Individuals who are resident in the UK are obliged to pay tax on their worldwide income, although non-UK domiciled persons can claim the remittance basis of taxation, where they pay tax on UK income and capital gain but only on any foreign income and capital gains that they bring into (or ‘remit’) to the UK.

The most basic form of tax evasion is not to declare one’s foreign income and gains to HMRC and keep them in an offshore bank account. For years Switzerland has been the destination of choice for tax evaders, with its strict bank secrecy and lenient treatment of conduct falling short of blatant tax fraud.

However, recently the Swiss Confederation has joined a host of international tax information exchange agreements. The latest is the Swiss/UK Tax Cooperation Agreement, which became law on 1st January 2013.

It applies to all UK residents who keep financial assets — no matter how small — in Swiss bank accounts or who are the beneficial owners of such assets held by Swiss companies, trusts, foundations and insurance wrappers.

The Agreement allows individuals whose Swiss assets constitute undeclared income and gains to settle their past UK tax liabilities while retaining anonymity, although a person who is under investigation for a tax-related offence generally cannot benefit from its terms. Also, assets such as Swiss real estate, contents of safes and chattels are outside the scope of the Agreement, and their owners should pursue different tax settlement opportunities.

The Agreement should be read together with the Swiss/EU Savings Agreement and Liechtenstein Disclosure Facility, which also regulate personal taxation and provide additional disclosure opportunities.

Who is affected?

A person will be deemed resident in the UK if they used a British passport to open an account, unless their bank is presented with a tax residence certificate issued by a non-UK tax authority. Also, anyone with a principal private address in the UK based on the Swiss banks’ records will be considered UK resident. This might be an issue for some UK expatriates who, by failing to notify their Swiss banks of their departure, unwillingly might be subject to the effects of the Agreement.

The Agreement applies to both compliant and non-compliant UK residents. They can choose between subjecting their Swiss assets to a one-off payment and authorising their bank to provide details of their Swiss assets to HMRC.

The choice is irrevocable and should be communicated to the bank before 31st May 2013. If the taxpayer does nothing, even if their tax affairs are in order, the bank will deduct the one-off payment. If the person chooses anonymity they will also suffer a withholding tax on their Swiss assets.

However, one can authorise the disclosure and avoid levying of the tax.

Different choices can be made in respect of individual’s separate accounts (but not sub-accounts) even if opened at the same bank.

How much will it cost?

Only the taxpayers whose Swiss bank accounts were open on 31st Dec 2010  and stay open until 31st May 2013  can choose to make the one-off payment. Its rate is 34% of the account balance, calculated using a formula based on capital and income/gains, the length of time that the account was held and the rate of balance increase over the years. The effective rate will range between 21–41%.

According to ICAEW, the lowest rate will apply if the account was set up in 2003, and the bulk of the funds now in the account were already there in 2003.

The bank will deduct the payment on 31st May 2013 and remit it to HMRC in full satisfaction of income, capital gains, inheritance tax and VAT, together with interest and penalty on unpaid tax in respect of the amounts in the account.

However, any withdrawals made prior to 31st December 2010 will not be covered and may be liable to tax. If the funds in the account on 31st May 2013 are insufficient to cover the payment amount, the individual will have eight weeks to replenish them, failing which the bank will automatically pursue the disclosure option.

If the taxpayer dies on or after 1st January 2013, the assets in the account will suffer a 40% levy representing UK’s inheritance tax liability. Personal representatives can avoid it by authorising the bank to make a disclosure or demonstrate that the person was not liable to the tax.

In addition to the one-off payment, the bank will levy a lifetime withholding tax on income and gains that arise on investments held in the Swiss bank accounts after 1st January 2013.

The rates are slightly lower than those chargeable on the top slice of income and gains in the UK — 27% on capital gains, 40% on dividends and 48% on interest and other income; the latter probably to be decreased in light of the 45% top rate announced in Budget 2013. Withholding tax will apply annually until the person authorises their bank to make a disclosure.

Other options

As an alternative to both of these charges a taxpayer can authorise their bank to disclose full details about their Swiss assets to HMRC. This should be accompanied by a voluntary disclosure directly to HMRC. However, the disclosure should only be authorised after taxpayer becomes certain that there are no material discrepancies in the information held in Switzerland and the UK.

If there is an outstanding tax liability discovered following the disclosure, HMRC will seek unpaid taxes with interest and penalties. However, HMRC has stated (with lots of qualifications) that if a taxpayer fully cooperates with them, that person is highly unlikely to be subject to a criminal investigation by HMRC for a tax-related offence in respect of certain liabilities and assets. The same will apply to the person agreeing to a one-off payment.

Notably, no other authority besides HMRC has made this promise. Non-UK domiciled individuals who submitted tax declarations for the tax years 2010/2011 and 2011/2012 and claimed the remittance basis of taxation, and whose status is evidenced by a professional advisor, can choose the withholding tax to be levied only on UK source income and gains or the same remitted to the UK.

Additionally, they can opt out from the Agreement, maintain anonymity and avoid paying the one-off charge; however, this does not remove the withholding tax liability or remove the risk of future tax investigations and higher tax penalties.

Reasons to reveal

In making a choice under the Agreement, a taxpayer should decide whether anonymity is more valuable than the additional outlays that it will entail; particularly for lower-rate taxpayers. Also, the strict terms of application of the one-off charge may prevent it from applying to the full amount of unsettled tax liability.

HMRC’s growing sophistication in tracking tax evaders, particularly of its affluent unit, penalties of up to 200% of unpaid taxes, the risks of “naming and shaming” and criminal liability make disclosure attractive.

Some might choose to close the account before 31st May 2013 and move the assets outside Switzerland, thus escaping the effect of the Agreement. However, HMRC will have the list of top ten jurisdictions to which such funds will be remitted. It will be only a matter of time before HMRC will succeed in using UK’s extensive network of information exchange agreements and double taxation treaties with the same provisions to trace the assets and identify their owners.

Also, while HMRC declared that it will not actively seek to acquire customer data stolen from Swiss banks, there is little doubt that it will never refuse to receive it.

Dmitry Zapol is an international tax advisor at International Fiscal Services.