John Cassidy, partner in the tax investigations team at Crowe Clark Whitehill, discusses the options left to investors holding non-UK tax compliant assets held or managed in Switzerland.

John Cassidy, partner in the tax investigations team at Crowe Clark Whitehill, discusses the options left to investors holding non-UK tax compliant assets held or managed in Switzerland.

The UK/Swiss Tax agreement came into force on 1 January 2013 with the primary aim of addressing the issue of non-UK tax compliant assets held or managed in Switzerland. The basic premise was that tax evaders hiding funds in Switzerland would either have to reveal those funds and pay the appropriate back taxes, or pay a hefty one-off levy to remain anonymous. Either way, HMRC wins - either good intelligence is received or a large amount of cash.

There was a third option - for an account holder to close down their Swiss operations entirely. In my view, this was somewhat misguided given that the number of jurisdictions that the funds could realistically be transferred to is rapidly diminishing, due to significant growth in Tax Information Exchange Agreements between nations and pressure from the EU and the US. The Swiss will also inform HMRC of the top ten jurisdictions that funds have been transferred to, enabling appropriate pressure to be applied in those locations.

A problem with the UK/Swiss agreement is, however, that it applies to all accounts, not just those linked to a loss of tax. Hence, fully-compliant tax payers were hit with the one-off levy, which was set at between 21 – 41 per cent of the total account balance if they did not authorise the bank to disclose the account to HMRC before the 31 May deadline. I have had a number of calls from investors in this position.

A difficult position

In theory, the Swiss banks were supposed to identify relevant UK account holders and inform them of the position. Account holders were duly contacted from around November 2012 onwards. However, the letters were long and all too easy to ignore by those who assumed they didn’t have to do anything as they were fully UK tax-compliant. Also, many Swiss accounts are operated on a “retained mail” basis, meaning that the bank could not issue mail to the client. Many compliant account holders have therefore been unnecessarily caught out by the severe levy as they had not fully understood that it applied to all UK Swiss bank account holders.

The problem is that the compliant tax payer now has no remedy to recover the funds. If the bank correctly identified them as a “relevant person” – broadly, a person residing in the UK who has beneficial ownership of the Swiss assets – the levy has been correctly deducted in accordance with the UK/Swiss agreement. The only provision in the agreement for a refund to be given by HMRC is where it can be demonstrated by the tax payer that it was wrongly levied by the bank in the first place. In my view this is wrong and I hope that HMRC will be sympathetic to the tax payer who is fully up to date but has suffered a further, significant charge on his Swiss assets.

If, on the other hand, the tax payer is not UK tax-compliant, they should still take further steps to remedy the position.  Whilst the levy, in principle, covers all past tax liabilities it doesn’t really achieve that in practice. For example, if funds had left the account over the years, even if only to pay bank charges, those amounts are not deemed to be cleared for UK tax purposes, so the account itself can in reality still be investigated. 

This leaves non-compliant account holders with very little real certainty and no real ability to spend or invest the funds as they wish. It may also cause inheritance tax and other family problems on death. Other alternatives, such as the Liechtenstein Disclosure Facility are available as a potential avenue to disclose any tax irregularities and should be seriously explored. There is no need to have historically held assets in Liechtenstein. While account holders will need to make a full disclosure to HMRC, the Liechtenstein Disclosure Facility is a smooth and established process which provides absolute certainty regarding past taxes at a reasonable cost with no intrusive HMRC investigation. Once the process is complete and the account holders’ tax affairs have been squared with HMRC, they will have freedom to use the funds as they wish.

Non-compliant account holders should also bear in mind that it is becoming more and more difficult to remain one step ahead of HMRC. The relatively new Offshore Coordination Unit is staffed by experienced investigators tasked with coordinating intelligence on all matters offshore. Such intelligence comes from far wider sources than just the Swiss banks. For example, EU finance ministers are working towards the automatic exchange of tax information, tax transparency agreements have been negotiated with other countries – a process which had previously stalled for several years – and of course we have the FATCA arrangements coming out of the US.  Coming forward with a voluntary disclosure now really is the only sensible option.