Tough withholding tax rates in UK-Swiss agreement

22 August 2011

The UK-Switzerland withholding tax agreement was announced today. It exacts a high price from British residents who still want to make use of Swiss banking secrecy.

As from 2013, Swiss banks will be required to impose withholding taxes of 48 per cent on past and future interest payments and 27 per cent on capital payments to anonymous UK clients. These rates are slightly less than the marginal UK rates for high earners.

UK resident clients will also have to make a one-off tax payment to HM Revenue & Customs in order to address their assumed non-compliance in the years before the agreement. The rates set for these "regularisation payments" are 19-24 per cent of the average account balance (34 per cent is the absolute maximum) - the same proportion as was agreed in the Swiss-German tax deal announced earlier this month. When a taxpayer has made this payment, he will generally  be regarded as having fully complied with his UK tax liabilities on his undeclared Swiss assets - unless the UK tax authorities were already aware of them from their own investigations.

Alternatively, UK-resident clients can opt to disclose their Swiss accounts to the UK tax authorities. In this case they will not be subject to the withholding taxes, though they will have to pay back-taxes.

Proceeds of the new withholding taxes will be passed on to the UK in their entirety. When the agreement comes into force, probably in May 2013, Swiss banks will also have to make an advance payment to HM Revenue & Customs of CHF500 million (GBP385 million, USD630 million) in aggregate. In return, they will be granted "improved [UK] market access for financial services". This too is similar to the Swiss-German tax agreement, although the banks' advance payment to Germany was CHF2 billion - significantly more because Swiss banks have traditionally had far more German clients than British.

According to Mark Summers of Speechly Bircham AG in Zurich, UK residents hold between GBP100 billion and GBP125 billion of undeclared assets in Swiss bank accounts. If this estimate is correct, then the potential gain to the UK Treasury from the one-off regularisation levies could be as much as GBP20 billion - though, depending on the extent of capital flight from Switzerland, it could be more like GBP5 billion. Future revenues from withholding taxes could net GBP3 billion to GBP6 billion a year.

Like the German tax authorities, HMRC will be allowed to submit a limited number of banking information disclosure requests each year, to check that the withholding taxes are indeed being applied. The requests - "in the low hundreds" - will have to name the client but not the bank. Automatic exchange of bank data will certainly not occur, says the Swiss Finance Ministry.

According to the Swiss Bankers Association, the agreement applies to individuals who hold Swiss assets through a trust or other domiciliary company in which they have a beneficial interest. But the SBA says non-doms will be exempt from the withholding taxes (though this has yet to be confirmed by the two governments).

"Some non-UK domiciliaries have concerns about information exchange agreements, fearing that financial data may find its way into the wrong hands in their country of origin", says Speechly's Mark Summers. "If [the SBA] is correct then it will be of comfort to them".

The question now is whether UK residents will move their assets out of Switzerland and into Liechtenstein, where they can take advantage of the Liechtenstein Disclosure Agreement. This only requires them to pay HMRC the taxes due from 1999-2000 onward, rather than the total value of the assets; and penalties are limited to 10 per cent of unpaid taxes.

There is no need for the UK resident to have a long-term connection with Liechtenstein for the LDF to be utilised, says Summers. "Moreover, the terms of the LDF are very generous, particularly where there are large liabilities to income tax or CGT dating from before April 1999."

 

News story updated on 4 October 2011

Sources

 

Swiss Federal Department of Finance

Swiss Federal Department of Finance (PDF file)

Reuters

Wall St Journal

Citywire

Ft Advisor

Telegraph

Independent

Speechly Bircham Zurich (PDF)

Rosemont International

IFA Online

Chartered Institute of Taxation

Swiss Banking Association

Swiss Banking Association (Q&A - PDF file)


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