 Taxing Swiss accounts and assets
On 6 October David Gauke, the Exchequer Secretary, signed a Tax Co-operation Agreement with Switzerland that will see tax deducted from bank accounts and other assets held in Switzerland by UK resident individuals. Although the agreement will come into force on 1 January 2013, it will impose liabilities in respect of past years, as far back as 2003 and is expected to raise at least £3bn for the UK Government. It is not an amnesty and gives HMRC strong incentives to start investigating Swiss account holders before 1 January 2013. In most cases, using the Liechtenstein Disclosure Facility will be a cheaper option to regularise overseas assets.
All UK based individuals who have undisclosed assets in Switzerland should seek advice on their position and options as soon as possible.Contact us
Outline of the deal
One-off payment for past tax issues
Options for non-UK domiciled individuals
Excluded individuals
Tax deductions for future years
Outline of the deal
This tax agreement is not another so-called amnesty or disclosure agreement and, unlike the Liechtenstein Disclosure Facility, it should not be viewed as a stand-alone mechanism for sorting out past tax irregularities. The UK-Swiss agreement does not offer account holders immunity from prosecution and it is difficult to envisage any situation in which it allows an individual to draw a line under the past completely.
UK taxpayers with accounts and various other assets in Switzerland will have a one off amount deducted from the total balance in the account, which will then be paid over by the Swiss banks to the UK authorities without revealing the account holder’s identity.
Each year after that, an amount will be withheld by reference to interest and other income (48%), dividends (40%) and capital gains (27%) arising on investments held by individual UK taxpayers in Swiss banks. Tax deducted under the EU Savings Directive will be credited against the withholding tax.
As an alternative, an individual taxpayer can authorise the Swiss bank to disclose the account to the UK authorities and tax, interest and penalties will be calculated in the usual way. Taxpayers who give that authorisation immediately should not be complacent: as the Agreement is not yet in force, HMRC will still be able to investigate that person and his or her Swiss assets in the normal way, perhaps going back 20 years.
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One-off payment for past tax issues
Individuals will be subject to the one-off deduction from their accounts on 31 May 2013 where the accounts were opened before 31 December 2010. This deduction is meant to settle income tax, capital gains tax, inheritance tax and VAT liabilities in respect of the funds in the account.
If there are not funds are available to cover the payment on 31 May 2013, the account holder will have a brief opportunity to pay in the shortfall. If this does not happen, the individual will be deemed to have authorised his or her bank to make full disclosure of his details and accounts to HMRC.
The amount deducted will be between 19% and 34% of the balance in the account (the actual percentage will be based on a very complex formula applied by the Swiss bank). The taxpayer will be provided with a certificate, which he or she will then need to approve, to use as proof, if ever it is needed, that there is no further liability to UK taxes for the periods concerned.
However, this does not prevent HMRC raising future tax investigations into the account holder in any situation where funds have been taken out of the account between 1 January 2003 and 31 December 2010. Even payment of banking fees would count as removing funds for this purpose. HMRC can investigate to recover the tax that should have been paid on the withdrawn funds but the one-off payment will cover any UK tax due on funds retained in the account.
It should be remembered that the Agreement only covers Swiss assets, so cannot be used to rectify, for example, undeclared funds held in a Channel Islands bank account
An account holder opts out of the one-off payment by instructing his or her bank to disclose details of the account and his or her identity to HMRC. This will lead to HMRC launching a tax investigation in the normal manner – potentially covering the past 20 years with high penalties as appropriate – where it is not clear that the account and income has previously been disclosed on the individual’s UK tax returns.
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Options for non-UK domiciled individuals
The agreement includes specific provisions for non-UK domiciled individuals but these can only be employed where the individual provides the bank with a certificate (from a suitably qualified accountant, lawyer or tax adviser) to confirm their status and that it is not known to be in dispute with HMRC.
Where a certificate is provided, non-UK domiciled individuals can:
- self-assess all previously untaxed remittances from the Swiss source since 31 December 2002, plus untaxed UK sources, and authorise their bank to make a one-off anonymous payment to HMRC to cover them
- opt out of the one-off payment entirely (i.e. where no remittances to the UK have been made)
- do nothing – i.e. agree to the one-off payment (which may prove to be excessive depending on their personal circumstances).
If either of these options is chosen incorrectly, for example, remittances have in fact been made, past UK taxes will not be deemed regularised and HMRC can investigate up to 20 years as normal.
Any tax payment to HMRC under the agreement, whether levied on past or future amounts, will constitute a remittance to the UK and be subject to UK taxes in the normal way.
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Excluded individuals
There are exclusions for those who have been or are subject to a wide range of investigations in the past including:
- successful tax prosecutions
- Code of Practice 9 investigations
- investigations completed (prior to 31 December 2002) where the Swiss assets were not disclosed
- a very wide and vague range of other investigations, for example, simple self-assessment enquiries.
In this context, ‘investigation’ covers any type of enquiry that is supported by statutory information powers (true of all self-assessment enquiries).
In addition, anyone who used or was contacted by HMRC under any UK disclosure facility, whether or not related to offshore assets, cannot use the agreement to regularise part of their past tax irregularities.
Where a person is excluded, any withholding tax paid to the UK will be treated as a payment on account of the full liability to UK tax, including interest and penalties.
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Tax deductions for future years
Annual deductions will apply from 1 January 2013 (hence a part year deduction will be made for 2012/13). Relevant individuals will suffer withholding tax on future amounts as follows:
- capital gains – 27%
- dividends – 40%
- interest and other income – 48%.
These are deemed to cover all liabilities to UK tax, interest and penalties in respect of the particular income or gains. A credit against the withholding tax will be given for any amounts levied under the EU Savings Directive. The account holder can authorise the bank to make a disclosure to HMRC instead of levying the withholding tax. If insufficient funds are available to cover the payment, the individual will, ultimately, be deemed to have authorised disclosure of his details and accounts to HMRC.
For non-UK domiciled individuals, the deductions will only apply to amounts the Swiss bank can identify as remittances (i.e. amounts directly remitted to the UK). However, deduction need not be made if non-UK domiciled individuals declare to the Swiss banks that they intend to claim this status for a particular tax year and that the remittance basis is also to be claimed. For example, by 31 March in a particular year, the client must provide a declaration of intent to claim the remittance basis for the following tax year, together with an indication of how the bank should proceed if sufficient funds are not available to meet any withholding tax. Following that declaration of intent the taxpayer must provide formal certification of the position from a qualified UK adviser by the following 31 March. Alternatively, if this withholding tax is paid, it will itself be a remittance taxable in the normal way.
Higher withholding rates will be charged where a non-UK domiciled person provides a declaration of intent to claim the remittance basis but the formal certification is not received.
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