How the HMRC helped tax avoiders stay ahead of the law - by shifting cash for Switzerland to Liechtenstein

The crackdown on wealth stashed in Switzerland has failed. Why? Because of a deal Britain cut with Liechtenstein

It was billed as a multi-billion pound windfall for the long-suffering UK taxpayer, with HM Revenue & Customs getting its hands on a huge reservoir of untaxed “black money” stashed in Switzerland by wealthy subjects to keep it safe from the taxman.

But the estimated take from what the former HMRC boss Dave Hartnett hailed as a “ground-breaking deal” with Switzerland has been cut once again.

When the deal was signed it was expected to bring in as much as £5bn. By the time of this year’s Budget in March that figure had tumbled to £1.9bn. Now HMRC expects to net just £1.7bn, only about a third of its original estimate.

The reason? A flood of UK money was moved next door, into the banks of the tiny principality of Liechtenstein, where a similar deal was signed with much, much better terms on offer to those prepared to come clean about their overseas assets.

The Swiss banks are spitting tacks, fearing a goodwill payment of Sfr500m (£332m) when the agreement was signed, which was supposed be offset against future tax payments to the UK, is now under threat.

The deal was supposed to give holders of the untaxed assets two options: keep your assets secret but accept a withholding tax on them of up to 41 per cent before paying your dues as normal on the interest and capital gains; or declare your holdings to HMRC and battle it out (which would carry the risk of prosecution and heavy penalties).

However, accountants and lawyers soon discovered secret option three: move your money to Liechtenstein. There, the arrangement with HMRC comes with an amnesty. While you’ll still pay a penalty charge, with the assistance of a good accountant (and my, how they’ve been touting their services) and a good lawyer you’ll still likely pay much less than you would through the Swiss withholding tax, and without the risk of prosecution.

This accounts for a big part of why the yield from the Swiss deal has been so low, although the initial estimate was always viewed with scepticism.

The Swiss banks had never actually totted up how much money they held for British subjects, and they dropped the ball badly because the initial list of secret account holders supplied to the UK included non-UK taxpayers who just happened to have addresses in this country: non-doms and the like.

So far the agreement has netted £1.1bn. Less the down-payment, it amounts to £770m. That needs to hit £860m for the Swiss banks to get their down-payment back, which is why they’re getting twitchy. Few in this country will shed any tears for them, given the huge black hole in Britain’s public finances. From April to the end of October, the first seven months of the financial year, public sector net borrowing, excluding banks, was £64.1bn, a rise of 6.1 per cent from 2013, so every penny counts.

Judith Ingham, a partner with the law firm Withers, criticises the way the Swiss deal was negotiated. “If your affairs were compliant with UK tax you would allow the bank to hand your details to HMRC,” she says. “But if not, you had the choice of paying up to 41 per cent of your assets through a withholding tax or sorting your affairs out.

“The answer for many people was to move to Liechtenstein where, with professional help, the tax take could be much less. In my experience this was typically zero to 20 per cent, but the exact amount depended on the performance of the undeclared funds.”

So how much has the agreement with Liechtenstein brought in? HMRC says more than £1bn has been recovered to date, nearly on a par with the Swiss deal despite the vastly greater size of the latter’s private banking industry.

However, this is expected to increase to more than £2bn – comfortably in excess of the Swiss deal – before the arrangement ends. Previous agreements have seen a rush of declarations coming forward close to the end date – 5 April 2016 in the case of Liechtenstein. When it comes to tax, everyone leaves it late, no matter how wealthy they are.

HMRC says: “Given the commitment of more than 90 countries to the Common Reporting Standard [CRS] for automatic exchange of information, and the fact that 58 of these have committed to early adoption in 2017, the LDF [Liechtenstein Disclosure Facility] offers the best opportunity for those with significant undeclared offshore assets to come forward.

“HMRC has consulted on a range of tough sanctions for those who seek to evade tax by hiding offshore. We will be getting more information under CRS and are already looking at how we can use that data most effectively. So, now is the time to come forward.”

Nonetheless, HMRC still thinks the Swiss deal is a good one. “We have received over £1.1bn under the terms of the agreement. This is in line with the updated forecast of £1.7bn. This is money that we wouldn’t have received without this groundbreaking agreement. The original forecast was based upon the best available information at the time.”

Critics, however, cry a plague on both deals, saying that regardless of the fine detail, they offer too good a deal to wealthy tax avoiders when ordinary British citizens and businesses have the thumbscrews applied for filing their tax returns late, or making mistakes.

Hiding your money in banks nestled in the Alps might not be as attractive as it once was, but compared with what ordinary people face, it’s still a pretty good place to be.

Richard Murphy, a chartered accountant and the director of the Tax Research think-tank, describes the HMRC deal with Liechtenstein as “absurd”.

“It’s no wonder that the Swiss tax deal has not recovered the money that was expected when it was signed. That is because an incentive has been given for anyone to move funds to Liechtenstein at a lower rate with HMRC. It is quite wrong that you only get a 10 per cent penalty there for offshore tax evasion as a result of this deal when you can get a penalty of 15 per cent or more for simply paying VAT late in the UK.”