A tax agreement between the UK and Switzerland was signed on 6 October 2011 by the governments of the UK and Switzerland.
You can read the text of the agreement and associated declarations on HM Revenue & Customs website.
The Agreement entered into force on 1 January 2013.
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Key aspects of the treaty include:
Regularising the past
- Accounts held by relevant UK persons in Switzerland will be subject to a one-off deduction of between 21% and 41% (Additional Protocol – 20 March 2012) to settle past tax liabilities in 2013, as long as the account was open on 31 December 2010 and is still open on 31 May 2013. This deduction will settle income tax, capital gains tax, inheritance tax and VAT liabilities (but not, for example, corporation tax or stamp duty) in relation to the funds in the account . The deduction will not be applied if the account holder instructs the bank to disclose details of the account to HMRC. Following such a disclosure, HMRC will seek unpaid taxes with relevant interest and penalties.
- It is important to note that “clearance” for the past only applies to the funds subject to the withholding. The impact of this is that persons who have withdrawn funds or acquired assets such as property using funds that were in the account will not have certainty that all liabilities in their tax affairs have been settled. Taking a simple example:
- Account balance at 1.1.2003- £1m (all undeclared income)
- Account balance at 31.12.10 and 31.5.2013 - £500k (the other £500k has been spent)
- One off charge applied to £500k
- The £500k that has not been subject to tax remains taxable
Final withholding tax (the future)
- From 2013, income and gains arising on investments held by individual UK taxpayers in Swiss banks will be subject to a new withholding tax of 40% on dividends, 48% on interest and other income and 27% on capital gains. Again, the withholding tax will not apply if the account holder authorises disclosure of details of income and gains to HMRC and pays any associated UK taxes. This could present the Swiss banks with complications in trying to identify which assets are subject to income tax rather than capital gains tax.
- The agreement will apply to UK tax residents but is also extended to account holders who have provided the Swiss bank with an address in the UK as their main residence. Where a person has provided the Swiss bank with a UK passport as proof of their identity they will be deemed to be UK resident under the agreement unless they are Swiss resident or can provide confirmation from a relevant foreign tax authority that they are resident in that country.
- The applicability of the agreement extends wider than accounts held by individuals and is also likely to include UK persons who are the beneficial owners of offshore companies, foundations, trusts and other establishments not trading or carrying on commercial activities. It seems that discretionary structures with UK resident beneficiaries will not be caught by the agreement.
- There are a number of special provisions relating to UK resident non-domiciled persons who pay tax on the remittance basis. These include:
- Being able to opt out of the one off charge for the past. Where a person has opted out and it transpires there were UK tax liabilities that should have been subject to the charge (or disclosed) HMRC will look to recover all taxes owing as well as enhanced penalties or criminal prosecution.
- Being able to opt for an alternate basis of calculating the one-off historical charge (broadly, to pay 21-41% on UK source income and gains and amounts remitted, rather than on the full account balance)
- The withholding tax going forward will only apply to UK source income and gains or remittances to the UK.
- Confirmation needs to be provided to the Swiss bank by an accountant, tax advisor or lawyer who is a member of a professional body, that the account holder is a non domiciled person.
- There are a number of exclusions from the agreement whereby any person subject to the withholding tax will be treated as having made a payment on account rather than having full clearance. These include taxpayers under enquiry by HMRC at the time the treaty comes into force. This applies to all enquiries and is not, for example, only restricted to cases of suspected serious fraud as is the case with the Liechtenstein Disclosure Facility (LDF).
- The agreement does not provide a guaranteed immunity from prosecution. In a side letter to the agreement, HMRC set out that a person is highly unlikely to be the subject of a criminal investigation by HMRC for a tax related offence for past tax liabilities in respect of the Swiss assets unless the assets represent the proceeds of crime (other than crime connected to a tax-related offence) or represent the proceeds of crime connected to criminal tax-related offences punishable by two years or more imprisonment. Cases of tax fraud (e.g. extraction of profits from a UK business that are deposited in Switzerland) would appear to come within this exclusion as such cases would normally carry a term of greater than two years.
- Switzerland will collect data on the destination of funds withdrawn from the country following the announcement of this agreement, and will share that data (for the top 10 jurisdictions funds have moved to) with the UK. Any third country offering itself as a “safe harbour” for tax evaders will find itself under very significant global pressures. Those persons who consider this strategy are going against the global trend towards more and not less transparency and are therefore taking a gamble they will be able to avoid detection. The fact many offshore financial centres have signed up to information exchange agreements with OECD countries, as well as the crackdown by several tax authorities on tax evasion across the globe, highlights the risks.
- The agreement will enable provisions for enhanced exchange of information between UK and Switzerland for any new assets deposited in Switzerland. HMRC will be entitled to request information for individuals who they suspect of holding a Swiss bank account. HMRC will not need to name the bank but will be obliged to give the name of the person and the reason for their request. The number of requests will be up to a maximum of 500 per year, for the first three years.
- An Inheritance Tax levy is introduced which applies on the death of a relevant person. The levy is 40% of the relevant assets at the date of death. This levy will not apply if the personal representatives authorise the Swiss bank to disclose the account details to the UK. Also it will not apply if it can be certified that the deceased person was not domiciled within the UK and was not considered as deemed domiciled for IHT purposes in the UK (Additional Protocol - 18 April 2012).
- It is likely that many UK persons with Swiss assets will now be contemplating a disclosure (or withholding). For a large number of UK taxpayers the LDF is still likely to be the most appropriate (and cheaper) route. The key immediate benefits of the LDF seem to be a guaranteed immunity from prosecution, the use of the composite rate option (which from our experience to date can reduce the size of the tax liability substantially), being able to resolve worldwide undisclosed assets and achieving certainty for the future.