From HMRC with love

I recently moved to Geneva and some of the nightlife around here has got me thinking about the 70s. As a child of Thatcher who doesn’t remember anything before the Falklands War, I like to think that, back in the day, there were three types of private client: those who raced horses, those who raced dogs and those who did both. They worked for their family business or not at all and they played at Aspinalls. Any one of them could have walked onto the set of one of the more outré cold war spy thrillers and not looked out of place and, without fail, they banked in Switzerland.
 

Numbers game
 

Let’s not be squeamish, some did this because it was a place to hide money, but many were attracted by the Rolls-Royce service, the proximity of the slopes, and frankly, because a cheque book from a foreign sounding bank no one had heard of was the thing to have. What could be more desirable than an account which didn’t have a name, only a number, and a bank which was overlooked not by Nelson’s Column, but Mont Blanc.
 

Where are these clients now? Well, still with us, most of them. Less fashionable maybe, but more distinguished, and though most of them never owned a Red Rum or Mick the Miller, in many cases they still have their Swiss accounts, and Switzerland has continued to attract billions of new assets from UK clients thanks to its security, expertise and service.
 

Now, with the advent of the UK/Swiss tax agreement, these clients are going to need some help. Much of the focus has been on the impact of this agreement on tax evaders, but of more immediate interest to many of us will be the impact it is going to have on the compliant majority.
 

So, what is the agreement? The UK and Swiss governments have signed a bilateral agreement which will be implemented in domestic legislation and is expected to come into force on 1 January 2013. The arrangements will be looked after by the Federal Department of Finance in Switzerland and Her Majesty’s Revenue & Customs (HMRC) in the UK. The agreement runs alongside and does not replace disclosure facilities available to UK taxpayers, such as the Liechtenstein Disclosure Facility (LDF).
 

The background to the agreement is the UK’s desire to collect tax and Switzerland’s wish to be able to continue to offer clients banking secrecy. The agreement seeks to replicate the tax collecting benefits of information exchange, while allowing Swiss banks to offer their clients banking secrecy, by offering a blunt choice. Clients must choose automatic information disclosure (allowing HMRC to make checks) or opt for an automatic tax on historic and future liabilities.
 

The agreement deals with historic liabilities and future liabilities separately, but in both cases compliant clients are affected. Even a fully compliant taxpayer will be charged in respect of historic liabilities if they do not opt for information about their account to be given to HMRC. To the extent the automatic taxes are greater than the tax due, this is the price of banking secrecy.
 

Pinning down
 

The agreement affects all cash or investments held in Swiss accounts where the direct or indirect beneficial owner is a UK-resident individual. Or in the language of the agreement, it provides for the tax regularisation and future effective taxation of ‘relevant assets’ held by ‘relevant persons’ with ‘Swiss paying agents’.
 

‘Swiss paying agent’ includes more or less any legal person in Switzerland that deals with assets of third parties or makes secure payments of income or gains as part of their business. The range of assets affected is broad and includes precious metals and derivatives. The contents of safe deposit boxes are left untouched, but investments held within ‘insurance wrappers’ are not.
 

One must then look to the beneficial owner of the assets and see if they are UK resident. Beneficial ownership is determined in accordance with Swiss client due diligence rules and beneficial owners of assets held through non-commercial structures such as trusts, foundations and holding companies can be included. Discretionary beneficiaries of trusts or similar structures may not be included but such cases will need to be looked at in the light of HMRC guidance. Persons who are themselves merely intermediaries are not covered, provided the true relevant person can be identified.
 

Whether a potential relevant person is UK resident for the purposes of the agreement does not depend on whether they are resident under UK tax rules, but is again decided by reference to client due diligence rules. It seems possible that some non-UK taxpayers could be caught by the agreement, which they will want to avoid.
 

Within two months of the entry into force of the agreement, the paying agents will give notice to relevant persons about the agreement which bites on ‘appointed date 3’, five months after the agreement comes into force. On appointed date 3, all accounts of relevant persons will be subject to a one-off charge of between 19 per cent and 34 per cent of the account (determined according to an incredibly complex formula in schedule 1 of the agreement and mainly affected by how much has been deposited for how long). This charge will not apply if the client permits the Swiss to disclose detailed information including annual statements of assets for the last ten years.
 

If the charge is applied, the taxpayer will have no further liability to income tax, capital gains tax, inheritance tax or VAT or interest, surcharges or penalties for those assets for the period before the entry into force of the agreement. The payment will not always satisfy tax liabilities where there is, or has been, a tax investigation, or where the assets derive from crime (other than tax evasion).
 

The way the agreement applies to non-UK domiciled clients has been an area of confusion. As far as the one-off payment is concerned, a non-dom appears to be able to opt-out altogether (though ambiguities remain). A person is non-UK domiciled for these purposes if they were not domiciled in the UK on 31 December 2010 and they claimed the remittance basis for 2010/2011 or 2011/2012. They will need an adviser to certify this.
 

Going forward

The agreement then deals with future liabilities. Clients can choose ongoing information disclosure, or they can choose to maintain their anonymity, in which case profits will be subject to a withholding tax. The rates of tax are 48 per cent (interest), 40 per cent (dividends), 48 per cent (any other income) and 27 per cent (gains).
 

The withholding tax only applies to non-UK domiciled taxpayers where income has a UK source or where foreign income or gains are transferred directly to the UK and the taxpayer informs the agent that it is taxable. ?Again certification is required.
 

We can expect to hear from any clients who have assets in Switzerland. They will need to decide how they wish to be treated under the agreement. Some will wish to pay for secrecy. Others will accept information disclosure and stick with Switzerland. Some may decide that their affairs do not justify the complications of a Swiss account. There is talk of tax evaders looking for somewhere else to hide. However, such jurisdictions may not be safe homes for wealth and similar pressure can be expected on them. Switzerland has agreed to let the UK know the top ten destinations for assets transferred.
 

Non-compliant colleagues would be well-advised to settle their affairs with HMRC before appointed date 3. HMRC is not offering a period of grace. The LDF is still available and will generally be preferable to the one-off payment. It offers limitation on liability to the last ten years, penalties of only ten per cent of tax due and immunity from criminal liability (there is no binding guarantee in the UK/Swiss agreement).
 

James Badcock is a partner in the Geneva office of Collyer Bristow