On 6 October 2011, the UK and Swiss Governments signed an agreement which allows HMRC to tax funds held by UK-resident individuals in Switzerland, while preserving Swiss banking secrecy. The agreement affects all UK residents with relevant assets in Switzerland, whatever their UK tax compliance position. Special rules apply to non-UK domiciled individuals. The agreement is in two parts:
First, if you take no action before 31 May 2013, your bank will deduct a one-off payment of between 19% and 34% based on your capital balances at 31 December 2002, 2010 and 2012. This sum is paid anonymously to HMRC. It clears all Income Tax, Capital Gains Tax, Inheritance Tax and VAT (incurred by an individual) prior to 1 January 2013 connected to the relevant assets. It does not clear most tax liabilities incurred by a company. This part of the agreement applies to assets and accounts which were open on 31 December 2010 and are still open on 31 May 2013.
Second, if you take no action by 31 March 2012, your bank will apply a “final” withholding tax on any income and gains arising on your capital from 1 January 2013. The rate of withholding tax is broadly equal to the relevant rate of UK tax. The tax will be paid anonymously to the UK and clears Income Tax and Capital Gains Tax liabilities on such income and gains.
Although you have until 31 May 2013 to consider how the one-off payment provisions apply to you, you should look at this promptly as there may be benefit in taking early action. With regard to the final withholding tax, you will need to take action by 31 March 2012.
MY UK TAX AFFAIRS ARE UP TO DATE – HOW DOES THIS AFFECT ME?
You can opt-out of paying the one-off payment by notifying your bank if you were non-UK domiciled at 31 December 2010 and claimed the remittance basis of taxation in tax years 2010-2011 or 2011-2012.
However, HMRC have indicated that they will prosecute and impose heavy fines or penalties if this opt-out process is abused. You must therefore be comfortable that you do not have any undeclared historic UK tax liabilities before opting-out.
In particular, you will need to check to make sure that, if you have a structure around your assets to take advantage of the UK tax benefits of being non-UK domiciled, the structure has been properly operated at all times. For example, you will need to check to make sure that there have been no actual or constructive remittances of overseas income or gains to the UK of any kind.
You should engage a professional adviser to help you with this process. Your adviser will need to certify your position to the bank, including providing assurance that your non-dom status is not being disputed by HMRC.
What if I do nothing?
If you do nothing at all, the bank is required to apply the one-off payment on 31 May 2013.
When must I do this by?
Your bank is required to contact you formally after 1 January 2013 and you must provide the bank with the required certification by 31 May 2013. However, many banks are already having informal discussions with their clients. You should review your position as soon as possible. If you discover during this review that you have undeclared liabilities for the past, it is better to know that as soon as possible for the reasons given below.
YOUR OPTIONS IF YOU HAVE HISTORIC TAX TO PAY
If you have undeclared tax liabilities, you have three options:
- Option 1 (“the Self Assessment Method”): You can self-assess to the bank the amount of income and gains arising between 1 January 2003 and 6 October 2011 which should have been taxed. The bank will apply a 34% charge to that sum and pay this anonymously to HMRC.
- Option 2 (“the Capital Method”): You can allow the bank to apply the standard one-off payment of between 19 and 34% based on your capital balances on 31 December 2002, 2010 and 2012. Again, this is paid anonymously to HMRC.
- Option 3 (“the Disclosure Method”): You can contact HMRC to make a disclosure of the issues and instruct the bank to share your data with HMRC rather than levy any payment. You may be able to use a special facility called the “Liechtenstein Disclosure Facility” (LDF).
Which option should I choose?
You will need to consider what you value most out of tax cost, anonymity and certainty.
- Option 1: This option will maintain your anonymity but may not give you certainty. It may also result in a higher tax cost than Options 2 and 3. This option only clear liabilities arising after 1 January 2003. It only allows you to clear tax liabilities in your name and not liabilities for a company you may be connected to, for example where an offshore company has UK tax liabilities due to being controlled from the UK. It is available only in respect of assets located in Switzerland as at 31 December 2010 so cannot be used to clear undeclared liabilities connected to other countries.
- Option 2: Like Option 1, this option also lets you maintain anonymity, but again may not give you certainty. This option will be of value over Option 1 where it results in a one-off payment which is less than that computed under Option 1 or where you have liabilities which arise before 1 January 2003. As with Option 1 only tax liabilities in your own name are cleared and it applies only to Swiss assets.
- Option 3: This option provides you with certainty (provided you disclose all of your irregularities) but you lose your anonymity as you need to contact HMRC. It may result in a lower tax cost than Option 1 or 2. Depending on your circumstances, you may wish to consider using the LDF to make your disclosure. Under the LDF, HMRC agree not to collect tax arising before April 1999, rather than the normal look back period of 20 years in cases of fraud. The LDF can be used to settle all tax liabilities, including those relating to companies, trusts and foundations, and to assets held outside Switzerland. It can also be used to obtain agreement from HMRC on your domicile position and to the re-segregation of income and capital accounts which have become mixed. No pre-existing connection with Liechtenstein is required.
If you can clear all your historic liabilities using Options 1 or 2 at a lower tax cost than under Option 3 but you want certainty of treatment, it may be possible to achieve this is you are prepared to lose your anonymity after the bank has taken the one-off payment. The bank will provide you with a certificate and it may be possible for you subsequently to approach HMRC to seek their confirmation that you no longer have any historic tax liabilities.
Is there a prosecution risk?
Options 1 and 2 only give you assurance that prosecution is “highly unlikely”. The LDF (Option 3) gives you formal immunity from prosecution. In both cases, no protection applies for those involved in non-tax related crimes.
I have undeclared assets outside Switzerland. Are they covered?
Not under Options 1 and 2. They can be covered under Option 3.
If I choose Option 3, do I have to disclose my entire worldwide wealth?
No – you only need to disclose details of assets where there are related UK tax liabilities.
What if I close my account before 31 May 2013?
The agreement will not apply to you. However, if you have undeclared UK tax liabilities the problem will not go away. The Swiss authorities must provide HMRC with details of the ten most popular destinations for assets moved out of the country. The international community is likely to bring pressure to bear on those countries which it perceives to be assisting taxpayers to evade tax.
When do I need to take action by?
You must let the bank know what you want to do by 31 May 2013 at the latest, but it may be better to take earlier action.
What happens if HMRC contacts me first?
If HMRC makes contact with you before you instruct the bank to make a one-off payment, you lose the ability to regularise your position under the agreement. The agreement envisages that you can instruct the bank to make the one-off payment at any time (although any such instruction only becomes irrevocable on 31 May 2013). You should therefore consider making an early instruction.
There is ambiguity about whether you also receive assurance about criminal prosecution with an early instruction, which we are trying to resolve with HMRC. If you are concerned about prosecution, you obtain immunity from prosecution under the LDF as soon as you register, and the facility is open now.
You are precluded from using the LDF if, before you register, HMRC issues you with its “Code of Practice 9″ procedure (used to investigate suspected serious fraud) or you are arrested as part of a criminal investigation.
If you want absolute certainty about your treatment at the earliest possible time, making an early registration under the LDF is the only option.
FINAL WITHHOLDING TAX FOR THE FUTURE
Will the final withholding tax from 1 January 2013 apply to me?
The withholding tax will apply to income and gains arising on assets held in Switzerland after 1 January 2013. As a non-dom, you are able to opt-out of the withholding tax by allowing the bank to share data on your income and gains with HMRC.
What if I want to retain my anonymity?
If you wish to retain your anonymity, you may elect for the withholding tax not to apply to non-UK sourced income and gains which are not remitted to the UK. If you use this option, the bank still needs to apply a withholding tax to any UK-sourced income and gains you receive, or foreign-sourced income and gains paid directly by your Swiss bank to a UK bank or paying agent.
You pursue this option by providing your bank with certification from a qualified UK professional adviser that you are in fact non-dom and that the adviser is not aware of any dispute about your status with HMRC.
You will also need to confirm that you intend to claim the remittance basis for the relevant tax year when you file your tax return. You must do this by 31 March prior to the tax year in question. So, for the tax year 2012-2013 (which is the first tax year in which the withholding tax will apply), you must file this intention with the bank by 31 March 2012.
Before 31 March following the tax year in question, you will need to provide your bank with proof that you did in fact file on that basis and paid the “non-dom levy” if it applies to you.
If you do not provide this proof, the bank will need to apply a retrospective, higher withholding tax. If you do not have sufficient funds with the bank to meet this liability, the bank is required to disclose your details to HMRC.
GENERAL
Does the agreement apply to all assets in Switzerland?
The agreement applies to all forms of bankable asset. It does not apply to real property, chattels, the contents of safety deposit boxes and certain insurance contracts. It applies if the assets are held by you directly or indirectly (for example through a company) and you are the beneficial owner. It does not apply to genuinely discretionary trusts that have been operated as such. Some banks are questioning whether it applies to trusts with a defined class of known beneficiaries and we are seeking clarification on this.
Does the agreement need to be ratified?
Yes, the agreement needs to be passed into law by both countries, and it is possible that the terms could change during this process. If there is any delay in this process there may be knock-on consequences for the timetable outlined above.
At McGrigors we have one of the leading tax teams in the UK, comprising tax advisers, investigators and lawyers. All discussions are on a confidential basis in a legally-privileged environment. We have in-depth knowledge of offshore tax issues and can help you to make informed choices about how you should proceed, and can provide non-domicile certification if needed.
Download the whole guide as a pdf-file here.
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