The UK government is about to sign a landmark agreement with Switzerland which will oblige Swiss banks to tax interest payments made to UK taxpayers. As part of the deal thousands of Swiss bank a
The UK government is about to sign a landmark agreement with Switzerland which will oblige Swiss banks to tax interest payments made to UK taxpayers. As part of the deal thousands of Swiss bank account holders will probably also pay millions of pounds to HM Revenue & Customs (HMRC) in backdated taxes on previously undeclared interest income. The days of hiding money in Switzerland are long over and legitimate approved tax planning arrangements are the only way forward.
Last October the UK and Swiss governments signed a joint declaration to work towards taxing UK owned Swiss bank accounts. At the time negotiations were expected to commence early this year. It has now been reported that the head of HMRC, Dave Hartnett, has told tax experts that the terms of the new agreement will be announced in May.
The Treasury estimates that UK taxpayers have ?125 billion hidden in Swiss banks. The interest earnings are not being declared and therefore not being taxed by HMRC. This deal with Switzerland will therefore be a lucrative victory for the UK authorities. It has been estimated that the Treasury will earn between ?3 billion and ?6 billion over the next few years as a result of the deal ? but it could be even larger, especially as more years go by as it will bring many people back into the UK tax system so they will then continue to pay tax every year from now on.
The government has not yet commented on the deal other than to say that it should be confirmed soon but an article in The Sunday Times included a list of terms supplied by tax advisers familiar with the discussions.
It is expected that Swiss banks and other financial institutions will start to deduct a withholding tax from interest and dividend payments. There was speculation that the tax rate would be between 25% and 35%, but on 2nd May the Financial Times reported that, according to a source familiar with the negotiations, the withholding tax rate will be 50%, though we do not have official confirmation yet.
Even 25%-35% tax would be a big enough deterrent to make people think twice about hiding funds in Switzerland, let alone 50%.
While this withholding tax will apply from the start date, it is reported that investors will have to pay a separate one-off levy in recognition of past unpaid taxes.
Swiss Finance Minister Hans-Rudolf Merz had acknowledged the possibility of this levy in October, when there was also talk that inherited accounts could be targeted. Many people who choose to evade tax by hiding money offshore do not consider the implications for their heirs.
As part of the agreement, Swiss banks will start to oblige all British clients to supply evidence that their bank accounts comply with the UK?s tax system.
The money collected in withholding taxes will be collectively handed over to the UK Treasury and will not include any details of who has paid them. The deal therefore allows the UK to collect tax on Swiss bank accounts and at the same time allows Switzerland to retain its banking secrecy.
Having said this, banking secrecy is not as tight as you may think. The agreement will oblige Swiss banks to hand over financial details on individual accounts in situations where HMRC makes a specific request and can demonstrate that a Swiss bank has been used to evade taxes. In October it was reported that HMRC will not need to provide the bank account details ? they just need to provide the individual?s name and the Swiss authorities will trace the bank account.
Switzerland has been keen to sign a deal with the UK after the Liechtenstein Disclosure Facility (LDF) resulted in many people transferring bank accounts from Switzerland to Liechtenstein in order to regularise their accounts without huge penalties? and before the government found them and charged them with tax evasion.
The LDF allows UK taxpayers with undisclosed assets there to pay a reduced penalty of 10% – significantly lower than normal penalties can be – in return for coming clean about their offshore accounts. It is turning out to be more popular than originally expected. In January it was reported that it could earn the UK government ?3 billion, much higher than the ?1 billion previously expected.
At the end of last year HMRC made its first two arrests in its current offshore tax evasion crackdown, and it was for failing to disclose Swiss bank accounts. It is believed the UK got the information from data stolen by an ex-employee of the bank in question which was handed over to the French authorities. Since EU countries now share tax information data, UK taxpayers included on the list was passed on to the UK tax authorities.
Other countries benefited from the stolen data. Spain, for example, were reportedly able to investigate 3,000 Swiss bank accounts and by the end of January had collected around ?300 million as a result.
In January Hartnett warned that: ?Everyday HMRC exposes more money hidden offshore. So burying your head in the sand is becoming a very expensive and risky option.?
Increasingly people in the UK and other countries are turning to voluntary disclosure as they realise that it is only a matter of time before they are caught. The only way to lower your tax bill is through professional guidance and legitimate tax planning arrangements. For reassurance that you are not paying more tax than you need to and that your tax planning is compliant, speak to a tax and wealth manager like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
3rd May 2011