 Offshore accounts - Emergency advice and FAQs
The following frequently asked questions cover offshore accounts and the Liechtenstein Disclosure Facility.
Click here for further FAQs on other tax investigation issues.
I have a Swiss bank account but did not use any of the previous disclosure facilities that HMRC has offered. I have heard of the Liechtenstein Disclosure Facility – can I use it now?
The short answer is yes. In simple terms, the Liechtenstein Disclosure Facility (LDF) is available to anyone with relevant property in Liechtenstein, such as a bank account. However, that account does not have to already exist; one can be opened now in order to use the LDF, which has many benefits both financial and otherwise. PKF has many appropriate contacts in Liechtenstein, which has a mature, sophisticated and regulated banking industry, to help you achieve this.
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What happens if I do nothing until the UK-Swiss agreement takes effect?
The agreement does not come into force until 1 January 2013. However, continuing to conceal a Swiss account is a fraudulent act and will only add to the penalties that HMRC can charge should it catch you out. HMRC is stepping up its investigation activity to try to catch as many Swiss account holders as possible before that date: if it has launched any form of investigation into your affairs before 2013, you will not be able to benefit from the terms of the agreement.
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Where can I get help when the UK-Swiss agreement starts?
Although, the agreement does not come into force until 1 January 2013, you should be seeking expert help now to put things right. Not only can this save you money in the long run but it will also mean you settle matters before HMRC can launch a tax investigation into your affairs. However, if you are intending to wait until the withholding tax is deducted under the agreement in May 2013, no suitably qualified UK adviser will be able to act for you now as delaying putting things right entails making another false return (or deliberately delaying the return).
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When will I have to pay tax under the UK-Swiss agreement?
The first payment will be required on 31 May 2013. If there are insufficient funds to pay the amount due, you will be given a short period to make up the shortfall. If you do not do so, you will be deemed to have agreed to your Swiss bank sending details of your identity and past income and gains to HMRC.
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I opened a Swiss account in 2004 and have never declared the income from it. How much will I have to pay under the UK-Swiss agreement?
The rate of tax you have to pay under the agreement is determined by a complex formula and will depend on how much has been in the account at different dates. However, the amount due will be a minimum of 19% (and potentially up to 34%) of the account balance (and value of other assets) at 31 December 2010 and this will be taken from your account on 31 May 2013. Depending on your circumstances it may be cheaper to make a voluntary disclosure under the LDF. We can help you with the calculation but you should remember that using the LDF to come clean has a number of other advantages – see below.
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What are the benefits of using the LDF?
The particular benefits will depend on your specific circumstances. A summary of some of the main potential benefits is:
- Low 10% penalty on unpaid tax for periods up to 5 April 2009, in most cases
- Beneficial 20% penalty rate on unpaid tax for periods after 5 April 2009
- ‘Look back’ period limited to ten years back from 5 April 2009
- Option to use a 40% "composite" rate which can save significant amounts in the right circumstances
- Guaranteed immunity from prosecution for tax related offences
- No naming and shaming
- "Bespoke" service from HMRC including the option of a "no-names" discussion.
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Can I keep my Swiss account private or will the UK-Swiss agreement mean that HMRC is told about my finances?
If you agree to pay the withholding tax for past years and on future income, dividends and gains your Swiss bank need not pass any details over to HMRC. The tax payments will be anonymous but you will get a certificate of tax paid that you can show to HMRC should it raise a subsequent investigation into your affairs based on information from other sources.
While you can keep your finances private, payments made under the UK-Swiss deal do not guarantee that HMRC will not raise a tax investigation into your affairs nor do they give immunity from prosecution for tax offences.
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I did not make a disclosure under the previous disclosure facilities because I could not afford to pay the tax that would be due over the years. What can I do?
One option is to consider whether you qualify for the LDF which is still open and runs until 2015. Depending on your circumstances, it is possible that the tax (and interest) bill can be reduced enormously thereby enabling you to properly square matters away with HMRC at a reduced cost.
If you held the overseas account in Switzerland, it is important to remember that if there are insufficient funds in the account when the first tax payment (the one for past years) is due on 31 May 2013, and you cannot add funds to make up the amount required, you will be deemed to have agreed to your Swiss bank sending details of your identity and past income and gains to HMRC. It may therefore, be better to consider making a disclosure under the LDF if this will be cheaper or payment terms can be negotiated with HMRC.
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I have a Swiss bank account but I think that my circumstances mean that no tax is due. What will HMRC do to me?
HMRC accepts that a large number of offshore bank accounts will not lead to tax being due. However, to avoid tax deductions under the UK-Swiss agreement, you will need to authorise your Swiss bank to disclose your details to HMRC and it is likely that you will be asked to substantiate that no UK tax is due. If you have all the facts in support of your case this should be straightforward. If you have not checked, you should do so now and make a disclosure if necessary, perhaps using the LDF if your circumstances are appropriate.
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What is likely to happen to affected taxpayers who have not made any disclosure relating to offshore funds?
HMRC is continually gathering data on offshore accounts from a wide range of sources. It is therefore likely that it will eventually unearth the overwhelming majority of people whose affairs are not up to date.
HMRC has stated that any penalty levied will fall into the category of “deliberate” non payment (hence a penalty of between 30% and 100% of the tax due as opposed to only a 10% penalty under the LDF). In addition, the first Finance Act in 2010 introduced new legislation allowing for these penalties to be doubled – so up to 200% of the tax due may be charged.
Ultimately, HMRC can be expected to take the details it has received from banks and pass them to its various investigation teams. Local offices will get the smaller and simpler cases. Civil Investigation of Fraud (CIF) and Specialist Investigations (SI) teams will take the larger cases and a small number will be passed to the prosecution team. These teams will then investigate taxpayers on the basis of the evidence from the banks and from what is already held on file. If co-operation is not forthcoming, estimated assessments of the tax due can be made and enforced through the tax tribunal and the courts.
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If I have not passed over any information myself under any disclosure facility, surely HMRC cannot prove that I have a tax liability?
The information given by the banks may be enough to give HMRC reasonable grounds for suspicion that you have a liability. HMRC may make a reasonable estimate of what you owe as part of a formal investigation and then it would be up to you to show that its estimate is too high. Once the existence of an offshore account is known, the same appeal tribunal that ordered the banks to pass on information to HMRC could be asked for notices ordering individual taxpayers to hand over more complete information. In addition, it has set up a special department to find and investigate offshore account holders and has a lot of data to help achieve this.
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Beyond the LDF, will there be a further disclosure facility under which I can make a disclosure?
The LDF is still open and runs until 2015 so, in theory, there is no need for a further facility. HMRC’s senior officials have so far denied that there will be further facilities and the nature of the UK-Swiss agreement bears this out. In any event, it is extremely likely that any future facility will not be on such favourable terms as the LDF, not least because of the upward trend in penalty levels.
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Will HMRC prosecute taxpayers who have not made a disclosure?
HMRC has already said that it will bring prosecutions against a range of taxpayers who have failed to disclose. UK based holders of Swiss bank accounts will not be given immunity from prosecution under the UK-Swiss agreement.
Mounting a full prosecution is a lengthy process and involves considerable legal expertise. These factors limit the number of prosecutions that can be brought. However, HMRC has a new project to reduce the "tax gap", part of which is a target of a FIVE FOLD increase in prosecutions for tax evasion. Hence, those who have not made a disclosure should do so immediately.
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Will HMRC be the only officials who get access to the bank disclosures?
HMRC has powers to share information. In addition, the police and other prosecuting bodies may also copy HMRC’s idea and get authority to obtain more detailed disclosures from the banks concerning particular individuals.
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I have not yet made a disclosure because I find the whole subject too frightening. What can I do?
You should consult an accountant now. The problem will grow as time goes on, especially as HMRC makes inroads into the vast amount of data it holds concerning offshore account holders.
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What led HMRC to offer the various recent disclosure facilities and the UK-Swiss agreement?
HMRC has been struggling for decades to recover tax that has been evaded by taxpayers concealing money offshore. It has in the past relied on bringing criminal prosecutions or levying heavy penalties in the few cases that it was able to bring to light, hoping that this would deter other taxpayers from hiding money beyond the jurisdiction. HMRC therefore convinced the tax tribunal on several occasions that banks had to hand over details of offshore accounts to investigators.
HMRC had no such route into Liechtenstein bank accounts because of local privacy laws, so it entered into a bespoke arrangement with Liechtenstein which, in effect, forces account holders to come forward under the LDF. The agreement with Switzerland is less generous to account holders but does enable them to keep their accounts secret if they wish.
Overall, HMRC now holds a vast amount of material about offshore accounts. The disclosure facilities offered a great opportunity for the taxpayer to get his or her affairs up to date. The LDF in particular – which is still ongoing – presents an opportunity to resolve matters quickly and at a relatively low cost.
A further incentive for HMRC was that it saved an enormous amount of man hours as taxpayers do almost all the work of calculating the tax on these accounts.
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Who have the UK based banks made disclosures for?
Broadly, this is customers with an offshore account but a UK address. The banks in Liechtenstein will not be disclosing data directly to HMRC but will contact account holders directly – those who should be making a disclosure, but choose not to, will see their accounts closed down without exception, thereby providing an incentive to regularise matters with HMRC.
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What is wrong with holding an offshore bank account?
There is nothing wrong in holding an offshore account; there are entirely innocent arrangements under which offshore accounts are held. Some individuals may not be liable to UK income tax on their offshore bank interest – where their domicile or tax residence status qualifies them for specific tax exemptions. Other individuals are liable on the interest and will have always disclosed this on their UK tax returns. Problems arise where the account holder is liable to UK income tax on the interest earned but it has not been declared, or where the account is used to hold tainted funds such as diverted business profits. The conditions covering exemptions for domicile or tax-residence status are highly complex and HMRC suspects that often the exemptions are not really due. Specialist advice is needed to be sure that the arrangements can stand scrutiny.
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Will everyone with an offshore account have to make a disclosure?
Many people with an offshore account are not taxable in the UK on their overseas interest – particularly if they are not domiciled in the UK and have not remitted any of the interest back to the UK. Others will have reported their interest on their tax returns and have nothing to disclose. Anyone with an offshore account should take care to check that they really do qualify for any exemptions that they have relied upon and that any interest they have declared has been correctly treated in their tax returns.
Under the UK-Swiss agreement, non-UK domiciled individuals will have to complete a certification process (which involves a suitably qualified professional certifying that they are not domiciled in the UK and are claiming the remittance basis of taxation) to avoid automatic deduction of tax. While this may be a straightforward administrative task in some cases, if your status is in doubt, any adviser will want to check very carefully before a certificate is issued.
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How does the exemption for non-domiciled people work?
Individuals who are not domiciled in the UK can arrange their affairs so that they are not taxable on their overseas interest unless that income has been brought into ('remitted to') the UK. The definition of 'remitted' is very wide and it can be difficult to prove that the income in question was not remitted. Unless you have a ruling from HMRC that you are not domiciled here and your circumstances have not changed since that ruling was given, you should consider your position very carefully. If you assume that HMRC will accept that you are not domiciled and this turns out not to be the case, you can expect it to seek a penalty of much more than 10% on any future settlement.
Under the UK-Swiss agreement a formal certification process will be required – read more here
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If some people are exempt from UK tax on their offshore bank interest why can I not simply claim to fall within those exemptions?
The exemptions from UK tax that exist depend upon satisfying complex and narrow conditions. HMRC can be expected to check that exemption is really available and a false claim could put a taxpayer in a more difficult position than he or she started with. HMRC has been testing the limits of some of these exemptions through recent court cases, and some individuals may find that that their tax planning arrangements do not work. We also find that the operation of business and personal arrangements that are designed to keep taxpayers outside the UK tax net can lapse or become slack over time. We recommend that any such arrangements are reviewed regularly.
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Is my company safe from investigation provided it has never held an offshore account?
If you, a fellow shareholder or one of your relatives has held an offshore account HMRC can be expected to ask whether the offshore money had been taken from the company without tax being paid. If this is the source of the money, you will need to make a disclosure relating to tax and VAT on the suppressed income and to any PAYE and National Insurance that has been lost. Under the LDF, it is possible to opt for the 'composite rate' to apply which could reduce the overall tax bill in these circumstances. However, under the UK-Swiss agreement, although the one-off payment for past years will clear some of an individual’s personal tax liabilities, any liabilities of that individual’s company will not be cleared.
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Is the UK-Swiss agreement or another route a viable alternative to using the Liechtenstein Disclosure Facility?
Probably not. The UK-Swiss deal does not clear all past irregularities and does not give immunity from prosecution. There is also no guarantee that account holders will not face a tax investigation in the future.
In some cases it will not be possible to use the LDF and it may be more appropriate to seek the protection of HMRC's Code of Practice 9 – the 'CIF' procedure that requires a detailed disclosure of the facts in return for immunity from a tax prosecution as long as the CIF procedure is properly embraced. Given the amount of detail now held by HMRC, hoping that the liability - and the tax man - will go away is not a viable course of action.
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Will HMRC accept that I did not need to make a disclosure if my account has gone unreported through innocent error?
You should still report the matter to HMRC but you will not be liable for any penalty and the collection of tax arrears will be limited to 4 (rather than up to 20) years. The difficulty is likely to be in persuading HMRC that you have only omitted income and gains as a result of a truly innocent error. Proving that an omission has been made innocently is difficult with any form of error in a tax return, but where positive steps have been taken to move the money offshore HMRC is likely to be extremely sceptical.
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What is the position if I inherited the offshore account?
You will be liable personally on the interest earned since the account came into your ownership. HMRC can also seek tax from the Estate within certain time limits if income was not declared by the deceased. In addition, if inheritance tax should have been paid, HMRC can seek to recover that tax without time limit.
Under the Liechtenstein Disclosure Facility it may be possible to remove the inheritance tax entirely if the 'composite rate' option is used. It is not necessary to already hold a bank account in Liechtenstein in order to use that facility.
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