Andrew Godfrey looks at the implications of the imminent UK-Swiss tax agreement

The UK-Swiss Tax Agreement on Co-operation in Tax Matters (‘the UK-Swiss agreement’) was signed on 6 October 2011, and is expected to come into force on 1 January 2013 (subject to the national legislation being in place in both countries before then).

It will have important implications for those who are within the UK tax net and have, directly or indirectly, a beneficial interest in financial assets or bank accounts in Switzerland. Unless appropriate advice and action is taken, those affected could be in for a nasty shock.

Nothing to declare

In recent times, UK taxpayers with offshore assets that have not been properly declared in their tax returns have been able to take advantage of offshore disclosure facilities made available by HM Revenue & Customs (the Revenue). The origin of the foreign assets may be earnings from a business that have been squirreled away without being declared, or an inheritance from a kind aunt.

The taxpayer has placed the funds in an offshore bank account or portfolio because they either do not know what to do about the situation, or have chosen to do nothing. The offshore disclosure facilities offered the taxpayer the incentives of allowing these problems to be tidied up with the Revenue and only reduced penalties being charged.

Given that there are possible criminal sanctions for evading tax, and penalties can now reach a maximum of 200 per cent of the unpaid tax, a lot of people have taken advantage of these facilities. The Revenue, on the other hand, welcomed the collection of tax for past events and the fact that tax will be paid in the future on these assets as well.

The UK-Swiss agreement, however, seeks to attack the problem of those UK taxpayers with financial assets or bank accounts in Switzerland who have so far not made a disclosure to the Revenue. From next year, such taxpayers will be faced with some decisions to make.

Broadly there are two decisions, and for each decision there are two options. The first decision concerns how to regularise the position to date (‘the one-off payment’), and the second concerns how to regularise the on-going position (‘the lifetime withholding tax’).

UK resident and domiciled

For those who are UK resident and domiciled, for each decision there will only be the options of:

1. maintaining anonymity but paying away part of the capital of the assets or income/gains as they arise (the payments being made to the Revenue via the asset holder (for example, the bank) and Swiss authorities); or,

2. allowing a disclosure to be made to the Revenue.

As regards regularising the position to date, if the first option is selected, then a one-off payment of the capital value of the assets is taken by the asset holder. The value of the payment is calculated according to a formula and will be between 21 per cent and 41 per cent of the total capital value (calculated according to provisions in the UK-Swiss Agreement). This payment will in most cases clear all liability for income tax, capital gains tax, inheritance tax and VAT, and associated interest and penalties.

For the on-going position, the taxpayer will need to decide whether anonymity is to be preserved and a lifetime withholding tax is paid on the income and gains of the assets as they arise, or alternatively if disclosure is to be made. The rates for the withholding tax are in line with, but slightly less than, the top rates of UK tax as they are collected as they arise and so earlier than on a self-assessment basis (40 per cent on dividend income, 48 per cent on other income and 27 per cent on capital gains).

The one-off payment and lifetime withholding tax are unlikely to be the correct rates of tax to apply to the particular assets, income or gains, and so disclosure will often be the better option for UK resident and domiciled taxpayers.

If no option is selected by 31 May 2013 as regards the one-off payment, then anonymity will be preserved and the tax payment will be taken automatically by the asset holder. Similarly, the lifetime withholding tax will commence once the agreement comes into force (1 January 2013) unless the option to disclose is chosen.

UK resident and non-UK domiciled

Those who are not domiciled within the UK but are resident here have additional options as regards the one-off payment. They can also opt out of it, or apply it only to income and gains with a UK source or those that are remitted to the UK. There will be no, or only limited clearance of, past tax liabilities if these options are chosen.

The lifetime withholding tax also only applies to income and gains with a UK source or those that are remitted to the UK. The taxpayer will need to supply the asset holder with a certificate as to their domicile supplied by a lawyer, accountant or tax adviser in order to select this option.

Withholding tax on death

There is also provision for a withholding tax (at 40 per cent) to apply when the UK taxpayer dies, but this is only in the case of UK resident and domiciled taxpayers. Again, there is the option of disclosing the relevant details to the Revenue to avoid a withholding tax being taken.

Liechtenstein Disclosure Facility (LDF)

Thankfully, for those who own Swiss assets but have not paid the correct amount of tax, there is a disclosure facility currently open with the Revenue.

The LDF allows those with offshore undisclosed assets to establish a link with Liechtenstein (if one did not exist already), disclose their position to the Revenue and benefit from the Revenue looking no further back than 1999, much reduced penalty rates and also removing the threat of criminal prosecution for tax evasion (which the UK-Swiss agreement does not).

If the taxpayer acts quickly enough, their tax position can be regularised in a cost-efficient manner and the UK-Swiss agreement need not cause such concern.

Andrew Godfrey is an associate at Penningtons www.penningtons.co.uk