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December 9, 2011

LDF versus the UK-Swiss tax agreement

By Spear's

Swiss Rolled
 
 
Decision time looms for many taxpayers between the Liechtenstein Disclosure Facility and the new UK-Swiss agreement. Charles Gothard and Sangna Chauhan assess the choices

 
 
DODGING TAX IN
the UK is getting difficult. The list of countries which will accept untaxed funds and not ask questions is getting shorter. Moving money to one of those countries was recently described as ‘going to hell’ by Dave Hartnett, the UK permanent secretary for tax, who said he was quoting his Swiss counterpart.

In issue 20 of Spear’s we wrote about the Liechtenstein Disclosure Facility (LDF) and the unique opportunity it provides for non-compliant UK taxpayers. The LDF allows them to regularise their offshore assets (whether in Switzerland or elsewhere) by paying only certain taxes due during a limited period (April 1999 onwards), together with interest and a reduced penalty of only 10 per cent of the tax due. The take-up of the LDF has been encouraging: by 30 September 2011 there were 1,721 registrations and this figure is set to grow exponentially.

One of the key reasons for the increase in LDF registrations is the new, much-heralded UK-Swiss tax cooperation agreement, which was signed in October. The main details of the agreement have now been publicised and, in many cases, it’s obvious that the LDF remains a more attractive option for regularising historic UK tax liabilities. Most people with Swiss bank accounts who were delaying making LDF applications, in the hope that the agreement would provide an even better deal than the LDF, have been disappointed.

In our earlier article we predicted that the agreement would allow for the preservation of banking secrecy by allowing account holders to opt for withholding tax (instead of disclosing their account and paying tax at their marginal rate). We also suggested that Swiss banks would charge a one-off payment which would regularise any historic unpaid tax liabilities. Much of this has now been borne out. If UK-resident Swiss account holders do nothing, then at some point during 2013 the Swiss bank will levy a one-off payment of between 19 and 34 per cent of the account balance.

The agreement differs from the LDF in being forward-looking as well as dealing with historic non-compliance. For 2013 and subsequent tax years, taxpayers with Swiss accounts can choose whether to allow the bank to provide information to HMRC about those accounts, including the income and capital gains, or to pay withholding tax on the income and capital gains but preserve banking secrecy.

The withholding tax rates are broadly comparable to the current highest UK tax rates: 40 per cent on dividend income, 48 per cent on other types of income and 27 per cent on capital gains. In many cases allowing the withholding will be more expensive, in tax terms, than allowing reporting of the income and gains and paying tax on them through the self-assessment process. The withholding will also be expensive for the Swiss banks to administer, and it’s possible that some of the cost will be passed on in the form of bank charges to account-holders who take this option.

The treatment of non-doms under the agreement reflects their favourable tax treatment in the UK, but they must provide professional certification to the bank that they’re remittance-basis taxpayers (and therefore paying the annual £30,000 charge if they’ve been resident in the UK for seven or more tax years). They can then opt out of the one-off levy. For non-doms, the annual withholding tax is only due on UK source income and capital gains on UK assets (if any) and any non-UK income/gains remitted to the UK. Again, this treatment depends on professional certification of non-dom status and (where required) payment of the £30,000 charge, on an annual basis.

THERE ARE SOME
examples where the agreement may be more attractive than the LDF. However, for many the LDF will remain the better option. A scenario we regularly come across is that of an individual who has inherited an account from a parent, has failed to pay the requisite inheritance tax and has dipped into the funds occasionally. The 2013 one-off levy under the agreement for such an individual will often be 19 per cent of the capital value, whereas under the LDF it would often be about half that, and if an application is made now the individual is protected from an HMRC investigation and granted immunity from prosecution.

Those who want to take their chances and wait for 2013 run the risk of HMRC catching them in the meantime, resulting in tax being payable going back twenty years with a penalty of up to 150 per cent of the tax, plus interest charges and possible prosecution. Of some comfort to non-compliant taxpayers will be the announcement by HMRC that it will no longer ‘actively seek to acquire’ stolen data regarding Swiss bank accounts. This does not prevent HMRC from using the stolen data it had already got.

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Whichever route non-compliant taxpayers choose, in the face of increased activity from HMRC the message has to be act now or ‘go to hell’. 
 
 
Sangna Chauhan is a private client solicitor at Speechly Bircham LLP, and Charles Gothard is head of International Private Clients at the firm

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