Secrecy preserved but tax professionals defend Swiss deal

HMRC will ‘stay on the trail’ of British investors who fail to come clean under the UK-Switzerland agreement signed last week, an investigations expert has told Tax Journal.

The controversial agreement on cooperation to tackle evasion was signed two days after the Tax Justice Network ranked Switzerland top of its ‘Financial Secrecy Index’. But the Chartered Institute of Taxation said the agreement left HMRC with ‘plenty of routes to pursue Swiss account holders guilty of serious crimes if they choose to do so’.

Heather Taylor, tax investigations specialist at Grant Thornton, told Tax Journal that the agreement would get money into the UK Treasury which it would not otherwise easily track down. But she added: ‘Make no mistake – the UK taxman will still stay on the trail of those who do not come forward to lift the veil of secrecy on their Swiss accounts’.

David Gauke, Exchequer Secretary to the Treasury, said: ‘This is an excellent agreement which tackles a problem many people thought would never be solved. Working with the Swiss government we have delivered a highly effective solution which will benefit both countries and recover billions of pounds of unpaid tax for the UK.’

‘Switzerland will collect data on the destination of funds withdrawn from the country following the announcement of this agreement, and will share that data with the UK,’ HMRC said. However, secrecy will be maintained – that data will merely set out ‘the top 10 destinations’ of those funds.

HMRC said funds of UK taxpayers in Switzerland faced a ‘significant’ one-off deduction of between 19% and 34% to settle past liabilities. From 2013, a new withholding tax would ‘ensure the effective future taxation of UK residents with funds in Swiss bank accounts’.

The charges will not apply if the taxpayer authorises a full disclosure to HMRC. The agreement includes what HMRC called a ‘powerful anti-abuse clause’ to prevent promotion of avoidance by Swiss banks.

‘Switzerland will collect data on the destination of funds withdrawn from the country following the announcement of this agreement, and will share that data with the UK,’ HMRC said. However, secrecy will be maintained – that data will merely set out ‘the top 10 destinations’ of those funds.

HMRC added: ‘There will be no clearance of past liabilities for those involved in criminal attacks on the tax system or for anyone whose Swiss assets are the proceeds of non-tax crime. Any person who has failed to disclose their Swiss assets when challenged will not be able to benefit from the clearance of past tax liabilities. HMRC’s ability to carry out investigations will be preserved: any person under investigation cannot benefit from the clearance of past tax liabilities.’

The agreement

HMRC and the Swiss tax authority will assist each other in (a) the ‘tax regularisation’ of ‘relevant assets’ (broadly, bankable assets booked or deposited with a Swiss paying agent) held in Switzerland by or for ‘relevant persons’ (broadly, UK-resident individual account holders and UK-resident beneficial owners of assets held by companies or other legal entities); (b) the effective taxation of income and gains on such assets; and (c) further exchange of information by the UK to ensure effective taxation of Swiss residents in relation to UK assets.

The UK and Swiss governments believe the agreement, expected to come into force on 1 January 2013, will achieve an enduring effect equivalent to automatic exchange of information. However, they will consult and agree ‘adequate measures’ in the event that ‘extraordinary upheavals’ on the financial markets endanger implementation of the agreement.

‘Regularising the past’

UK resident taxpayers (other than non-domiciles, see below) who hold relevant assets at both 31 December 2010 and 31 May 2013 must:

• instruct the paying agent to make a one-off payment to settle income tax, capital gains tax, inheritance tax and VAT liabilities on funds in the account; or
• authorise a disclosure to HMRC via the Swiss tax authority.

Non-domiciles who hold relevant assets at both dates must:

• instruct the paying agent to make the one-off payment (the ‘capital method’); or
• make a modified one-off payment based on the ‘omitted taxable base’ – broadly, untaxed remittances since 2003 – using the ‘self-assessment method’; or
• authorise a disclosure; or
• ‘opt out’ by telling the paying agent that none of the above options is chosen.

One-off payment

The Swiss paying agent will levy the one-off payment on 31 May 2013 where the taxpayer:

• has instructed him to do so, or
• has failed to choose any of the above options.

The payment will be calculated as set out in the schedule to the agreement, using an applicable tax rate of 34%. A complex formula has been set to produce an effective rate of between 19% and 34% of the funds held in the account. For non-domiciles using the self-assessment method, the payment will be 34% of the ‘omitted taxable base’.

Withholding tax

The Swiss paying agent will levy a withholding tax on interest at 48%; dividends at 40%; ‘other’ income at 48%; and capital gains at 27%. A non-domicile liability to withholding tax will be limited to income and gains arising in, or remitted to, the UK.

Other provisions

• Disclosure: Where disclosure is authorised, the Swiss paying agent will disclose the income and gains instead of levying the one-off payment.
• Withdrawn assets: The Swiss tax authority will disclose to the UK authorities the ten states or jurisdictions to which ‘relevant persons’ who close their account prior to 31 May 2013 have transferred the largest volume of relevant assets. The report will state the number of relevant persons concerned for each state but will not identify them.
• Exchange of information: The Swiss tax authority will provide information to the UK authorities (relating to a period up to 10 years prior to the request) if a request identifies the UK taxpayer and there are plausible grounds for the request. There are plausible grounds where HMRC ‘has identified on a case-by-case basis a tax risk in relation to the UK taxpayer and sees plausible, non-arbitrary grounds for checking the tax position of a UK taxpayer’. The agreement provides that ‘so called “fishing expeditions” are excluded’. A joint commission will determine the maximum number of admissible requests per calendar year, which must be ‘proportionate to the perceived risk of non-compliance by investors’. The number of requests will not exceed 500 a year in the first three years.
• Stolen data: In a separate declaration, the UK government undertook not to ‘actively seek to acquire customer data stolen from Swiss banks’. Heather Taylor observed that this did not mean that HMRC would not use ‘any future data which may gratuitously come its way’.
• Up-front payment: Swiss paying agents will make an up-front payment of SFr 500m to the UK authorities, via the Swiss tax authority. Once the one-off payments have reached SFr £1.3bn, further one-off payments may be set against this up-front payment.
• Criminal investigation: A taxpayer who agrees to make either a one-off payment or a voluntary disclosure and fully cooperates with HMRC is ‘highly unlikely’ to be subject to a criminal investigation by HMRC for past liabilities unless the relevant assets represent the proceeds of crime, HMRC said in a side letter.

Four choices

Heather Taylor, Senior Manager, National Tax Investigations at Grant Thornton writes:

 ‘Taxpayers will basically have four choices:

1. Put their head above the parapet and make a full disclosure to HMRC of any undisclosed liabilities. Unlike the current Liechtenstein agreement, there is no guarantee of non-prosecution and no mention of what level of penalties would apply.
2. Retain anonymity and authorise the ‘one-off payment'. The threat of discovery by HMRC and potential future prosecution remains.
3. Disclose via the Liechtenstein facility if it is available. This does give a guarantee of non-prosecution and a guaranteed 10% penalty and a 10 year look-back period, but requires loss of anonymity.
4. Withdraw all funds from Switzerland. This loses the security and expertise of the Swiss banking system and perhaps sends the money to a riskier bolt hole. Such taxpayers risk prosecution and penalties of up to 200% of the tax lost should they be tracked down in future.’