DESPITE THE GROUNDBREAKING nature of the UK and Switzerland agreement regarding tax liabilities of UK taxpayers announced in principle last month has met a mixed reaction, it is fair to say. To some, it is a pragmatic solution that will help the Exchequer collect up to £6bn a year extra revenue; to others, it is an escape route for tax evaders.
Yesterday, the details of the agreement were published. The document must still be digested and there will be a briefing by HM Revenue & Customs next week that attempts to translate its largely legalese language into plain English.
Even at first glance the agreement has fleshed out many of the details that had confused tax advisors and the wider electorate. But the lingering criticism that evaders have been given an easy ride remains and will do for a while yet. How safe can tax dodgers feel under the terms of the agreement?
NO IMMUNITY TO PROSECUTION
Perhaps the most striking point is that this cannot be described as an amnesty. One of the accompanying documents to the agreement states that anyone who fully co-operates with the tax authorities is “highly unlikely” to face prosecution. But the difference with the Liechtenstein Disclosure Facility (LDF) on this point is stark – the LDF specifically guarantees no prosecution.
For individuals paying the one-off payment on their Swiss accounts, the documents state that the funds in their account on 31 December 2010 will “cease to have any [tax] liability” in the UK. But this does not mean it is totally clean in the eyes of HMRC; paragraph 13 of the same article states that this will not apply to people under investigation.
The definition of investigation in this case is wide. Obviously criminal investigation is included in the definition, as is civil investigation by HMRC. But intriguingly, it also includes people who have been contacted as part of “project-based enquiries… into multiple identified taxpayers stemming from specific third party information”. This would seem to include customers of HSBC Switzerland whose information was obtained by HMRC.
But it could also include plumbers and medics who were the subject of past disclosure schemes. Those plumbers and doctors who have accounts in Switzerland should not feel safe from prosecution. Also excluded from immunity are accounts where the proceeds are derived from crime, tax or non-tax related.
Immunity is not the only issue on which the agreement has been directly compared with the LDF. This is slightly misplaced – the LDF has been marketed as a way of regularising your tax affairs whereas the Swiss agreement has always been portrayed as a pragmatic revenue raiser. Despite this, it is understandable, and many clients and advisors are likely to be making calculations comparing the Liechtenstein and Switzerland offerings in the next few months.
Those wishing to make a voluntary disclosure of their accounts will have to provide their identity, tax reference number, name of the Swiss bank, account number and the yearly balance and statement of assets from 31 December 2002. But there is precious little detail about the penalties they would incur.
Under normal circumstances, HMRC can look back 20 years for people undertaking voluntary disclosures. Under the LDF, HMRC can go back to 1999 but the individual’s tax irregularities are wiped out. The rate is also fixed at previous tax liabilities plus interest and a 10% penalty. A voluntary disclosure by a Swiss account holder will be treated in the same way as a standard disclosure, with the only difference being that they will only have to disclose their accounts from 2002 onwards. But, importantly, their pre-2002 accounts will be fair game for HMRC investigation, at least until the 20-year limit is hit.
In this case, it seems to be an implicit assumption in the agreement that a voluntary disclosure means a disclosure under the LDF. Although the LDF imposes a penalty on all your accounts – unlike Switzerland, which only covers that particular account – it is highly unlikely that the aggressive evader who has accounts elsewhere would choose the voluntary disclosure route. If someone moves their account from Switzerland to , for example, Singapore before 2013, they will still not be subject to the agreement.
HMRC will, however, be able to ask Switzerland to provide details about their account under one of the provisions in the agreement. The deal allows the UK to request information on up to 500 taxpayers with accounts in Switzerland per year.
To do so, HMRC will have to present the Swiss authorities with “plausible grounds” for requesting information. The agreement states that these grounds “shall be based on an analysis of a range of information such as previous tax returns, level of income, third party information and knowledge of the persons who were involved in completing a tax return”. It adds, “so called ‘fishing expeditions’ are excluded”.
But what this means in practice has not been clarified. The provision mentions “time periods” for which HMRC will request information, but again it is not clear whether a request for information over too great a period will render the request unsuccessful.
One interesting point about HMRC’s information request is that Switzerland can refuse it if the money in the account is clean with regards to tax liabilities – ie, all the funds in the account took the hit of the one-off charge. This means that funds that are suspected to be the proceeds of crime will remain secret, even if HMRC specifically points a finger in the direction of the UK resident.
This is, in part, to prevent fishing expeditions – meaning, HMRC requesting details on the off-chance the individual has an account in Switzerland. Requesting information that does not yield much for HMRC also has implications on its ability to request information in future years; if less than two-thirds of requests yield less than £10,000 a year, then HMRC’s allocation of requests will be cut by 15%; if more than two-thirds yield this amount, it will increase its allocation by 15%.
Along the same lines, Switzerland will provide the UK with broad numbers of the destination of funds being moved out of the country. Every year, Swiss authorities will publicise the top ten most popular countries, with numbers of how many people have moved there.
Both these measures will prove useful for the UK. The 500 names effectively provide a deterrent, with tax evaders no longer able to guarantee secrecy in Switzerland. The destination numbers will allow HMRC to focus on areas to target next that are not just based on anecdotal evidence – an important tool in the long-term war against tax evasion.
However, there is little to refute the valid criticism that Switzerland has managed to avoid transparency. There is plenty of wriggle room for Swiss banks to refuse requests for information from HMRC (perhaps ironically for anyone who has submitted an unsuccessful freedom of information request to the Revenue) and, while useful, the big picture numbers do little to compromise the identities of the aggressive tax evaders.
EVADERS HOME AND DRY?
The agreement might not frighten the most hardened tax evader. In fairness to the Revenue, it was never meant to. But this is not the same as saying it is a sop to evaders.
They would undoubtedly benefit if the agreement had not been made. True, they have a choice under the deal: paying the capital charge; a full disclosure of the account; or moving their money. But none of these options are particularly palatable. They involve either a sizeable sum, a different sizeable sum or more running away.
Crucially, however, none of the options will provide the evader with immunity. Without a full disclosure of all their funds under the LDF, the evader will be still be fair game for HMRC investigation. Further information sharing, while not the goal of full transparency, will tighten the worldwide net.
While this is not the weapon to efficiently catch tax evaders that all law-abiding citizens might want, it is unfair to deny that the agreement is a step in the right direction.
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