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  1. Wealth
September 25, 2013

HMRC is disappointed with UK-Swiss tax agreement, but were expectations unrealistic?

By Spear's

The government hoped to extricate £3.2 billion from UK-held bank accounts in Switzerland, but only £747 million has been received so far

Recent press reports have suggested that the UK government’s efforts to extricate undeclared assets hidden in Switzerland have been a failure – but is this really the case?

The objective of this agreement between UK and Swiss governments to collect tax from accounts held in Switzerland by taxpayers based in the UK, which began two years ago, was to ensure that the accountholders either declared the accounts for UK tax purposes or had amounts taken from them to compensate the Treasury for the unpaid tax.

The agreement gave Swiss bank accountholders with UK addresses the option of permitting the banks to pass the accountholders’ details to HMRC. If they failed to give this permission, the bank deducted one-off payments from their accounts on 31 May 2013 on behalf of HMRC.

The payments were calculated using a complex formula, which assumed that the profits generated by the accounts had never been declared to HMRC. The agreement also provided that (unless accountholders authorised the release of their details to HMRC) the bank will pay over a proportion of any profits generated going forwards.  

Figuring out the results

Recent reports focus on the fact that the agreement was predicted to generate £3.2 billion, but in fact only £747 million has been received to date. This figure would appear to represent the total of the one-off payments levied from accounts on 31 May. But was £3.2 billion ever realistic, and is this the right measure by which to judge the success of the agreement?

Pictured left: George Osborne

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It is hard to see how HMRC could have made their initial estimate. The accounts concerned are by definition ones they know nothing about. Even if their estimate of the Swiss accounts had been correct, it would have been hard to know how many were in the names of UK based individuals paying tax on the regular ‘arising’ basis.

But it would have been impossibly hard for a formula to be devised which dealt fairly with the position of accountholders who are resident, but not domiciled in the UK, and who pay tax on the ‘remittance’ basis, because their liability to UK tax depends on the amounts they bring into the UK.  

Another difficult category is that of UK resident beneficiaries of discretionary trusts holding Swiss accounts – their liability generally depends on the level of distributions they receive. Trustee accounts were therefore largely put outside the scope of the agreement and it gave ‘opt outs’ to resident non domiciled accountholders.  

Liechtenstein Disclosure Facility

Another undoubted factor is the existence of other ways of dealing with undeclared funds. The Liechtenstein Disclosure Facility (or LDF) can (subject to the taxpayer making a ‘connection’ with Liechtenstein) be used where the funds are held in Switzerland or anywhere else in the world.  

Regularising funds via this route can often be less expensive than the one-off payment under the UK/Swiss agreement and gives immunity from prosecution. However it does require the taxpayer’s name to be passed on to HMRC.  

The LDF is bringing in more tax than the HMRC estimated (they upgraded their 2009 estimate of £1 billion to £3 billion in 2012). Over £600 million had been received as at March 2013 and, judging by the number of registrations now in the course of being dealt with, there may be a similar amount in the pipeline.  

It seems misguided to dub the UK/Swiss agreement a failure simply on the grounds that its initial target has not been met, given that the unpaid tax on many additional accounts is being settled via another route.

In any event, the bigger prize may be the increased publicity given to the obligations of UK taxpayers.   Though it is perhaps disappointing that the immediate take under the agreement has not been greater, it is good to see that the initiatives are drawing taxpayers into greater compliance. 

Judith Ingham, Partner, Withers LLP, Zurich 

Read more on the law from Spear’s 

Read more on tax avoidance from Spear’s



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