The UK-Swiss tax agreement, announced last month, will be in force from 31 May 2013, and full details will only be made available as both countries sign it. But it is already clear that the existence of the agreement places legal advisers in a difficult position when advising their clients on compliance.

There are significant uncertainties at a time when clients affected want to ‘regularise’ their tax affairs, and being party to some client information may lead solicitors to fall foul of proceeds of crime legislation.

As private client advisers know, all tax agreements and amnesty initiatives are closely watched by the individuals and families whose assets are being targeted. While it might be assumed that the international wealthy can simply move the wealth ‘elsewhere’, in fact their confidence in that option has sharply decreased in recent years.

A 2009 survey of the family offices that manage wealthy families’ affairs, sponsored by Withersworldwide, reflected the damage a series of events had done to such an approach.

In the wake of the Madoff and Stanford affairs (see box below), and investigations into the role that UBS AG and Liechtenstein bank LGT Group allegedly played in enabling tax evasion, more than half said they had been prompted to review their tax position. A US tax ‘amnesty’ received 7,500 applications in the seven months it was available.

As one family office manager told researchers: ‘Some families are hoping they can avoid the entire issue. This is a false hope.’

The deal

It is against that changed backdrop that the UK Treasury sounds a confident note about the Swiss agreement. It trumpeted the deal reached with the Swiss government as one that would secure ‘billions in unpaid tax’. The Treasury’s statement of 24 August said: ‘The agreement will resolve the long-standing abuse of Swiss banking secrecy by those who seek to conceal the proceeds of tax evasion and is expected to secure billions of pounds of unpaid tax for the UK exchequer from 2013.’

Under the terms of the agreement, existing funds (basically cash and shares) held by UK taxpayers in Switzerland will be subject to a significant one-off deduction of between 19% and 34% to settle past tax liabilities, though those who have already paid their taxes are unaffected. As a gesture of good faith, Swiss banks will make an up-front payment from Switzerland to Britain of SFr500m (£360m).

Then, from 2013, a new withholding tax of 48% on investment income and 27% on gains will be introduced to ensure the ‘effective future taxation of UK residents with funds in Swiss bank accounts’. This will, the Treasury says, be accompanied by a new ‘information sharing’ provision that will make it easier for HM Revenue & Customs to find out about Swiss accounts held by UK taxpayers. The new charges will not apply if the taxpayer authorises a full disclosure of their affairs to HMRC.

Based on the detail currently available, legal advisers to people affected by the agreement see some positive points in it. Judith Ingham, head of the Zurich office of international law firm Withers, says: ‘Regularisation under the agreement will protect banks, bank employees and clients from prosecution and the UK will not use stolen information in the future.’

Ingham also notes some advantages to the ‘anonymous regularisation’ option provided for: ‘It really does look as though the anonymous route will protect confidentiality in all normal cases’. This means previous fears about the implications of the audit process seem unfounded. ‘For many people it may therefore offer the option of more tax than under the Liechtenstein Disclosure Facility (LDF), but anonymity,’ she concludes.

Knowing look

In advising and taking clients through these issues, tax advisers will need to keep in mind that failure to pay tax liabilities (whether in the UK or abroad) constitutes ‘proceeds of crime’ for the purposes of the anti-money laundering (AML) legislation.

Bircham Dyson Bell partner Helen Ratcliffe explains: ‘In connection with tax advice there are many potential AML provisions which advisers could run the risk of breaching. One of the most fundamental is the offence of failure to disclose.’

Failure to disclose is covered by section 330 of the Proceeds of Crime Act 2002 (POCA). A person commits an offence if, in the course of their business they know or suspect or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering, and fail to disclose their knowledge or suspicion to their firm’s money laundering reporting officer, or direct to SOCA (Serious Organised Crime Agency) if a sole practitioner.

‘A professional legal adviser may not commit an offence if the information came to them in privileged circumstances,’ Ratcliffe notes. ‘But solicitors will need to consider carefully their position both under the general common law rule of legal professional privilege and also the definition of privileged circumstances within POCA.’

Options

The legal position of the adviser is of huge importance, as one of the issues clients will consider is the dissonance between various agreements and options to regularise their affairs. The pros and cons of the options are in part financial, but also involve decisions around liability and anonymity, and not least a degree of enforcement competition between various agreements reached between different jurisdictions.

One option, for example, may be for the taxpayer to deal with disclosure of their Swiss source income and gains through the existing LDF. Some advisers note that the LDF looks like a more attractive option.

Ingham comments: ‘Our experience of the LDF is that for many clients the tax payable is less than 20-25% of the balance, which is the figure suggested as the likely outcome if the "anonymous regularisation" option is selected.’

Mark Summers, a partner at Speechly Bircham AG in Zurich, notes that most disclosures made under the LDF result in ‘many only losing 5% or less of undisclosed funds and most losing less than 10%’. As a result, he concludes: ‘Many will favour this route over the Swiss withholding payment in order to clean up their tax affairs where they wish assets to be disclosed.’

But advisers will need to take care over the role they have in advising on, or affecting, client decisions here. On choosing to use the LDF, Ratcliffe advises: ‘This would probably result in assets having to be moved from Switzerland to Liechtenstein.’

This will require consideration of further AML provisions, notably those relating to arrangements (section 328 of POCA). ‘A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates the acquisition, retention or use of criminal property by or on behalf of another person,’ she adds. If the solicitor is involved in the arrangements for the movement of non-compliant funds, then even though this would be done to resolve the tax status of the money, ‘AML provisions may still mean that a report to SOCA is required in these circumstances’.

Crisis of confidence

The UK-Swiss tax agreement was reached against a background of falling confidence in the financial structures and wealth management strategies used by those who hold assets in jurisdictions where their tax liabilities will be lower.

UBS and LGT

UBS AG is the world’s largest wealth manager. Its conduct was cited by a US Senate subcommittee, which alleged that UBS and LGT, a Liechtenstein bank, had helped 19,000 wealthy Americans to hide up to $17.9bn from the Internal Revenue Service. The committee’s report alleged that LGT, owned by Liechtenstein’s ruling family, ‘fostered a culture of secrecy and deception’. UBS, it added, ‘opened thousands of accounts in Switzerland that are beneficially owned by US clients, hold billions of dollars in assets, and have not been reported to US tax authorities’.

FraudBernard Madoff’s investment fund fraud, and the collapse of Sir Allen Stanford’s banking group, involving alleged fraud (denied by Stanford) were viewed by wealthy families as signaling failures that are systemic. In a Withersworldwide survey of family offices in October 2009, 92.1% of respondents said the level of trust in institutions and investment advisers had been affected.

Madoff’s fraud especially ‘reflected badly on a wide range of professionals’. The effect of these events has been to proportionately increase the attraction of transparent and secure financial arrangements as compared with the attractions of ‘unregularised’ tax arrangements.

Uncertainties

National governments looking to end tax evasion are acting in an atmosphere where the wealthy are more open than in the past to demands that they ‘regularise’ their tax affairs.

What their advisers note, though, is that when their clients start that process, they are looking for some certainty in the outcome. Put simply, will any settlement end the interest of investigators into their affairs, and allow them to plan their future arrangements with confidence?

Here, lawyers note, the final UK-Swiss agreement, when signed, will need to provide certainty on some key points.

Noting that 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% and 27% respectively), Summers notes: ‘This deal means that there is now very little incentive to evade tax.’

But Summers adds: ‘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 – 50% as opposed to 27%. ‘It remains to be seen whether there will still be evasion on these investments,’ he concludes.

Noting that ‘voluntary disclosure without penalty’ is also offered, Ingham asks: ‘What does the "without penalty" description mean for clients who might have chosen to pay the tax actually due plus interest and penalties under the LDF? Will they be able to pay the same amount, but without the penalties?’

Of central importance, Ratcliffe argues, is this: ‘It is not… clear whether the payment will cover only income and gains resulting from the funds while they have been held in the Swiss bank account, or whether it will regularise the tax position with respect to all non-compliant funds.’

On some points though, a degree of uncertainty may assist with co-operation. HMRC will have the right to make a few hundred information requests per year of the Swiss regarding specific UK taxpayers. Though Summers notes that ‘fishing requests’ under this right are ‘almost certainly off limits’, what is certain is that this agreement is one of many developments that are making it harder to avoid paying national taxes.

If the full agreement addresses advisers’ main questions, compliance may also provide long-term peace of mind for clients – albeit it at a cost.

Eduardo Reyes is Gazette features editor