The safety, security and secrecy of Swiss bank accounts are legendary. The practical consequence of this is that such accounts have sometimes held money that tax authorities all over the globe would like to know about. In an effort to stop taxable funds being shielded in this way, the UK (and an increasing number of other countries) has entered into a Tax Agreement with Switzerland.

The essence of this Agreement is that an account holder who has a UK connection of the necessary sort will have the choice either of:

  • permitting the Swiss bank to declare details of the assets and the account holder to HMRC; or
  • suffering what is effectively a withholding tax on the income/ gains, and also in the event of a death.

In the second case, the Swiss bank will deduct from the account a sum roughly equal to the tax that should have been paid on the funds and will pay that sum direct to HMRC, but without providing information on the particular account from which it came. In other words, the UK Government will receive a large global sum in respect of Swiss bank accounts that have not been declared, intended to be pretty much equivalent to the amount that HMRC would have received if the individuals in question had been paying their tax. In this way – and this is most important for the Swiss banks, and for some customers – banking secrecy will have been preserved, even though HMRC receives its tax.

Why should the innocent, who have declared and paid tax in relation to assets in Switzerland, worry about this? Because what is described in the previous paragraph is the conceptual aim of what is actually a very complicated agreement that means that it is possible for individuals – perfectly compliant individuals who have paid their tax – to get tripped up. The most important trap to appreciate is that, unless the account holder gives the Swiss bank exactly the correct information, by the right deadline, about how the tax has in fact been paid to HMRC and authorises the bank to disclose details to HMRC, then the Swiss bank is required simply to go ahead and make the deduction from the account and pay the withholding over to the UK Revenue. Recovering those funds, when it is discovered that there has been a ‘double payment’ of tax, will inevitably be slow and complex.

When an individual has relied on their Swiss bank accounts for the benefit of secrecy, the choices are complex. They may welcome the opportunity that this Agreement gives them to retain secrecy while at the same time getting their tax affairs into order (that is certainly one of the motivating factors for the Swiss banks in entering into the agreement – they do not want Switzerland to be seen to be the home of ‘dirty’ money). In some cases, however, it may well be better for the individual to regularise their tax affairs by using the Liechtenstein Disclosure Facility instead of, or as well as, the Swiss Agreement mechanism.