For UK resident individuals who need to regularise their tax positions, the Liechtenstein Disclosure Facility (LDF) will, in principle, remain available until 5 April 2016. However, for UK residents with secret Swiss accounts, a more pressing deadline looms.
UK residents who have undisclosed assets in Swiss bank accounts need to take action as a matter of urgency. At the end of May 2013, those who haven’t disclosed their Swiss accounts to HMRC and have not yet registered for the LDF will, in effect, be forced to regularise by the UK/Swiss Tax Cooperation Agreement (TCA). As explained below, such forced regularisation could well prove expensive.
For UK residents with Swiss accounts, the options are as follows. This assumes that the TCA will come into effect at the beginning of 2013 - which is very likely but still not completely certain.
1. Suffer a one-off payment under the TCA
Under the TCA, a UK resident holder of a Swiss bank account will have the option of instructing the bank to make a so-called “one-off payment” from the account, probably on 31 May 2013, to remedy the account holder’s (assumed) tax evasion. The cash extracted from the account will be passed to HMRC, but indirectly and anonymously, so banking secrecy will be preserved.
In most cases, such a payment will exonerate the account holder from liabilities to UK taxes in respect of the account. However, in some circumstances the one-off payment will provide a credit against UK tax liabilities but not full exoneration.
For those who take this option, the preservation of banking secrecy will come at a cost of between 21% and 41% of the capital value of the account. The exact amount of the deduction will depend on a complex formula in the TCA. Deductions are likely to be higher, as a proportion of the capital value, in relation to larger accounts.
The Swiss banks will be required under the terms of the TCA to make such deductions from the accounts of UK residents, not only where an instruction has been received to make a one-off payment, but also where no instruction has been received from the client either way.
The alternative will be for the UK resident account holder to instruct the bank to disclose information regarding himself and the account to HMRC. That will ensure that no one-off payment is made from the account. However, that option will only make sense if the account holder (a) is already tax-compliant in relation to the account, or (b) has registered for the LDF so that he is protected from prosecution and other sanctions. Otherwise the transfer of information to HMRC pursuant to the TCA is almost certain to trigger a “serious tax fraud” investigation by HMRC, which could culminate in prosecution and severe financial penalties.
2. Come clean via the LDF
Making a disclosure to HMRC under the LDF will be the better approach in most cases. Experience shows that the cost of an LDF disclosure in terms of tax, penalties and interest is most commonly around the 20% mark and very rarely more than 30% of the account balance.
The LDF also provides immunity from prosecution for tax evasion, which remains a theoretical risk even after an individual’s tax position has been regularised by a one-off payment under the TCA.
Whereas 1 and 2 above are both genuine options for those with undisclosed Swiss accounts, capital flight is not. Moving moneys out of Switzerland to avoid the impact of the TCA would be very unwise. Such transfers stand a high risk of detection, and individuals who have deliberately avoided the opportunity to address past irregularities are likely to be dealt with by HMRC very severely.
The Swiss authorities will be passing details of the 10 most popular “capital flight destinations” to HMRC, and a crackdown on tax evasion through the deposit of assets in those countries is inevitable. Most countries which might be considered as “capital flight destinations” have entered into tax information exchange agreements with the UK, making them dangerous places to store “grey money”. It is also worth noting that Singapore has recently clarified its position regarding assets deriving from foreign tax evasion, to the effect that such assets will be regarded as the proceeds of crime, and must not be accepted by the Singaporean banks.
Time to act …
UK residents with undisclosed accounts in Switzerland need to make a decision urgently. They should seriously consider making a disclosure to HMRC under the LDF, given the likely financial benefits of that option, compared to allowing a one-off payment to be made under the terms of the TCA. However, if the LDF is to be used, the process should be started now, to ensure that a Liechtenstein “footprint” is established in time and registration with HMRC takes place in advance of the 31 May 2013 deadline. Many of the Swiss banks are forcing their UK resident account holders to make a decision within the next month or two about which way they are going to jump.
The LDF is almost certainly the best opportunity that will present itself to address past tax irregularities at a modest cost and, equally importantly, to secure peace of mind. For Swiss account holders, this is definitely a case of “take it or lose it”.