Tax
The UK-Switzerland Tax Deal - What Do We Know So Far?
Fiona Fernie, partner, and Dawn Register, senior manager, in the tax investigations team at BDO, discuss the workings of the new UK-Swiss tax agreement.
Fiona Fernie, partner, and Dawn Register, senior manager, in the tax investigations team at BDO, discuss the workings of the new UK-Swiss tax agreement.
The much anticipated tax agreement between the UK government and Switzerland, signed on 24 August 2011, is the latest demonstration of HMRC’s continuing efforts to tackle offshore tax evasion. The deal, which is planned to come into force in January 2013, marks an increasingly pragmatic approach which is expected to secure £6 billion (around $9.54 billion) of unpaid UK tax. It also raises questions as to what is the best approach to tackle tax evasion more generally.
Who is covered by the deal?
To be eligible for this deal the Swiss account must have been open on 31 December 2010 and still in existence on 31 May 2013. Under the terms of the agreement existing funds held by UK residents in Switzerland will be subject to a one-off deduction of between 19 per cent and 34 per cent on their principal sum at 31 December 2010 to settle past tax liabilities. The amount deducted will depend on the length of time the account was held, when the funds were deposited, the frequency of deposits and the value of the funds deposited and withdrawn between 2003 and 2010.
Non UK-domiciled individuals will be able to opt out of the historic payment. However if they are discovered to have a problem later they will suffer higher penalties and will have no immunity from prosecution. For the future, non UK-domiciled individuals cannot opt out of the withholding tax even if they pay the Remittance Basis Charge (£30,000 per annum, to increase in certain circumstances to £50,000 per annum from April 2012). Their only way of not paying is by disclosing the account, or, if claiming the remittance basis on their UK personal tax return and paying the RBC, showing that there are no amounts in their accounts which are liable to UK tax. As for UK individuals, the deal can look through structures including offshore trusts and companies.
From 2013 UK residents with funds in Swiss banks will have a choice: they can either authorise a full disclosure of their affairs to HMRC or face a new withholding tax. The rates of the new withholding tax are 48 per cent on investment income, 40 per cent on dividends and 27 per cent on capital gains. If individuals want to disclose their accounts the process will be similar to the one followed under the European Union Savings Directive: they will inform their Swiss agent, who will notify the Swiss Federal Authorities, who will in turn inform HMRC.
Some individuals are specifically excluded from taking part in this deal in a number of scenarios (e.g. if they are currently under investigation by HMRC).
How does this compare with the LDF?
The favourable terms of the Liechtenstein Disclosure Facility (LDF) remain unchanged. Therefore, from 2013, UK taxpayers with undisclosed funds in Switzerland wishing to legitimise them will have to decide between using the LDF or a one off deduction under the Swiss Deal. There are a number of issues to consider.
Cost: It is too early to say with any certainty which will be more cost beneficial, due to the fact that the agreement is subject to further scrutiny by the UK and Swiss governments and could well change. The devil will most certainly be in the detail and we will not see the full text until the agreement is ratified. This is likely to be late this year. There have even been suggestions that, if the proposal proves controversial in Switzerland, it could be subject to a referendum. However, given what we do know, it is expected that for the majority of cases the LDF is likely to be the cheaper option.
Peace of mind: The LDF is definitely the more attractive to anyone who wants to avoid the possibility of HMRC catching up with them. One of the key points to bear in mind about the UK-Swiss deal is that whilst accounts will remain secret, account holders still face all the risks of tax investigations on funds that remain in Swiss accounts. It is also already clear that where money is no longer in the Swiss account or where a disclosure is needed on real estate and safe deposits then the LDF is a better option.
The LDF is available now so taxpayers can make immediate disclosures. This is important because if HMRC opens an investigation into a taxpayer under the Civil Investigation of Fraud procedure then they cannot use the LDF or the Swiss agreement to settle their unpaid tax from earlier years. They will also probably face a higher overall bill as the penalties will not be limited to 10 per cent and tax can be charged for up to 20 years where taxpayers deliberately failed to disclose their Swiss accounts.
The Swiss arrangement will also be accompanied by a new information sharing provision. The UK tax authorities will be allowed to request account details of up to 500 people a year, potentially more in the future, who they suspect of tax evasion whether the individual authorises their bank to respond or not. This includes accounts where it is suspected that funds have been removed from Switzerland before the deal bites.
Will evaders move to other jurisdictions?
Many view Singapore, which has made a concerted effort to attract wealth by making regulatory and tax changes and Hong Kong as the “next havens” for those currently holding money in Switzerland. It is estimated SFr62 billion were moved from Switzerland to Asia in the first eight months of 2010, demonstrating that some evaders have already decided to make the move. However, the increased level of co-operation between the UK and Swiss authorities as well as the Tax Information Exchange Agreements that are already in place in jurisdictions such as Hong Kong and Singapore all support the view many advisors hold that tax evaders will eventually reach the realisation that they can run but they can’t hide.
Conclusion
There are many complexities to be considered under both the LDF and Swiss deals. Advisors will no doubt be getting a tranche of enquiries in coming weeks. With this in mind, it is very important that individuals fully consider all potential outcomes at this early stage and seek help from those specialists.
