Fiona Fernie, tax investigations partner at accountancy firm BDO, explains what UK holders of Swiss bank accounts need to do to avoid being hit with the one-off levy which comes into force at the end of this month.

Fiona Fernie, tax investigations partner at accountancy firm BDO, explains what UK holders of Swiss bank accounts need to do to avoid being hit with the one-off levy which comes into force at the end of this month.

The UK-Swiss tax agreement was hailed as a landmark in the erosion of tax evasion through Swiss banking and was therefore widely publicised in the professional press. But how aware of the 31 May deadline do you think Swiss account holders are in general?

We have heard from some Swiss banks that up to 50 per cent of account holders they have written to have not yet responded, despite the fact that those who have not put their affairs in order by 31 May 2013 will be subject to the one-off levy. This would suggest that there are a significant number of people who are simply not aware of the Swiss-UK agreement. We have also received a notable number of client enquiries from Swiss account bank holders who do not fully understand how the agreement affects them and what their options are. 

Are there any particular groups of people who may not be aware of the need to declare their assets? Why have they “slipped under the radar”?

Interestingly, it’s often those who have a legitimate reason for having offshore assets that are unaware that they still need to take action. For example:

·        People who are now not resident in the UK but did live here in recent years, for example expatriates, may be unaware of the process they need to go through to ensure that the Swiss bank has the correct (overseas) address for them. The bank will want a letter from a UK tax advisor to confirm the individual really is non-resident and does not have a UK tax exposure.

·        Non-UK domiciled individuals who are not aware of the specific “non-dom” rules in the UK/Swiss Agreement may also be unaware of the levy and again will need a letter to confirm their non-dom status and that they have paid the remittance basis.

·        Many new UK residents are oblivious to the agreement.

·        Those with death estates where the executors need to make a disclosure before funds can be distributed are also likely to be unaware they need to declare having previously not had to administer such accounts

What penalties do Swiss account holders face if they do not declare their assets to HMRC?

Doing nothing means that the one-off levy of between 21 per cent and 41 per cent (of the account balance as at end-December 2010) will be deducted automatically from the account in question on 31 May 2013. The precise percentage depends on how long the account was held and the level of funds deposited or withdrawn; the Swiss bank should be able to advise as to what this percentage would be.  In certain circumstances the one-off levy does provide tax clearance for the past; this is effectively in lieu of paying all back taxes, interest and penalties.

Do you see many clients preferring to pay the withholding tax in order to maintain their anonymity?

Retaining anonymity is one of the key attractions of the Swiss agreement when it is compared to the Liechtenstein Disclosure Facility and we certainly know of some account holders that will take advantage of this aspect of the agreement by paying the one-off levy for the past and the withholding tax for the future. That said, in the vast majority of cases, for those needing to disclose previously undeclared offshore assets, the LDF, remains the preferred option. For example, many are drawn to the non-financial benefits of the LDF, which include immunity from prosecution for tax offences as well as giving finality to the tax affairs in question.  In many cases, the LDF is also the cheaper option, even taking into account professional tax adviser costs.

Imagining that a Swiss account holder has done nothing to regularise their affairs, what can be done at this late stage to stop the withholding tax from being levied?

It is essential that those concerned seek the help of a tax advisor before the 31 May 2013 deadline. We are advising account holders to contact their Swiss bankers, or other financial institutions, to ensure that they are fully aware of their UK tax status before the deadline.  The Swiss bank will need the appropriate election forms signed and returned before 31 May 2013 - so time is running out.

It is important to establish whether individuals have UK domiciled or non-UK domiciled status, as banks will assume that they are UK-domiciled and will therefore apply the one-off levy and future withholding tax to their account. Domicile is based on facts and intention, and may therefore change. Following a review of current facts and intentions relevant to an individual’s domicile status an advisor would be able to provide certification as necessary. Non-UK domiciled individuals can choose instead to authorise the bank to disclose the account to HMRC, self-assess the amount of the payment (if any) or opt out of the charge.  Non-UK domiciled individuals are defined, for the purpose of this levy, as individuals who have claimed the remittance basis for at least one of the UK tax years ended 5 April 2011 and 5 April 2012. Therefore some individuals have paid the Remittance Basis Charge for 2010-2011 or 2011-2012 because of the impact of this agreement.

How well do you think Swiss banks have done in alerting account holders to the need to regularise their affairs?

All of the Swiss banks have now written to account holders who are potentially affected by the deal. However, alarmingly, we’ve heard from some Swiss banks that many of those they have written to have not responded.  There are also some circumstances where the UK address is wrong, the individual no longer lives in the UK or the account holder has died and executors need to communicate with the Swiss bank.

How will things work in future under the UK-Swiss agreement?

Going forward withholding taxes will be applied to interest, dividends and capital gains received in Swiss bank accounts. This withholding tax will apply to non-UK domiciled individuals, although those claiming the remittance basis will only be subject to the withholding tax on monies that are remitted to the UK or income/gains that have a UK source. Those being taxed on the arising basis will be subject to the withholding tax on income and gains within Swiss accounts each year.

The Swiss UK agreement is also accompanied by an information sharing provision whereby HMRC is allowed to request account details of up to 500 people a year who they suspect of tax evasion, whether the individual authorises their bank to respond or not. This figure of 500 is expected to increase if appropriate. HMRC will also receive details of all those people who elected for voluntary disclosure under the agreement; we expect it will take some time to review all data but in the coming years, HMRC will use this information to open investigations where a full disclosure has not already been made to HMRC. 

The onus now seems very much on offshore account holders to prove their compliance. How on top of this are people in general?

Cracking down on those with funds offshore who have neglected their tax obligations is a key priority for HMRC, with further agreements with the crown dependencies (Jersey, Guernsey and the Isle of Man) announced earlier this year. Awareness is increasing given the political will behind tackling tax evasion and avoidance. Those with offshore assets are increasingly realising the need to declare them.  Major changes in the rules for so-called non-doms from 5 April 2008 and the new Statutory Residence Test from 6 April 2013 mean that many people are struggling to ensure their UK tax affairs are up to date and fully compliant.

At the start of the year HMRC said it would be adding an additional 100 inspectors to its affluent compliance team as part of plans to garner an additional £75 million in revenue a year. How viable do you think this aim is?

We think it’s highly viable. By the end of December 2012 the unit had brought in an extra £75 million in tax and is aiming to reach £586 million by the end of 2015. The success so far is likely to be bettered with the additional resources alongside the various other methods used such as monitoring the internet. Moreover, we are seeing a proliferation of offshore disclosure agreements – such as those recently announced with the Crown dependencies – and these are a very cost-effective way of generating tax revenue for HMRC.  The inspectors are likely to be individuals redeployed from other departments within HMRC rather than new recruits.

In terms of offshore tax compliance, what should HNW clients be looking out for next?

The enhanced information exchange terms with Switzerland include an undertaking that the Swiss authorities will provide information to HMRC of the top ten destinations to where funds are transferred if they are removed from Switzerland prior to January 2013. With the increasing mobility of information between governments as well as ever greater number of agreements with other jurisdictions, it is important that clients are aware of the need to disclose and discuss their options with a tax advisor at their earliest convenience.