Will the Swiss tax deal be full of holes?

Thursday, September 22, 2011 | Posted by: Dave Jennings
Categories: Personal, Protecting your wealth | Tags: tax planning, HMRC, offshore, income tax, Dave Jennings, tax havens, disclosure, investigation, banking, penalties, Liechtenstein Disclosure Facility, tax amnesty, Switzerland, savings, Liechenstein, evasion, Swiss, Tax Investigations, UK-Swiss deal

The new UK-Swiss deal clamping down on tax evasion is expected to drive UK investors into the arms of Liechtenstein – with significant tax savings possible through the Liechtenstein Disclosure Facility (LDF).

Following the high-profile announcement of an agreement between the UK and Swiss governments to levy a withholding tax on undeclared assets in Swiss bank accounts held by UK taxpayers, there have been reports that some Swiss banks are helping affected customers to move their funds to other offshore jurisdictions, such as Singapore. 

Is this really the best option for non-compliant Swiss account holders, though?

Undeclared funds held in secretive offshore tax havens always run the risk of an investigation by HM Revenue & Customs (HMRC) – and there is a real danger of criminal prosecution. The tax world is getting smaller, and the global financial crisis means that there is increasing international pressure on these low tax jurisdictions to ‘come in from the cold’.

Investors who are determined not to disclose their offshore assets may choose to play a game of cat and mouse with HMRC; constantly moving their assets around the world to avoid detection. This is now much more risky, however. Under the terms of the UK-Swiss deal, HMRC can ask for information on accounts held by up to 500 named individuals a year if funds have been transferred out of their accounts.

In trying to avoid the new withholding tax by syphoning off funds to other jurisdictions, taxpayers may be putting themselves at greater risk of investigation by HMRC.

It‘s also worth remembering that the Swiss arrangement can only apply to Swiss bank accounts. It is not a ‘tax amnesty’ for undisclosed accounts held in other countries.

What about Liechtenstein?
There is a better way to avoid the withholding tax, however. The majority of those with Swiss accounts will be eligible to make a disclosure under the terms of the Liechtenstein Disclosure Facility or LDF,which runs until March 2015.

The LDF offers extremely favourable terms for those with offshore bank accounts to come forward and make a disclosure to HMRC. These are as follows:

• Tax will only be charged on income and gains arising from April 1999 onwards (as opposed to the usual 20 years which HMRC is entitled to go back)
• A reduced penalty of 10% of the unpaid tax will be charged
• Provided a full disclosure is made, the LDF offers immunity from prosecution

In addition, by ‘legitimising’ previously undeclared offshore assets, taxpayers will be free to use the funds as they wish, without the fear that HMRC could catch up with them at any minute.

Our experience suggests that those disclosing under the LDF will on average only lose around 10% of the total capital value of their offshore assets. Compared to the 19% to 34% withholding tax that the Swiss authorities will charge, it is clear that some significant savings could be achieved by using the LDF. Any funds held in Switzerland, which have been fully disclosed to HMRC, will not be subject to the withholding tax.

The announcement of the deal with Switzerland is expected to dramatically increase the uptake of the LDF in the coming weeks and months. In addition, those with existing accounts in Liechtenstein will be contacted by their banks within the next few weeks, advising them of their obligation to make a disclosure of any undeclared funds to HMRC.

What if the LDF is not possible or appropriate for me?
If there are reasons why the LDF procedure has to be ruled out then a standard voluntary disclosure can be made to HMRC instead. This would still reduce the penalties or criminal prosecution that HMRC could bring and may actually be cheaper if there is no undisclosed income prior to 1999.

In summary, a calculation would have to be made as to the most advantageous ‘deal’. Another factor to consider is that the ‘do nothing’ option is a gamble that HMRC will not start a tax investigation in the meantime.

Help and advice
Our Tax Investigations team has years of experience in disclosures, defending investigations and disputes with HMRC. Do get in contact for a confidential, free initial discussion if you have any concerns.

Image (cc): Images_of_Money / TaxBrackets.org

You might also find these posts useful:

* Read more posts on the Liechtenstein Disclosure Facility
* ‘How does HMRC know I have undisclosed income?’
* High risk tax avoidance schemes to be listed by HMRC