An agreement entered into between the UK and Switzerland will enable HMRC to recover tax on undeclared income sequestered in Swiss bank accounts. The Swiss banking system will however retain much of its capacity for confidentiality as blanket settlements will be made, but at a price. An important aspect of the arrangements is that they are not in fact finalised.

It appears that there are two steps to the process. First of all, a confiscatory tax will be applied to deposits in Swiss institutions where it has not been established that tax on the underlying funds has been paid. A withholding tax will subsequently be applied on an on-going basis to income and gains arising on investments subject to the declaration of the income in question to the UK revenue authorities. The salient points as we have them from the Treasury statement are as follows:

“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 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. The rates of this withholding tax will be very close to the top rates of UK tax. Payment of the withholding tax will satisfy UK tax liabilities on the income and gains. Again, 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 here.”

This one-off deduction will be at rates of between 19% and 34%, the idea being to settle past tax liabilities. We understand that these differential rates are determined by a formula that reflects the number of years of investment and the nature of the account movement. The latter will distinguish between regular deposits, attracting a higher rate, and interest only added to an initial deposit, that will attract the lower rate.

A statement from HM Treasury is available at http://www.hm-treasury.gov.uk/press_98_11.htm