UK: UK Big On International Tax Issues

Last Updated: 28 February 2012
Article by Leo Coyle, Sue Holmes and Andrew McKenna

During the last few years HMRC has adopted a new approach to tackle offshore tax evasion. A new agreement between Switzerland and the UK has been settled, but what are the benefits and concerns? Is the Liechtenstein Disclosure Facility (LDF) still the most beneficial facility for those with undisclosed tax issues? In a world of increasingly extensive HMRC powers, international tax compliance is paramount in order to avoid new, tougher penalties.

Swiss/UK Tax Agreement

What is the Agreement?

A unique agreement between the UK and Switzerland will effectively bring the end to untaxed funds held in Swiss banks and finance houses. The agreement is intended to come into force on 1 January 2013 and will result in the following consequences for UK residents holding Swiss assets.

  • Historic liabilities – a complex formula applied to the capital held in Switzerland at 31 December 2010, will result in between 19% and 34% of that balance being deducted and paid over to HMRC by the Swiss authorities. The individual account holder will remain anonymous.
  • Future taxes to be withheld – following the historical deduction, annual withholding taxes will be deducted as follows:

- 48% on interest and other income

- 40% on dividends

- 27% on capital gains.

This will be paid over to HMRC. Again, the individual will not be named.

Both of these deductions can be avoided by the individual, allowing the Swiss bank to provide details of their name and address as well as extensive asset and account details to HMRC. HMRC would then examine the disclosed information to ensure it had been returned for tax purposes and possibly challenge the source of the capital deposited for the last 20 years.

Assets affected include: cash, precious metals accounts, stocks, shares, securities, options, debts, forward contracts and other structured products.

The agreement affects all holders of Swiss accounts with a principal address in the UK. If the account belongs to a UK passport holder then they will be treated as a UK resident unless a certificate of tax residence, issued by another jurisdiction, is provided to the Swiss bank.

Weaknesses that need to be considered Areas of concern which have arisen from this proposed agreement include the following.

  • Non-UK domiciliaries will also be subject to taxation unless they can prove by way of certification, by a lawyer or tax professional, that they have claimed the remittance basis of taxation for 2009/10 or 2010/11. This, in conjunction with a notice to opt out, will remove them from the Agreement's historical impact.
  • Discretionary trusts managed in Switzerland are exempt from the Agreement. It is therefore vital that any such structure is correctly identified as such to the Swiss bank since it is the bank which will apply the agreement. The concern here is that it is expected the Swiss banks will consider discretionary trusts as non-discretionary for ease of compliance, unless clear identification is provided. The Swiss guidance on this matter is potentially in conflict with the legal position for a number of discretionary structures.
  • The Agreement only allows for the clearance from any future taxation of funds held in Switzerland at 31 December 2010. Amounts withdrawn and not refunded to the Swiss account are not covered and neither are any tax compliance failings outside of Switzerland. Consequently, if HMRC were to challenge at a later date, the sums deducted and paid over by way of the Agreement will be treated as a payment on account of a re-calculation of the total tax liability which may be due. This is not a disclosure facility (it is simply a method of collecting tax) and will not provide closure on all irregularities.

What options are available to Swiss asset holders?

  1. Apply the Swiss Agreement – the costs are a high price to pay for anonymity. Any funds which have been withdrawn or expended prior to 31 December 2010 need to be returned from a non-UK source before 31 December 2012 to allow them to be cleared from any future tax challenges. Anonymity could lead to incorrect tax returns being submitted year on year in the UK in certain circumstances.
  2. Opt for voluntary disclosure – in the event of there being a past tax liability HMRC will look to recover the tax for up to a maximum of 20 years and apply a 50% penalty on any additional tax arising.
  3. Move the funds out of Switzerland before 31 December 2012 – the Swiss banks are required to pass to the UK, details of the amounts of money moved out of Switzerland and the location they were sent to. This will allow HMRC to pursue those funds via that country as it has done with Swiss funds. It is highly likely that the terms of any future agreements with such countries, or indeed for individuals who are subsequently discovered having moved funds in this way, will be significantly higher than anything levied before. Individuals would also be exposed to criminal prosecution action.
  4. Consider the LDF – those looking to resolve a long standing tax problem, which cannot be cleared through the Swiss Agreement, should utilise the more advantageous LDF.

Liechtenstein Disclosure Facility

Individuals, businesses and trusts who held an offshore asset at September 2009 can participate in the LDF, as long as they hold or acquire relevant property in Liechtenstein.

Participation in the LDF allows persons with a tax compliance failure to settle the matter with HMRC very beneficially, often reflected in a cost of only 10-15% of the funds held offshore.

From a financial perspective and in terms of dealing with the matter with the least intrusion from HMRC, the LDF is often the most beneficial disclosure opportunity available for those with historic tax problems with HMRC.

A golden opportunity

The benefits of the LDF include the following.

  • Liabilities only apply from 6 April 1999 to date, rather than the 20-year period covered by UK tax legislation.
  • Beneficial terms exist under the LDF for the years 1999/2000 up to and including 2008/09. This allows:

- the settlement of all undeclared tax matters in addition to any offshore issues within the facility and its beneficial terms

- restrictions on any penalties on unpaid taxes to 10% as opposed to 50% + - which would be likely be charged under normal rules

- the tax to be calculated on an actual basis year for the relevant tax year or alternatively by way of the innovative composite rate option (CRO)

- the CRO taxes any income or gain at 40%, however it beneficially allows inheritance tax to be ignored and relieves the burden of layered taxation – for example, the multiple taxation of a sum by corporate, VAT and income taxes under CRO results in the sum being only taxed once.

  • Participants do not need to meet HMRC, the LDF is carried out via correspondence and all areas are dealt with under that process.
  • Domicile matters can be agreed with HMRC in the LDF, something which cannot be achieved outside of the facility.
  • Individuals settling past tax failings through the LDF will not be part of HMRC's 'naming and shaming' rules which allow HMRC, in certain circumstances, to publicise personal details of tax evaders.
  • The participant will not be exposed to the threat of criminal prosecution, unless there is wider criminality involved.
  • Closure is achievable if the disclosure is full and complete in respect of all tax irregularities.

What is an offshore/relevant asset?

An offshore asset includes:

  • an offshore bank account
  • interest in a non-UK company or business
  • interest in a non-UK trust
  • interest in an offshore property or an overseas insurance policy.

A relevant asset in Liechtenstein is a bank account, company, trust or insurance policy issued, formed, settled, incorporated, administered or managed in Liechtenstein.

That relevant asset needs to be of a meaningful nature, but does not require the transfer of all, or indeed the majority of any, assets or investments to Liechtenstein.

The Liechtenstein intermediary will issue a certificate of relevance which is required by HMRC at the date of registration for the LDF. A relevant asset can be obtained easily and we can facilitate this.

Making your funds available

Once a LDF disclosure has been made and accepted by HMRC, the funds held offshore are available for utilisation by the individual free from any subsequent challenge by HMRC. Future compliance requirements must of course be kept, but the funds are completely free to use personally and for the benefit of the wider family and business.

New penalties to tackle offshore tax evasion

HMRC has announced new penalties for offshore non-compliance.

These new penalties come into force from 6 April 2011 and apply to income tax and capital gains tax. The legislation can be found in Schedule 10 of Finance Act 2010.

How it works

The new penalty process is an enhancement of the penalties for

  • failure to notify
  • inaccuracy on a return
  • failure to file a return on time.

These penalties will be linked to the tax transparency of the territory in which the income or gain arises. Where it is difficult for HMRC to obtain information from another country, the penalties for failing to declare income or gains arising in that country will be higher.

There will be three new levels of penalty.

  1. Where the income or gain arises in a territory in category 1, the penalty rate will be the same as under existing legislation.
  2. Where the income or gain arises in a territory in category 2, the penalty rate will be 1.5 times that in existing legislation – up to 150% of tax.
  3. Where the income or gain arises in a territory in category 3, the penalty rate will be double that in existing legislation – up to 200% of tax.

Bermuda and Switzerland are part of the territory in category 2.

International compliance – important areas requiring care and consideration

Cross-border communication policy

It is essential in a world of extensive HMRC information powers and the increasing growth in the use of information exchange, that those with international financial and business affairs understand the accessibility of communications, particularly electronic communications, and give careful consideration to the communication policy that they have in place.

Document retention policy

For offshore businesses with UK clients, and for those clients themselves, a robust and sensible policy for the retention of documents, including the period for which they should be retained and the location they should be retained in, is essential. Consideration of regulatory requirements across taxation and other areas and the important issue of electronic data and documents needs to be fully understood with reference to power and possession over those documents. There should be an awareness and understanding of how to deal with any requests for documents by HMRC.

Audit of offshore structures and ensuring ongoing compliant management

Full consideration of the risks of any offshore structure, along with an audit of the implementation and ongoing management of it, is essential to ensure it meets the necessary compliance requirements. Such reviews allow for any necessary changes to be undertaken in real time, rather than in a situation when that structure is being challenged.

Responding to information requests from clients and tax authorities

Demands are placed on clients and intermediaries directly to supply information to satisfy a challenge by HMRC. It is essential that all concerned have an understanding of how such requests should be handled, in particular given the impact of the new offshore penalties rules and to facilitate a beneficial outcome in respect of the HMRC enquiry for the client.

Smith & Williamson Tax LLP have extensive experience in assisting clients with all of these areas – working with intermediaries and their clients to obtain the best results for all.

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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