It’s December already. Is there anything you need to do before the year ends in a few weeks time: buy Christmas presents (check), book New Year’s eve party (check), move millions out of Swiss bank account before they get snaffled (oops).

A “tax cooperation agreement” between the UK and Switzerland comes into effect on 1 January 2013. This is what the Chancellor was talking about when he stated, in today’s Autumn statement, that £5bn in tax would be recovered from Swiss bank accounts in the next 6 years.

The aim of the UK / Swiss agreement is to encourage historically non-compliant individuals, who are resident and domiciled in the UK, to disclose to HMRC the existence of Swiss accounts which contain taxable amounts on which UK tax has not yet been paid. Failure to do so will result in their Swiss bank deducting a one-off tax charge equal to approximately 21% – 41 % of the account balance. (There are also provisions for withholding tax on future interest payments but these will be less of a concern.)

At a very basic level, the agreement offers non-compliant UK individuals the option of remaining anonymous to HMRC at the cost of a significant one-off levy.

None of this is new – the agreement was made in October 2011, so affected taxpayers have had many months to consider what action they wish to take. However, the potential cost of doing nothing has increased.

The amount of the one-off levy imposed is to be calculated by a formula. The anticipated effective rate was initially announced as being 19% to 34% but in April this year was revised upwards, to 21% to 41%.

In addition, HMRC recently released a further “fact sheet” stating that account holders who do not disclose their identity will suffer not only the one-off levy mentioned above but the loss of a further 40% of the account balance on their death, unless they instruct their Swiss bank to inform HMRC of the assets in their accounts in the event of their death. Up to approximately 65% of the account balance could therefore be wiped out if no action is taken.

In HMRC’s defence, there is some “logic” to this deduction on death. The agreement is aimed at UK residents who are domiciled in the UK. As a starting point, such individuals are liable to UK inheritance tax on their worldwide assets on death (generally at a rate of 40% on the excess of assets above a value of £325,000).

What are the options for non-compliant individuals with undisclosed Swiss accounts?

  1. Do nothing and accept the one-off and on-death deductions;
  2. Disclose the Swiss account to HMRC and (as required) negotiate the penalties which are imposed; or
  3. Open an Liechtenstein account and (assuming the conditions are met) disclose the Swiss account under the “Liechtenstein Disclosure Facility”, which caps penalties at 10% of the unpaid taxes.

A further option (close the Swiss account and move assets elsewhere) should not be on anyone’s new year’s resolution list unless they are doing this in order to fall within the Liechtenstein Disclosure Facility. Doing so may involve continued tax evasion and could ultimately prove expensive. Although a 65% charge sounds harsh, bear in mind that evasion could attract penalties of up to 200% of the unpaid tax, public “naming and shaming” and a prison sentence. The Swiss agreement is actually generous in that it allows these ramifications to be avoided.

Whatever option is taken, non-compliant individuals with undisclosed Swiss accounts face an unhappy new year. Whether this will raise an additional £5bn in tax, however, remains to be seen.