Last month the Exchequer Secretary to the Treasury and the Swiss Finance Minister signed an agreement between the UK and Switzerland. The language of the official description is oblique. But the agreement in effect allows the UK to ensure that any UK sourced funds in Swiss Bank Accounts has been subject to UK tax already, otherwise a portion of it will be confiscated by the Swiss authorities and returned to the UK.

The Agreement will enter into force after both Contracting States have completed the necessary Parliamentary procedures required by domestic law and exchanged diplomatic notes – a procedure very similar to what is usually required for Double Taxation Agreements. Readers should note that the Agreement will not take effect before 1 January 2013. HMRC advise that further guidance will be provided prior to that date.

The key features of the Agreement are that 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. Article 9 and Schedule I of the Agreement deals with calculating the one-off payment, the applicable rate being 34%.

However, the deduction will not be applied if the account holder instructs the bank to disclose details of the account to HMRC. Following that disclosure, HMRC will seek unpaid taxes with relevant interest and penalties.

From 2013, income and gains arising on investments held by individual UK taxpayers in Swiss banks will be subject to a new withholding tax payment which will satisfy UK tax liabilities on the income and gains. Rates of the proposed withholding tax are dealt with in Part 3 of the agreement and specifically Article 19. The withholding tax will not apply if the account holder authorises disclosure of details of income and gains to HMRC and pays any associated taxes in the UK.

The new arrangements can perhaps be regarded as an alternative to the “withhold or disclose” approach of the EU Savings Directive. As Article 1 of the Agreement has it – “this Agreement will achieve a level of coopera-tion which has with regard to taxation in respect of income and gains on relevant assets an enduring effect equivalent to the outcome that would be achieved through an agreement to exchange information about such individuals on an automatic basis.”

Further information is available from the website at http://www.hmrc.gov.uk/taxtreaties/ukswiss.htm

In the wake of the agreement, HMRC is beginning to act on information received last year under a tax treaty which revealed that more than 6,000 individuals, companies, trusts and other bodies held accounts and investments with HSBC Geneva. Criminal and serious fraud investigations have already begun into more than 500 individuals and organisations holding these accounts. To date, HMRC advise that many others have taken advantage of HMRC's Liechtenstein Disclosure Facility.

As a result of the information obtained HMRC will shortly begin writing to those who have not yet come forward, or are not currently under investigation. A window of opportunity to contact HMRC and disclose all tax liabilities will be offered. If this is not taken up, HMRC will begin an investigation, which could include a criminal investigation, and result in penalties of up to 200%.

This work will be led by HMRC's new Offshore Co-ordination Unit, which has recently been established and is now fully operational. However, HMRC wish to make it clear that this is not an amnesty and there are no special rates of penalty or interest for those who come forward voluntarily.