Loophole for Britons with hidden overseas accounts

The EU is to levy a withholding tax — but you can keep your identity secret from the taxman. By Clare Francis
MOVES to make money laundering harder are about to receive a setback after an EU compromise.

A savings directive, due to be implemented in July, aims to clamp down on tax evasion. But bank customers with offshore accounts who agree to pay a withholding tax will have their identities shielded from their home tax authorities.

Mike Warburton at Grant Thornton, an accountant, said: “Anyone who is deliberately evading taxes will shift their money elsewhere — it is wrong and illegal, but there is always somewhere you can move your money to avoid tax and these people will do just that.”

Under the terms of the directive, EU states will have to hand over tax information about the income they are paying to foreign customers. Banks in other member states will have to inform the Inland Revenue about accounts held by Britons.

But Belgium, Luxembourg and Austria objected because they felt it infringed people’s privacy. As a result, they will offer customers a choice: they can either disclose their savings on their tax return or their foreign bank will levy a withholding tax that will be deducted from the interest paid. The rate will initially be 15%, rising to 20% in 2007 and 35% thereafter.

Each year, 75% of the tax collected will be paid to the relevant tax authorities as an anonymous lump sum and the collecting state will retain 25%. So if Luxembourg collected £10m in tax from all the British citizens with accounts in the principality, £7.5m would be given to the Inland Revenue — but the Revenue would not know which individuals this had come from or how much each had paid. This is said to be a temporary measure and these states are due to comply with the full directive in five years.

Graham Parrott at Ernst & Young, an accountant, said: “This enables individuals to keep their identities secret.”

Switzerland and the Channel Islands, which are not members of the EU, have agreed to similar provisions. They will apply a retention tax, basically another name for the withholding tax. So Swiss bank-account holders will continue to enjoy the sort of secrecy that for many years protected the likes of Idi Amin, the infamous dictator of Uganda, and Ferdinand Marcos, the former Philippine president, whose wife, Imelda, became famous for her shoe collection.

Simon Hull at Alliance & Leicester International said: “The Isle of Man, Jersey, Guernsey and Switzerland will apply a retention tax, and will not identify individuals. Customers will have the choice of disclosure or paying the retention tax.”

The tax is deducted automatically and customers will receive a receipt. They are then supposed to pay the remainder through their tax return — but will they do so? One attraction of offshore accounts has been that they enable people to invest funds in overseas bank accounts that they can keep secret from spouses or business partners. Under the new directive, they will still be able to do so — they just need to hold their money in one of the states that is not obliged to share information with their country of residence.

Hull does not agree that the new system will encourage people to do this. He said: “The retention tax is only a temporary measure and I believe it allows people to sort themselves out properly. The vast majority of our customers are in very transparent arrangements and we don’t expect people to change their behaviour.”

Every British resident should be paying tax on their savings, even if they are invested overseas. This should be disclosed on their tax return. For those who already do this, the new directive will have little impact.

Paul Garwood at Smith & Williamson, an accountant, said: “If you are UK-domiciled you are subject to tax on worldwide income, so the directive shouldn’t cause any problem if you have reported your savings correctly.”

However, if you have not, accountants recommend you contact your tax office and inform it of your mistake rather than waiting for the institution where you have your offshore account to notify the Revenue.

Loophole for Britons with hidden overseas accounts - Money - Times Online