UK: The LDF And Swiss-UK Tax Agreement

During the last few years HMRC has adopted a rigorous approach to tackle offshore tax evasion. There have been some significant changes in respect of the Liechtenstein Disclosure Facility and the Swiss-UK Tax Agreement. As HMRC's scrutiny continues, international tax compliance remains paramount.

The latest on the Liechtenstein Disclosure Facility (LDF)

Liechtenstein and the UK recently signed a double tax treaty which will come into force on 1 January 2013. The main features are as follows.

• A single charge rate (SCR) has been announced for 2010/11 – at a rate of 50%. This will operate with limited terms but in a similar way to the composite rate option (CRO) within the LDF beneficial terms.
• 2009/10 remains the odd year out with no CRO or SCR existing for that year. This is something which can complicate LDF calculations.
• The limited terms of the SCR will be published by HMRC shortly, along with an extensive update to their Q&A on the LDF which contains the operational guidance on the disclosure process.
• The LDF has been extended until April 2016. HMRC cites its success to date and has published the following details of cases and tax yield (as at May 2012).
  
  

The LDF is still the most effective and tax efficient way of settling any worldwide undisclosed tax matters.

Recent activity: Swiss-UK Tax Agreement

There has been some significant activity in respect of this agreement recently. In the UK, legislation is about to receive Royal Assent and become UK tax law. However, in Switzerland the far left political party is pressing for Switzerland to move towards a model of automatic information exchange and believes that the agreement with the UK (and Germany) will inhibit this. Consequently, the law failed to be approved by the Swiss Parliament and may now be subject to a referendum which is likely to be in November 2012. Observers believe this will delay the implementation of the law and so the planned 1 January 2013 deadline for the agreement to commence will be missed.

More importantly, the pursuit of a move to an automatic exchange of information model would be a massive change in Swiss banking and may result in the Agreement becoming unnecessary. Watch this space.

In terms of the mechanics of the Agreement, a recent modification means that in the future, if anonymity is preferred on the death of an individual with Swiss assets, then the Swiss bank will have to deduct 40% of the value of the assets at the date of death and pay that over to the UK. Clearly an expensive option which will need careful thought going forward.

Given the high rates charged in the withholding agreement for future Swiss investments if anonymity is retained (48% on interest and other income, 40% on dividends and 28% on capital gains), a detailed consideration of the value of that anonymity will need to be undertaken.

Other changes can be summarised as follows.

• The minimum rate payable will increase from 19% to 21%.
• Where under the original formula the tax rate applied in a specific case would have been 34%, and that rate would have been applied to at least £1m in relevant assets, then the tax rate applied will increase in steps of one percentage point for each additional £1m, up to a maximum of 41%. This means that the rate payable on £7m or more will be 41%.
• Clarification on the relationship between the Agreement and the EU Savings Agreement (EUSA) with Switzerland has been given. Where a relevant person has suffered withholding tax under the EUSA, an additional 13% 'tax finality payment' will need to be paid to obtain tax clearance under the terms of the Agreement. This achieves the same effect as the 48% withholding tax levied under the original terms of the Agreement.

At the moment the Agreement, with its increased tax rates and uncertainty of application, is not going to provide comfort for those with unresolved UK tax matters in respect of Swiss investments. HMRC is developing its Offshore Co-ordination Unit (OCU) with additional experienced investigators and we will undoubtedly see an increase in tax enquiry work in this offshore arena. Those under investigation may find benefitting from the LDF is not available to them as HMRC uses its recently strengthened enquiry powers under the new contractual disclosure facility and continues to open up criminal investigations into offshore tax fraud.

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.