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KEY POINTS
- Full text of UK-Swiss agreement now published.
- Agreement to come into force on 1 January 2013.
- Designed to collect tax and also to change taxpayers’ behaviour.
- There will be an exchange of information between Switzerland and the UK.
- Applies to both historical and ongoing taxes.
- Responsibility for ‘operation’ lies largely with Swiss paying agents.
- No full and final tax clearance and no guaranteed immunity.
Six weeks ago the UK-Swiss agreement (‘the agreement’) was ratified in principle and Phil Berwick wrote an article in this magazine (Decision time approaches), looking at the provisions of the deal in outline and comparing it with the Liechtenstein disclosure facility (the ‘LDF’).
At that time, the full text of the agreement was not published and there remained a huge number of questions as to how the agreement would operate in practice.
On 6 October 2011, the agreement was signed by ministers in Switzerland and the UK and the full text of the deal was published.
This article seeks to put flesh on the bones of how the deal will work and to point out some of the difficulties which might be experienced in putting it in to practice.
Agreement aims
As readers are probably already aware, the primary aims of the agreement are the recovery of substantial sums of unpaid tax on previously undeclared Swiss bank accounts and the changing of taxpayers’ behaviours such that the evasion of UK taxation is no longer seen as a financially rewarding or viable option.
The agreement provides for a significant ‘one-off payment’ to be made on behalf of ‘relevant persons’ who own ‘relevant assets’.
This payment is in lieu of historic taxation liabilities. There will, thereafter, be an ongoing obligation on Swiss ‘paying agents’ to withhold tax on Swiss income and gains, effectively at the UK higher rates of tax.
There are thus two main aspects of the agreement – regularising the past and a form of ‘enforced compliance’ via a withholding tax for the future.
The purpose of the agreement is further stated as being the provision of bilateral co-operation between the UK and Switzerland akin to an agreement providing for the automatic exchange of information.
The obligations and responsibilities under the agreement (other than on the UK taxpayer) are firmly on the Swiss paying agents who will be responsible for much of the administration and collection of tax.
Furthermore, Swiss paying agents will have two months from 1 January 2013 to give notice to relevant persons about their rights and duties under the agreement.
Swiss paying agents are broadly defined as including Swiss banks, securities dealers and corporate and individual residents of Switzerland that hold/invest assets.
Relevant persons and assets
The agreement applies to individuals rather than entities. Individuals affected by the agreement include those who hold an asset by way of an ‘insurance wrapper’, but may not include the beneficiary of a discretionary trust where it is not possible to ascertain the beneficial ownership of the trust assets.
However, if the asset is held in a trust or a company which is effectively a nominee for the individual, the agreement will apply.
Relevant assets are defined as all forms of bankable assets booked or deposited with a Swiss paying agent, including cash, precious metals, stocks, options and structured financial products. The contents of safe deposit boxes, real property and chattels are specifically excluded.
The deal covers the following UK taxes: income tax, capital gains tax, inheritance tax and VAT (sales tax). UK corporation tax is not covered.
The agreement provides an individual who is UK domiciled and has either their principal residence in the UK or a UK passport (unless they are able to prove residence outside the UK), and who has an undeclared Swiss bank account, with a choice:
- pay the proposed ‘one-off payment’ to regularise their tax affairs in relation to the asset for the past, keep the account in Switzerland, and pay the withholding tax in the future; or
- disclose the account to HMRC.
By contrast, an individual who is not UK domiciled and has either their principal residence in the UK or a UK passport, (unless they are able to prove residence outside the UK), and who has an undeclared Swiss bank account has a wider choice:
- make payments in accordance with the agreement’s terms as for a UK domiciled person;
- disclose the account to HMRC (also as for a UK-domiciled person);
- self assess in relation to the one-off payment and pay the withholding tax in relation to ongoing amounts which would be subject to UK tax if the account was disclosed;
- opt out of the one-off payment and pay the withholding tax in relation to ongoing amounts that would be subject to UK tax if the account was disclosed.
Swiss paying agents will only be able to accept that an individual is non-UK domiciled if they are provided with a certificate from a lawyer, tax adviser or accountant. The adviser will have to be able to certify that:
- the UK tax return for the relevant tax year contains a claim to be non-UK domiciled;
- if appropriate, the return contains a claim for the remittance basis and the ‘remittance basis charge’ has been paid; and
- to the best of their knowledge, the domicile status of the relevant person has not been formally disputed.
Individuals are excluded from taking part in the deal to regularise the past if:
- at 31 May 2013, they are under investigation by HMRC (whether civil or criminal);
- the individual was subject to an investigation in respect of Swiss assets which concluded after 31 December 2002 and they did not declare those assets during the investigation;
- the individual has concluded a civil investigation in the past where HMRC considered it necessary for the individual to complete a certificate of full disclosure or a statement of assets and liabilities (this is likely to be most cases where there has been a significant increase in the tax liability of the individual as a result of the investigation);
- they have a criminal conviction in respect of tax evasion (where the offence was punishable by two years or more imprisonment);
- they were contacted as part of one of the earlier voluntary disclosure schemes (offshore disclosure facility, new disclosure opportunity, etc.); or
- they have relevant assets in Switzerland arising from non-tax related criminal activity or missing trader intra-community (MTIC) fraud.
Dealing with the past
The one-off tax levy applies to the balance on the Swiss account as at 31 December 2010 and will be deducted from accounts on 31 May 2013.
If an individual fails to notify the paying agent as to their preferred option by that date, then the paying agent will automatically make the one-off payment.
If an individual chooses to make the one-off payment, they have an obligation to ensure that the Swiss paying agent has sufficient funds to cover the payment.
If sufficient funds are not available, the bank may grant the individual a maximum eight-week extension to provide them. If these are still not forthcoming, the paying agent is authorised to make a disclosure of the account.
The historical payment is at a tax rate of between 19% to 34% for UK domiciled individuals. The exact tax rate will be based on a complicated formula taking into account how long the account has been open and when the funds were deposited.
The more deposits there were and the higher they were between 2003 and 2010, the higher the rate that is to be applied between these parameters.
Non-UK domiciled individuals who opt for self-assessment will be taxed at 34% on their previously untaxed remittances.
For the purpose of regularising the past, non-UK domiciled individuals are defined as individuals who were not domiciled anywhere within the UK on 31 December 2010 and who claimed/will claim the remittance basis for either the year ended 5 April 2011 or 5 April 2012.
HMRC have stressed that this is not an amnesty and that a strong principle of no tax clearance without payment will be enforced. So if funds passed through the account prior to 31 December 2010, those funds will not gain tax clearance and an individual could still be investigated or prosecuted in relation to those funds.
At the time the one-off payment is levied, the Swiss paying agents will issue a certificate to the relevant person.
The relevant person shall then cease to have any liability to UK income tax, capital gains tax, inheritance tax or VAT in respect of the relevant assets. The one-off payment includes interest, penalties and surcharges.
Dealing with the future
The withholding tax that will apply from 2013 onwards will be charged at 48% on interest, 40% on dividends and 27% on capital gains.
There will be no UK reliefs or allowances available in calculating capital gains. If no base-cost information is available, the base cost will be taken either as the asset value at March 1982, or, if the asset was not held at this date, as nil.
Non-UK domiciled individuals will be subject to withholding tax in respect of both their UK source income and gains (in their Swiss accounts) and amounts remitted to the UK.
For the purpose of operating the ongoing withholding tax on income and gains, non-UK domiciled individuals are defined as individuals who were not domiciled anywhere within the UK and who make, to the Swiss paying agent, by 31 March a declaration of intent to claim the remittance basis of taxation for the following year.
This declaration then has to be supported by a certificate provided to the Swiss paying agent by 31 March following the end of the relevant tax year.
Dealing with non-UK domiciled individuals who are taxed on the remittance basis is going to be one of the most difficult aspects of the agreement for Swiss paying agents since there will have to be some sort of mechanism for determining which elements of the income and gains in their Swiss accounts would ordinarily be taxable in the UK under the remittance basis charge so that excessive withholding tax is not applied.
Similarly, this aspect of the agreement could be awkward for the individuals concerned since it is not always obvious whether it is beneficial for a taxpayer to pay the remittance basis charge until after the end of the tax year in question.
Other points of interest
The Swiss banks will make an up-front payment to the UK of 500m Swiss francs, which will be repaid by the UK authorities once 1.3bn Swiss francs have been recovered under the deal.
The Swiss authorities will also inform HMRC of the top ten destinations to which money removed from Switzerland is sent in order to enable HMRC to focus their efforts on offshore evasion.
Information to be provided will include the number of people who transferred their funds to each destination between the date of signature of the agreement and the last day of the month following a period of four months after the date of entry into force of the agreement.
HMRC will be able to make requests in relation to individual taxpayers to Swiss authorities to discover if the individual has accounts(s) in Switzerland. Initially and for the first three years this will be limited to a maximum of 500 requests per year, but there is provision for this to be increased/decreased if appropriate.
The agreement states that the maximum number of requests must be proportionate to the perceived risk of non-compliance by investors and that the number of requests per calendar year will be subject to a yearly review at the beginning of the year.
If necessary, the number of requests will be adjusted for that year based on the requests made three years before, with the first review taking place at the beginning of 2016.
The adjustment will depend on the ‘success’ of HMRC in converting such requests into identification of additional UK tax liabilities of at least £10,000. If an adjustment is required to the maximum number of requests HMRC can make, such an adjustment will be an increase or decrease of 15% per calendar year.
The taxpayer will be informed in advance that they intend to provide the information and the taxpayer can appeal against the intended provision of the information to the extent allowed by Swiss law.
If Swiss paying agents knowingly manage or encourage the use of artificial arrangements to avoid taxation under the terms of the agreement, the agent will be liable to pay an amount equivalent to the withholding tax avoided.
This is, of course, a worrying aspect of the agreement for those agents, since it may not always be possible to prevent taxpayers moving their funds, yet may be difficult for the agent to prove that he has tried to prevent such a course of action.
One aspect of the agreement which has received little or no publicity is that it allows Switzerland to request reciprocity through the introduction of equivalent measures to secure the effective taxation of Swiss residents regarding assets in the UK.
It will be interesting to see whether this is something that the Swiss feel is worthwhile requesting.
Fiona Fernie is a partner at BDO LLP specialising in tax investigations, often with an offshore element. She can be contacted by telephone on 020 7893 2685 and by email.
