A new tax agreement between the tw o countries was forged in the final months of 2011 but what does it mean and who does it apply to? Will the new agreement see your clients face an unexpected tax bill?
Following the initial announcement, on 25 August 2011, of a proposed agreement between the UK and Swiss Governments regarding greater tax transparency between the two jurisdictions, speculation was ended when the formal UK-Swiss Confederation Taxation Cooperation Agreement was signed on 6 October 2011.
With the introduction of the Agreement planned for 1 January 2013, the details are now available to allow those who might be affected to understand its terms, including its scope and extent and how it might result in taxes becoming due to the UK HM Revenue & Customs (‘HMRC’).
The Agreement is purposefully designed to address two aspects for those affected by it:
• The correction of previous UK tax positions; and
• The introduction of regime to take accent of future UK tax liabilities
who is affected?
The Agreement applies to any ‘relevant person,’ who is someone who is either UK resident or who maintains a ‘contractual relationship‘ with any Swiss ‘ paying agent.’ The Agreement is designed to apply to those people who are either the direct account holders and also those who may only be indirectly the account holder, but who are the actual beneficial owner of any accounts or assets.
In the case of foundations, trusts, companies and the like, or the indirect operation of accounts on a third party basis, then a ‘relevant person’ may be anyone identified as part of any due diligence work undertaken by the Swiss paying agent.
The Agreement requires the paying agent to assess the relationship with the relevant person for the application of the Agreement. A ‘paying agent’ is, generally, a Bank or any person or institution investing or transferring assets in the course of their business.
The intention of the Agreement should be seen as drawing widely the definition of both ‘relevant person’ and ‘paying agent’ to extend its application as far as is possible to as many financial relationships between UK residents and Swiss financial intermediaries as possible.
What are the effects of being within the agreement?
To address the correction of previous UK tax liabilities, the Agreement requires a one-off levy being applied to relevant assets held within an account or similar at 31 December 2010. The levy rates are variable and range between 19% and 34% of those relevant assets. However, if a relevant person wishes to avoid the application of this levy, they can opt out by making a disclosure to the Swiss tax authorities, with that disclosure then being made available to HMRC in the UK.
The regime to take account of future liabilities bears certain similar features to
the past corrections regime in that there is a withholding tax levy applied, in the case of future liabilities ranging from 27% to 48% of annual income or gains dictated by the nature of the underlying income or gains. Also, and similar to the past corrections regime, there is an ability to opt out of the withholding tax levy regime if authority is given to the Swiss paying agent to make disclosure to the Swiss tax authorities for subsequent exchange with HMRC in the UK.
It seems clear that the potentially unattractive withholding tax levy rates, whether for the past corrections regime or the future compliance regimes, are set at levels to encourage account and asset holders to consider disclosure to UK HMRC through the opting out mechanism.
This in turn raises the question about the UK tax implications for those account and asset holders who are UK resident but who are of non-UK domicile status and who have invested funds or assets in Switzerland for perfectly legitimate structuring of their tax and financial affairs on a worldwide basis.
It is, initially, for the Swiss paying agent to make a judgment on the application of the Swiss Agreement to clients and it requires this judgment to be exercised by considering the due diligence data relating to clients and gathered by the Swiss paying agents as part of their due diligence processes. Where that data shows the underlying client, beneficial owner or similar to have their private address within the UK, then the Agreement assumes them a UK resident for the purposes of the Agreement. The Swiss paying agent will categorise those clients as UK resident and deal with them within the Agreement as UK resident.
This results in, potentially, many cases where an account or asset holder is identified as being UK resident by virtue of their principle address, but where that person is in actual fact a non-UK domicile. In those instances, the Swiss paying agent can accept claims of non-domicile status from such clients only on the provision of a certificate produced by either a lawyer, accountant or tax adviser confirming both that the person concerned is a non-UK domicile status taxpayer and also that the person concerned claims the remittance basis of taxation in the UK. There is a detailed checking and verification process the UK professional must undertake to provide such non-domicile certification and such certification must be provided to the paying agent in Switzerland no later than 31 May 2013.
What if UK disclosure is the preferred route?
As can be seen, there is speculation the levy rates used and the application of those levy rates is designed to encourage UK resident Swiss account and asset holders to opt out of the levy regime by authorising the Swiss paying agents to provide information to the Swiss authorities for provision to UK HMRC.
When this authorisation is given to the Swiss paying agent, then the following needs to be provided, ultimately, to the UK’s HMRC:
• Name, address and date of birth of the account or asset holder
• The UK tax reference number of the account or asset holder
• Full name and address of the paying agent in Switzerland
• Customer or client number for all relevant accounts
• Annual account balances or statement of assets held between 31 December 2002 and 1 January 2013
The clear expectation of HMRC is that any client opting to allow the Swiss authorities to provide this information will be either planning, or will be well advanced discussing any failures in their tax affairs associated with Swiss accounts or assets with HMRC.
Another important aspect of the Agreement that must be understood is the treatment of funds or assets withdrawn from Switzerland, or transferred and bound for any other jurisdiction.
What the Agreement allows is for the Swiss to provide to HMRC details of where funds or assets are transferred for the 10 jurisdictions most common or ‘popular’ for such transfers between 6 October 2011 and 31 May 2013. While one can only speculate about the need for such a clause, the belief is that this will allow HMRC to track the destination of such funds with a view to further negotiations with these jurisdictions about other potential agreements.
What does UK disclosure involve?
With the new Agreement not taking affect until, at the earliest, 1 January 2013, many holders of Swiss accounts or assets will be taking stock of their affairs and asking themselves this question.
If disclosure to UK HMRC is needed, then there are some vital aspects of the Agreement that should be borne in mind.
The first peace of mind aspect is that HMRC have provided comfort via their accompanying material that, so long as a client opts for either the one-off levy regime or authorises disclosure to HMRC, then HMRC are ‘unlikely’ to seek criminal prosecutions for any tax failures or irregularities so long as that client cooperates with HMRC in the making of their full disclosure.
The facilities that HMRC make available for UK based disclosure of tax irregularities also present themselves as possible should a UK disclosure of tax failure be necessary, after considering the extent of Swiss account or asset holding.
The ‘Civil Investigation of Fraud’ process is available for anyone with tax errors or failures within their affairs, Swiss-related or not, and this process offers certain comfort for clients who use it. The main comfort obtained by using this mechanism is the undertaking given by HMRC when using this process that the tax failures forming part of any disclosure within this process will not be used as a basis for any level of criminal prosecution for those tax failures. This assurance clarifies explicitly for clients that they can come forward and make disclosures securely and with certainty on how they will be treated by HMRC.
Also potentially available to clients needing to make UK disclosures following a review of Swiss assets and accounts is the Liechtenstein Disclosure Facility or ‘LDF’.
While needing certain features to be in place, for example the holding of Liechtenstein ‘property’ (i.e assets, accounts etc), the LDF allows for the transfer of funds to Liechtenstein to create the necessary property, so long as the relationship with Liechtenstein is ‘meaningful.’ Armed with the necessary features, the advantage of disclosures made via the LDF is that the extent of historical disclosures, potentially, can be much reduced compared to other HMRC mechanisms. There are also other certain attractions around composite tax rates and potential penalty charges. The LDF is, however, not appropriate for everyone.
In considering the need for UK disclosure, clients should take stock of the full array
of possibilities available to them and consider in detail what are serious and, sometimes, complicated implications, both financial and personal.
It is perhaps comforting that the real affect of the Swiss agreement will not be felt until 2013, giving people affected a proper amount of time to take stock of their positions and to consider fully all of the options available to them.
