. In addition, the Swiss authorities are required to provide HMRC with a list of the top ten jurisdictions to which the largest volume of funds have been transferred, and the numbers of persons who have transferred funds to each jurisdiction. HMRC will be looking to concentrate its efforts on chasing these funds. Anyone involved in moving funds out of Switzerland to another tax haven may well find themselves at serious risk of criminal prosecution.

Conclusion

For anyone who has correctly disclosed liabilities arising on Swiss held accounts, this Agreement should not cause any difficulties, as permission to the Swiss authorities to disclose their accounts to HMRC will prevent the need to apply withholding taxes.

However, for those whose tax affairs have not been fully compliant, the net has been tightened once again. HMRC is determined to collect the billions of pounds it considers due in respect of hidden Swiss money. HMRC permanent secretary for tax, Dave Harnett said: "The world is shrinking fast for offshore evaders and this agreement will ensure that we now know where money that flees Switzerland is heading. We will not be far behind".

HMRC has significantly stepped up its tax investigation activities into monies held offshore over the last few years; we have seen various 'amnesties' allowing people to come forward and make voluntary disclosures. The Department has recently announced an intention to increase criminal prosecutions five-fold, and it appears that it means business.

Voluntary disclosure of any previously unreported liabilities must be the way forward in order to avoid the threat of prosecution. In this regard, disclosure under the LDF may well provide the best solution to wipe the slate clean.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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