Swiss / UK Tax Agreement
Private Client Services news bulletin
25 August 2011
Following a previous declaration made on 25 October 2010, an agreement was reached on 24 August 2011 between the Swiss Federal Department of Finance and the UK Treasury and regarding the treatment of Swiss accounts held by UK taxpayers. The agreement is due to be signed by both parties within the next few months at which stage the detailed terms will be issued. However, the outline of the agreement has been communicated. No immediate action is required as the treaty is yet to be signed and ratified by the parliaments of both countries before it enters into force, expected to be 1 January 2013. From this date there will be two options offered under the agreement and these can be broadly defined as follows:
- Payment of withholding tax at source, both in respect of a one-off payment to cover liabilities arising in those years leading up to the agreement and annual withholding tax to satisfy the liability going forward; or
- Voluntary disclosure to the UK tax authorities regarding Swiss assets and associated income.
The assets to which this agreement will apply include currency, precious metals, bonds and shares. Property and safety deposit assets are specifically excluded.
Option 1 - Withholding Tax
Payment for the past
This will be calculated by the Swiss banks and paid over to the UK authorities on an anonymous basis. The payment will be based on the value of the Swiss assets held and the rate of tax will range between 21% and 41%, dependent on a number of factors. The Swiss Banking Association have estimated the rate for the majority of clients will be between 20% and 25%. It is understood that this payment will cover any UK tax liability on the income and gains.
Payment for the future
Withholding tax arising on income from Swiss assets held will be deducted by the Swiss banks and paid anonymously to the UK authorities. The rates at which this tax will be applied stand at 48% on interest and other income, 40% on dividend income and 27% on capital gains. The rates represent a small discount from the highest UK rates on the basis that these taxpayers will be meeting their liabilities earlier than would be expected under normal compliance rules. It appears that the payment of withholding tax is equivalent to the relevant UK tax liability.
Option 2 - Voluntary notification
Those who do not wish to make a payment under either of the options explained above may instead authorise the Swiss bank to disclose all relevant information to the UK Tax authority (Her Majesty’s Revenue and Customs ‘HMRC’)). Payment in respect of past and future liabilities will then be managed directly with HMRC.
Who will be included?
The agreement will include all individual UK taxpayers. HMRC has advised that it will look through complex structures such as shell companies, trusts and foundations etc to identify the beneficial owner of the Swiss asset.
There are to be separate terms in respect of non-UK domiciled individuals and further details will be provided when the draft agreement is issued.
Those specifically excluded from the deal include those under civil or criminal investigation at the date at which the treaty is signed, those previously convicted of a tax crime, those who have previously undergone a civil investigation which has resulted in significant amendments, those who were contacted in respect of a previous tax amnesty or similar facility and those who have benefitted from the proceeds of a non-tax crime.
Should action be taken?
The message from HMRC is that Switzerland is no longer a hiding place for tax evaders’ funds. There is to be a broader form of exchange of information between the UK and Switzerland and HMRC will have the power to submit information requests that include the name of the taxpayer but will not necessarily indicate the relevant bank. The Swiss banks are due to make an upfront payment of CHF 500 million to the UK government and expectations are that once the treaty is in force, HMRC will be collecting billions in previously unpaid tax.
While the detailed terms of the agreement are yet to be released, possibly affected taxpayers may wish to start considering their options which may also include an alternative disclosure facility such as the Liechtenstein Disclosure Facility. It will be important for taxpayers to ensure they are aware of all factors and potential consequences when making their decision.