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KEY POINTS
- UK-Swiss agreement ratified in principle.
- Agreement expected to come into force in 2013.
- Option to remain anonymous.
- One-off levy to regularise historical position.
- Withholding tax to be introduced from 2013.
- The LDF may be a better solution.
It is more than two years since the ground-breaking tax agreement, the Liechtenstein disclosure facility (LDF), between the UK and Liechtenstein was announced.
For the past year or so, advisers have been waiting for details of the UK’s agreement with Switzerland, with clients waiting to see whether the Swiss deal will give them a better outcome.
The wait is now over – almost.
Last month, the UK government ratified in principle an agreement with Switzerland. The agreement will be signed later in the year, and the full text will be released at that time.
HM Treasury issued a press release giving only headline features of the agreement. The Swiss authorities have been more forthcoming in releasing details of the arrangement, with press releases from both the Federal Department of Finance and the Swiss Bankers Association.
Advisers should note that there are inconsistencies between the three releases, and these will be highlighted below.
Who can use it?
The Treasury’s press release refers to ‘individual UK taxpayers’. The Swiss authority’s release refers to ‘natural persons resident in the UK’, and goes on to say that the agreement also applies to natural persons resident in the UK who hold assets through a trust or company in which they have a beneficial interest.
The full text of the agreement will, it is to be hoped, clarify, for example, how the issue of residence will be determined by the bank. Presumably, residence will be taken at the date the agreement comes into force, which is expected to be 1 January 2013.
The UK release does not make specific reference to non-UK domiciled individuals, or how the agreement will impact on their position.
The Federal Department of Finance says that the ‘agreement contains special rules for non-UK domiciled individuals’, and the Swiss Bankers Association says that ‘the agreement is not applicable to non-UK domiciled individuals’.
Numerous concerns arise in relation to non-UK domiciled individuals, not least how banks will determine that their client has that status, or the application of the withholding tax. Assuming that the Treasury wishes to include non-UK domiciled individuals in the facility, extensive detail will be required.
What are the options?
Leaving aside the question of domicile, taxpayers will have several options under the agreement. According to the Swiss Bankers Association, the choices are as follows.
Anonymous regularisation
Bank accounts, etc. will be subject to a one-off flat-rate tax payment to settle historic tax liabilities. This will apply where the account was open on 31 December 2010 and is open on 31 May 2013 (assuming that the agreement comes into force on 1 January 2013).
The levy, which will be between 19% and 34%, will settle income tax, capital gains tax, inheritance tax and VAT liabilities in relation to funds in the account.
Banks will contact their customers within two months of the agreement coming into force to advise them what action needs to be taken. Taxpayers will be provided with a certificate confirming the amount deducted by the bank.
This option is expected to be the default position, so taxpayers will need to take action if they wish to avoid incurring the levy. Taxpayers need to ensure that they have sufficient funds in the account for the deduction to be made.
If they do not, the bank will provide the customer’s details to the Swiss Federal Tax Administration for onward notification to HMRC, unless the customer provides the funds within a period specified by the bank.
In most instances, payment of the one-off flat-rate tax charge will give the taxpayer a ‘line in the sand’ in relation to the funds in the account, and he will not face any further liability to UK tax on those funds.
However, the Federal Department of Finance says that, in certain circumstances, the amount deducted will be considered a payment on account: for example, when the funds are from criminal sources (presumably subject to the proviso that tax evasion does not constitute criminal sources for the purpose of the agreement), an investigation is underway, or the taxpayer has previously taken part in a disclosure facility.
Disclosure without penalty
The notes released by the Swiss Bankers Association refer to ‘disclosure without penalty’, i.e. no prosecution.
As an alternative to anonymous regularisation, taxpayers can voluntarily disclose to HMRC. If they choose this option, they must inform the bank of their intention to do so, and also authorise the bank to forward information to HMRC, via the Swiss Federal Tax Administration.
Taxpayers using the LDF would need to follow this route. Failure to notify the bank will result in the one-off levy being deducted from the account.
Voluntary disclosure
Taxpayers who are UK-tax compliant may make a voluntary disclosure. Those who are in this category must notify the bank, and also authorise the bank to notify HMRC, via the Swiss Federal Tax Administration.
From the documents available, the level of disclosure to HMRC by the Swiss Federal Tax Administration will be less than that following a ‘disclosure without penalty’.
Exiting Switzerland
For many taxpayers, closing their Swiss account and moving the funds to another jurisdiction will be a consideration. This may seem a viable option, as the one-off tax charge only applies to accounts which were open on 31 December 2010 and remain open on 31 May 2013.
The reality is that the financial world continues to be a smaller place, and there will be fewer stable jurisdictions in which to shelter the proceeds of tax evasion.
The UK is likely to sign agreements with other offshore territories in the coming months and years, and those agreements may not offer as favourable terms as those currently available. Furthermore, taxpayers run the risk of being discovered by HMRC, in which case substantial penalties or criminal proceedings can be expected to follow.
Although HMRC are silent on this matter, the Federal Department of Finance reports that Switzerland will provide ‘aggregated data’ on individuals who close their accounts in that jurisdiction.
Withholding tax
The agreement will see the introduction, from 2013, of a new withholding tax on investments held by UK taxpayers in Swiss banks.
The Treasury press release referred to a rate of 48% on investment income (the notes released by the Swiss Bankers Association refer to 48% on interest and 40% on dividend income) and 27% on capital gains.
The bank will deduct the relevant amount and pay it to HMRC, via the Swiss Federal Tax Administration, without any information that will identify individual taxpayers. The bank will issue an annual certificate confirming the withholding tax deducted.
The existing withholding tax of 35% against bank interest will continue to be applied, but it will be charged against the withholding tax due under the Swiss agreement.
The anonymised withholding tax is expected to be the default position, so account-holders will not need to take any action if they want that option.
The notes from the Swiss Bankers Association state that the rate charged will be equivalent to British rates, so the figures noted above are likely to change if, for example, there is a reduction in the 50% income tax rate.
As an alternative to the anonymised withholding tax, taxpayers can declare income and gains from Swiss assets to HMRC. This can be done on a tax return, or via an HMRC disclosure facility.
Taxpayers must notify the bank if they wish to report the income to HMRC. They must also authorise the bank to release the relevant information: name, address and date of birth of the client, name and address of the bank, the account number and IBAN code, the applicable tax year and the total amount of investment and gains, to the Swiss Federal Tax Administration for onward submission to HMRC.
Under this option, the bank will provide the taxpayer with an annual certificate detailing the amounts notified to HMRC. In the absence of authorisation to disclose the taxpayer’s details to HMRC, the bank will automatically deduct the withholding tax.
Risk of prosecution
The Treasury press release, and that from the Federal Department of Finance, was silent on whether taxpayers will be offered immunity from prosecution for tax fraud under the agreement. The Swiss Bankers Association says ‘regularisation means that clients, banks and their employees will be protected from any criminal prosecution’.
Clarity needs to be provided in this respect, and will presumably be established when the full text of the agreement is issued. Clients need to know the risk of prosecution when participating in the agreement, although HMRC are considered unlikely to pursue criminal proceedings where a taxpayer makes a voluntary disclosure.
The agreement will permit HMRC to establish whether an individual UK taxpayer has an account in Switzerland.
According to the Swiss Bankers Association, such requests, which will be capped at 500 a year, must contain the identity of the taxpayer and ‘a plausible ground for the request’ to rule out fishing expeditions. HMRC are likely to use this provision in relation to criminal investigations against tax evaders.
The requests can only be used for new assets brought into Switzerland; funds that have been regularised by the one-off levy are not subject to this process. This suggests that tax evaders who pay the one-off levy but continue to divert undeclared income to Switzerland may be subject to this provision.
On receipt of a request for assistance under the agreement, the Swiss authorities will search for accounts or deposits held, and report them to the Swiss Federal Tax Administration, which will provide the information to HMRC.
If HMRC want additional information in relation to the reported account(s), they will have to request assistance under the double taxation agreement.
Uncertainty continues
There are many areas where advisers will have to wait for the full text before a client can have certainty as to how they will be treated under the agreement. In many cases, though, there is sufficient detail for advisers to make basic calculations as to a client’s likely exposure under the Swiss agreement
Interaction with the LDF
There will be taxpayers who will be better off disclosing under the Swiss arrangement. Advisers need to be aware, however, that some taxpayers will achieve a better result using the LDF, or a combination of the facilities. The LDF is a tried and tested disclosure process.
Each case will need to be considered on its facts, with advisers having to calculate the likely liability under both agreements, and also factoring in the non-financial benefits of the LDF.
The LDF is a stand-alone process, and its terms and conditions are unaffected by the agreement with Switzerland. The Swiss deal may make the LDF more attractive, now that key details of the former are known. An important consideration will be the build-up of funds in the Swiss account.
The Swiss agreement provides for a flat-rate charge, and does not take account of any legitimate, non-taxable funds that may have been deposited in Switzerland. The LDF, on the other hand, charges tax only on income and gains arising.
Also, the LDF does not charge tax on offshore income and gains arising before 6 April 1999. A taxpayer who has held funds in Switzerland since before that time, and not deposited any undeclared income since, is likely to benefit from using the LDF.
Although the Swiss agreement is designed to tackle offshore tax evasion, it is not illegal to hold an account in Switzerland.
The LDF contains a provision for discussing situations where a taxpayer has made an ‘innocent error’ or taken reasonable care, and genuine mistakes have been made in relation to their UK tax affairs.
The Treasury press release did not allude to any such provision under the Swiss agreement, and clarification on this point may feature in the full text.
A taxpayer who has used a previous HMRC disclosure facility and failed to make a full disclosure may be disadvantaged by using the Swiss agreement.
Under that agreement, the one-off tax charge is deemed a payment on account, and does not give finality to the liability. By comparison, a person who has failed to make a full disclosure when using an HMRC disclosure facility is not precluded from using the LDF, and may not even suffer a penalty higher than the usual 10%.
The Swiss agreement does not provide finality where non-Swiss assets are held. To ensure compliance, the taxpayer will need to disclose income and capital gains arising from assets held in other jurisdictions. The LDF requires that the taxpayer makes a full disclosure of all irregularities in their tax affairs.
The LDF can be used in conjunction with, or instead of, the Swiss agreement in these circumstances. The first stage will be to determine the best route for disclosing the income and capital gains arising on the Swiss assets, i.e. the Swiss route or LDF; the latter can then be used to disclose tax liabilities for other jurisdictions, including liabilities arising on onshore assets.
The non-financial benefits of the LDF should also be borne in mind. For example, the bespoke service offered under that facility provides an opportunity to resolve tax issues not available under the Swiss deal.
Similarly, the LDF provides immunity from prosecution for tax fraud, providing a full disclosure is made. The Swiss agreement cannot provide the same level of comfort, as it relates only to the tax liability arising on Swiss-based assets.
Another benefit of the LDF is the ability effectively to suspend an HMRC enquiry into a taxpayer’s affairs, by acquiring the necessary footprint in Liechtenstein and ‘disclosing’ using that process.
A taxpayer is only precluded from using the LDF when his tax affairs are under ‘investigation’, as defined by the memorandum of understanding. HMRC have, so far, been silent on this matter in relation to the Swiss agreement.
A danger for clients is that, in waiting to use the Swiss deal in 2013, they run the risk that HMRC may contact them before the agreement comes into force. If that occurs, they are unlikely to have the option of using the LDF, and may face prosecution.
When considering the relative merits of the disclosure processes, advisers should note that the Swiss deal is not yet available.
By comparison, the LDF is open now. If the client decides to wait for the Swiss deal, he runs the risk that HMRC will approach him during that period, so he will not have certainty for almost two years.
One size fits all?
Although full details of the Swiss agreement are still to be released, it is apparent that the process will not offer the best solution for all UK taxpayers with undeclared assets in Switzerland.
The Treasury’s recent press release means that many clients who have been holding back from using the LDF are now better placed to decide which routes gives them the best option to deal with tax irregularities.
Those with more complicated affairs may have to wait a little longer. The challenge for advisers will be to ensure that the client is able to make an informed decision.
Phil Berwick is a director at McGrigors, the commercial law firm and tax investigations specialists. He can be contacted on 020 7054 2548, and via email.
