In the last issue of Private Client update we took a closer look at the features of the Liechtenstein Disclosure Facility (LDF) and its reported success to date. We now focus on another tax agreement, the UK/Switzerland Tax Co-operation Agreement (UK-Swiss Agreement).

HM Treasury has recently estimated that UK taxpayers are holding £40 billion in Swiss bank accounts. HMRC hopes that some of the unpaid tax due on this vast amount of money will be flushed out by the new UK-Swiss Agreement, which came into force on 1 January this year. The Agreement, which was signed by the UK and Swiss Governments in October 2011, now allows HMRC to tax funds held by UK taxpayers in Swiss bank accounts.

Under the UK-Swiss Agreement, UK taxpayers with interests in Swiss bank accounts have two options:

  1. To authorise the Swiss authorities to disclose their accounts to HMRC. Unlike the LDF, there is no specific disclosure facility so, if the taxpayer has deliberately or carelessly avoided paying tax on these assets in the past, penalties will be levied by HMRC at the normal rates.
  2. To do nothing and retain anonymity but, as a consequence, suffer three forms of tax deduction:
    1. on 31 May 2013, a one-off payment (anything between 21% and 41% of the capital held at 31 December 2010) to settle all past tax liabilities, including interest and penalties;
    2. a lifetime withholding tax on future income and gains (rates are set at 40% for dividends, 48% on other income and 27% on capital gains); and
    3. in the event of their death, a one-off withholding tax of 40% on banking assets, stocks, shares and securities.

Non-UK domiciled taxpayers can benefit from more preferential terms. They can either opt-out of paying the one-off charge on 31 May 2013 or apply it just to UK source income and gains or those that are remitted to the UK. However, there will be no, or only limited, clearance of past tax liabilities if they choose either of these options. The lifetime withholding tax also only applies to UK source income and gains or those that are remitted to the UK.

UK taxpayers who decide to remain anonymous and obtain clearance in respect of past tax liabilities should note that, unlike the LDF, this will not provide them with immunity from criminal prosecution or from being ‘named and shamed’ by HMRC. Further, HMRC has the power to require Swiss authorities to provide it with specific information on a UK taxpayer if it suspects he or she has failed to disclose liabilities, so anonymity is by no means guaranteed.

If they haven’t done so already, UK taxpayers with outstanding tax liabilities arising from Swiss assets should review their affairs without delay. However, before deciding which of the above options to take, they should also consider whether they satisfy the entry conditions for the LDF and making a voluntary disclosure to HMRC through that facility.

So, what impact has the UK-Swiss Agreement had in Switzerland and will it weaken its position as a major financial centre? Although the Agreement was criticised by certain Swiss conservative groups who even petitioned for a referendum to be held on whether it should come into force, they did not obtain sufficient support to put the Agreement to a public vote. It is difficult to predict what the implications of the Agreement might be. Some movement of assets out of Switzerland is expected in the short term and there might be a change in approach by the private banking sector, but the Swiss financial sector is anticipating an increase in business in the long term, as Swiss financial service providers may find it easier to provide crossborder services to taxpayers the UK.

This article was co-written by Jovanka Jordanoska