The UK and Swiss governments were due to sign an agreement today under which holders of offshore accounts in Switzerland pay a one-off charge to settle old tax bills.

The UK and Swiss governments were due to sign an agreement today under which holders of offshore accounts in the Alpine state will pay a one-off charge of between 19 and 34 per cent of funds to settle old tax bills.

As part of the agreement and as a “gesture of good faith”, Swiss banks will pay the UK an up-front sum of SFr500 million (around $629 million), according to a statement from the UK government late yesterday. The agreement takes effect in 2013, subject to legislative scrutiny in the UK and ratification by Switzerland. Negotiations on the issue started in October last year.

A deal had been expected and was broadly in line with what industry figures had predicted. It is similar to a deal inked by Switzerland in Germany a few weeks ago. A number of countries have been putting pressure on Switzerland to help crack down on offshore tax evaders.

The Swiss Bankers Association welcomed the deal. “Firstly, the bilateral treaty gives clients of banks in Switzerland who are taxable in the UK a path to tax compliance while maintaining their financial privacy. The maximum tax rate for regularising the past is 34 per cent. However, the effective tax rate for most clients will be between 20 per cent and 25 per cent of total assets,” the SBA said in a statement.

“Secondly, the agreement allows Switzerland as a financial centre to implement its forward strategy and focus in future on acquiring and managing taxed assets. Thirdly, the UK will receive direct access to the tax base it is due, both past and future, in an un-bureaucratic way. Finally, the agreement provides for easier market access in the bilateral relationship and the decriminalisation of banks and their employees – an important basis for future growth in the cross-border business with the UK,” the SBA added.

The agreement leaves certain questions unanswered, however, said Mark Summers, a partner at Speechly Bircham in Zurich, although he said it also removes almost all incentives to dodge taxes. 

"This deal means that there is now very little incentive to evade tax. UK-resident Swiss account holders who do not wish to disclose their accounts to HMRC will suffer very high withholding rates on income and gains, 48 per cent and 27 per cent respectively going forward," he said. 

"However, questions remain as to the withholding tax rate to be applied to capital gains on non-reporting mutual funds, hedge funds and certain structured products. These are normally charged at the highest marginal rate of income tax in the UK, ie often 50 per cent as opposed to 27 per cent. It remains to be seen whether there will still be evasion on these investments," Summers continued.

New regime

From 2013, there will be a new withholding tax of 48 per cent on investment income and 27 per cent on gains of UK residents with Swiss bank accounts.

Additionally, there will be a new information sharing provision to make it easier for HM Revenue & Customs to find out about Swiss accounts held by UK taxpayers. The new charges will not apply if taxpayers fully disclose details to the HMRC, the government statement said.

“The agreement with Switzerland is the latest step in HMRC’s crackdown on offshore tax evasion, which includes the agreement of the Liechtenstein Disclosure Facility, the creation of a new dedicated team of investigators to catch those hiding money offshore and ongoing work to put in place information sharing arrangements with other countries,” the statement continued.

“The days when it was easy to stash the profits of tax evasion in Switzerland are over,” said George Osborne, UK finance minister.

The UK government claimed that this “historic agreement” will enable it to collect “billions of pounds” from people previously evading taxes via Switzerland. Such disclosure agreements and tax amnesties have had a mixed record in the past. In the case of the Liechtenstein Disclosure Facility, there has been some criticism that the deal has not generated sufficient disclosure.

Accounts held by individual UK taxpayers in Switzerland will be subject to a one-off deduction in 2013, as long as the account was open on 31 December 2010 and is open on 31 May 2013. This deduction will settle income tax, capital gains tax, inheritance tax and VAT liabilities in relation to the funds in the account.

The UK government said the rates of the new withholding tax will be “very close to the top rates of UK tax”. (The top income tax band is 50 per cent although the government has hinted it will be scrapped). It also said that its power to discover if a UK taxpayer has a Swiss account will be in addition to, and go further than, provisions for information exchange under the UK-Switzerland Double Taxation Agreement.

The Lichtenstein Disclosure Facility (LDF) is unaffected by the proposed agreement.