Swiss advisers face extra workload after UK tax deal, warns lawyer
Switzerland’s banks and asset managers face the potential of a greater administrative burden in regards their UK clients, after a tax deal announced yesterday between authorities in London and Bern, according to a Swiss-based lawyer who advises on UK tax.
James Badcock (pictured), partner in Geneva with UK-headquartered firm Collyer Bristow LLP, said that in return for being able to protect their UK clients’ identities, Swiss banks may have to calculate, and remit, tax payable by those clients to the UK, as part of the deal.
“It seems the whole process will be managed by Swiss banks and authorities and possibly the UK will never know the names of those people involved.
“The idea that a Swiss bank will have to monitor the investment portfolio of all its clients, working out exactly the UK tax treatment on regular trading of bonds cum-dividend, for example, will present them with a challenge.
“The tax reporting relating to clients’ investment portfolios will become an area of greater complexity – possibly there will be a greater administrative burden on Swiss investment managers and banks.”
Glen Millar, head of Kinetic Partners’ Swiss operations, said: “The news the UK and Switzerland have reached a landmark deal…will leave Swiss private banks and others with an operational headache. Swiss-based private banks will need to plan for the impact of this agreement and consider how it will affect business strategy in the future.”
George Bull, senior tax partner at Baker Tilly, noted: “Generally, tax authorities around the world like to know who they are taxing, how much they are owed and where to collect it. However, with tax revenues hit by the current economic uncertainty, it’s not surprising that tax authorities are prepared to adopt a more pragmatic approach in the interests of maintaining their own cash flows.”
He “broadly welcomed” the latest move by the UK tax authorities, and cautioned both its supporters and critics “to suspend final judgement until critical, and currently missing, details have been clarified”.
He noted it will be possible for account holders to avoid the levy by allowing the Swiss bank to provide account details to HMRC – but that there is no detail about how to make the disclosure.
He noted the inclusion of an opt-out clause for individuals not domiciled in the UK – but questioned who will police their compliance, if identities are to remain anonymous.
Badcock advised Britons affected not simply to calculate their bill and write cheques. “Under the Lichtenstein disclosure facility, to some extent clients can try to do some tax planning, which maybe they should have done earlier.
“It seems a similar option may be available under the Swiss deal. If someone is not domiciled in the UK for tax purposes then it appears the deal may not apply to them at all, but even if it does, if they have, say, £1m in Switzerland which has been giving rise to interest, because they are a ‘non-dom’, then the income may not be taxable in the first place.
“It will pay to take a proper look at the situation and I think taxpayers will see the benefits of being compliant in terms of putting in place long-term secure planning for the benefit of their families.”
While the deal’s effect on UK holders of income-bearing Swiss bank accounts is fairly clear, Badcock said it was less so for UK tax residents investing in funds based in Switzerland.
He foresees the potential for more use of offshore insurance bonds, where income and gains from investments made within this wrapper can be rolled up, tax-free. Tax falls due on gains realised when the bond – rather than individual funds within it – is redeemed.
“Funds inside the wrapper can continue to be managed by Swiss banks or investment managers, and maybe tax need not be withheld, because income and gains can quite properly roll up until the insurance bond is redeemed. Firms offering insurance bonds see this whole movement as an opportunity for them.”
Badcock said the latest UK/Swiss deal – broadly similar to an earlier one Switzerland struck with Germany – is from the British government’s perspective “a pragmatic deal, if slightly political. The headlines are of [UK Chancellor of the Exchequer] George Osborne proclaiming that there is a raid on this money and of bringing in billions, but the reality is many UK investors with money in Switzerland will probably use the Lichtenstein Disclosure Facility, which I think will still be available to them, and may result in a lower effective rate of tax.”
Under this agreement, individuals affected can calculate the tax they should have paid, rather than yesterday’s agreement where the lump sum option invokes “somewhat arbitrary” tax rates depending, for example, on how long UK taxpayers held money undeclared in Switzerland.
“The first thing people need to do is to review their historic position and decide whether the best option is to report the position in the normal way, or use the options available under the UK/Swiss deal, or use the Lichtenstein Disclosure Facility.”
Simon Airey, director of national tax investigations at DLA Piper, said: “For those who wish to make a clean break of things, the LDF is likely to remain the most cost effective way of permanently regularising their affairs.
“People using the LDF typically pay between 10% and 20% of the undeclared overseas assets depending on their circumstances. On the face of it, this is less than the Swiss deal, but not everyone will be eligible and it is important for people to take advice in relation to their individual situation.”
Airey added the deal signalled “the demise of banking secrecy as a means of concealing tax evasion”.
Badcock expected the effective rate of tax remitted to the UK from Switzerland as a result of the deal to be less than the rate of 34% being widely mentioned, and the total tax take to possibly fall somewhat short of the £5bn.
“From the UK government’s point of view that is fine, because this is money that may not have seen the light of day because the consequences of disclosing it were so serious. Over the long term the cumulative effect of taxpayers not being able to evade tax through having money in Switzerland will be significant.
“The Swiss recognized some time ago that they needed to adjust as a jurisdiction. They have already had some nasty spats with the US and Germany and individual banks were not only having to make financial settlements, but also had the embarrassment of having client data stolen and bought.”
Switzerland’s Department of Finance has not said this will not be a risk in future, but noted yesterday that the UK does not envisage purchasing more stolen client data.
Badcock said: “That is what this is all about from the Swiss point of view. They will not be subject to suspicion, and their banks’ clients will keep their confidentiality.”
He added there was a risk money affected could move to a centre such as Singapore, but he cautioned the “up-and-coming financial centre” in Asia to exercise caution, “as in a few years it could find itself involved in the exercise Switzerland is going through now”.
DLA Piper’s Airey said: “Under the terms of the [latest] deal, it is important to note that HMRC will obtain certain information about the destination of assets that are transferred out of Switzerland, so closing accounts in order to avoid the levy is not a risk free option.”