UK and Swiss authorities to tackle tax evasion

PLANS BY THE UK government to agree a withholding tax on Britons’ secret Swiss bank accounts signal a pragmatic approach to combating tax evasion in the world’s most famous and secretive tax haven.

Switzerland, which man­ages an estimated $1.8trillion of foreign wealth, is the most lucrative target in the international crackdown against tax dodgers. But at what rate will the withholding tax come in, and what effect will that have on those with funds stashed away?

A possible tax rate of 25% to 35% on untaxed income in Swiss bank accounts could add an estimated £3bn to £6bn to Treasury coffers within a couple of years, according to experts close to HM Revenue & Customs, while preserving bank secrecy.

The tax would require Swiss banks to collect a percentage of the tax owed from the interest on the money earned in their accounts on behalf of HMRC.

Last October, the UK and Switzerland signed a joint declaration to work towards sharing information on tax issues. A withholding tax, which would make Britons with Swiss bank accounts pay tax on the interest they earn, would be a significant boost for HMRC’s push against on tax evasion.

It would also help the UK government fill the hole in public finances at a time when it is imposing some of the deepest public spending cuts in decades.
Talks between UK ministers and the Swiss government are due to begin soon. An agreement in principle over the tax could be reached as soon as April, HMRC?permanent sec­retary Dave Hartnett told Accountancy Age in an interview.

Withholding taxes, which operate in a number of countries including Austria and Luxembourg, have become a useful option for tax authorities as they increase pressure on tax dodgers.

The European Directive on taxation of savings, was introduced in 2003 to discourage European Union residents using foreign bank accounts to evade tax.
The directive, which was enacted in the UK in the same year through the finance act, requires member states to automatically share bank account details of EU residents.

If a member state refuses, the alternative is for the banks of that country to impose a withholding tax for a transitional period on money in EU residents’ banks accounts.

Three member states – Austria, Belgium and Luxembourg – have since applied this withholding tax during a transitional period. If a withholding tax is agreed with the Swiss government it could mean more business for tax advisers.

Mike Down, tax investigation partner at Baker Tilly, the eighth biggest UK accountancy firm by fee income, said the suggested level of between 25% and 35% for the withholding tax was less than the top rates of 40% and 50% income tax in the UK, but was still a big enough deterrent to make Britons think twice before hiding money in Swiss bank accounts.

As tax authorities worldwide attempt move to close tax loopholes and shine spotlights on tax havens, people are realising that “the [tax] world is getting smaller and there is no hiding place,” said Down. He said that this is one reason why voluntary disclosure is becoming more common.

“We’ve had a lot of people walking in our doors over the past year who have money in the UK or offshore and who want to come clean to the taxman,” he said.
One possible affect of a withholding tax being agreed with Switzerland could be to increase demand for a tax disclosure scheme with Liechtenstein.

The Liechtenstein Disclosure Facility [LDF] – which allows UK taxpayers with undeclared assets in bank accounts in the tiny European principality to pay a reduced penalty in return for coming clean on their finances – has been more popular than originally expected.

Britons with cash hidden in other offshore finance centres have transferred their money to Liechtenstein in order to take advantage of the unique deal, which charges a fixed penalty of 10% on undeclared investments – significantly lower than normal penalties.

Tax advisers, authorised by their clients, can request against a withholding tax being levied on their client’s income by providing details of savings income payment to HMRC, who will then charge tax (usually at the rates of 40% or 50% given the wealth of the average taxpayer using tax havens).

Alternatively, a tax adviser can ask HMRC for a tax certificate individual on behalf of their client, detailing the source of their savings income. The certificate will usually be valid for up to three years.

In order to make sure that investors are not taxed more than once on the same savings income, investors who have tax withheld under the new scheme rules may claim credit for the tax withheld from their tax authority.

Related reading