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UK is no tax haven, but it does have relatively
low tax rates compared with some other European
countries, and it offers exemption from tax for
income from foreign investments for people who
are resident but not domiciled in the UK. For
expatriate executives with assets to invest, a
UK posting or residential base therefore offers
very good tax planning opportunities.
The
concept of domicile, which is unique to the English-speaking
common law jurisdictions, attaches to a person's
original home country, and cannot be changed unless
the person moves their whole life, family and
base to another country, with the intention of
remaining there permanently. Few 'visiting' residents
will therefore have a UK domicile.
Foreign
investment income is exempt from tax for such
individuals as long as the income is not remitted
to the UK. Therefore they can safely make offshore
investments knowing that the income will be reinvested
without deduction - the ideal way of turning income
into capital without taxation. Note however that
capital gains crystallised abroad during a period
of residence are deemed to be remitted to the
UK, and are then taxed. Some types of mutual or
hedge fund impose capital gains unilaterally on
members.
American
citizens, and nationals of the very few other
countries that tax world-wide income on the basis
of citizenship, won't be able to take advantage
of this UK possibility, but for all other nationals,
it is available. This rule has led to many foreign
celebrities making the UK their home for tax purposes.
For the last few years, the Treasury has been
making threatening noises about the tax privileges
of the 'non-doms'. In the 2003 budget a more formal
period of consultation was launched over proposed
changes.
The
most likely reform, according to experts, would
be to impose a limit on the number of years that
an individual could remain resident in the United
Kingdom but not domiciled there for tax purposes.
After the expiry of that period, they would be
obliged to pay tax in the UK on their overseas
income.
Perhaps
surprisingly, there was some support for Gordon
Brown's plans from some in the accounting and
tax consulting professions. Many
organisations supported the prospect of reform
in this area of tax law, in the hope that new
legislation would make the domicile rules simpler.
Also, by taking a proactive approach to the reforms,
they were hoping to stave off more radical proposals
that Gordon Brown may be considering.
It has been estimated by the Treasury that the
government would gain between GBP1 billion and
GBP1.5 billion from a tightening of the domicile
rules. However, some experts contend that the
government could actually lose revenue if changes
prompt an exodus of wealthy foreigners from the
UK.
In
September 2003 the Paymaster-General, Dawn Primarolo,
a known tax 'hawk', said she was increasingly
hard pressed to justify the current state of affairs
to her constituents. Primarolo told the FT: "There
seems to be quite a lot of agreement it is not
fair...People pay tax...and they want to ensure
they are paying a fair amount compared to anybody
else. What I am hoping this time is we will actually
get to the bottom of it," said Primarolo.
Michael Caden, Tax Partner at the London office
of Hacker Young however said that the government
simply "wants to have its cake and eat it." Responding
to Treasury and Inland Revenue proposals on the
issue, Mr Caden has formulated a five pronged
plan of action for non-domiciled residents seeking
to escape the clutches of the UK tax man: invest
for growth rather than income; look for assets
that attract taper relief on sales; transfer foreign
income and gains abroad as gifts to family members
who can import them into the UK tax free; establish
a foreign trust to shelter non-UK assets from
inheritance tax; and re-invest overseas assets
to establish a new/higher base cost.
In
January, 2004, the government dropped a further
strong hint that the current non-dom rules would
be scrapped with the news that the Inland Revenue
(now HMRC) was building a new database of expatriate
workers living in the country. The Revenue was
said to have set up five regional offices to collect
personal details of non-domiciled workers, including
names and national insurance numbers. It also
began to send out letters to around 6,500 employees
asking for information on “inward expatriate employees
who are non-domiciled”.
The tax authorities have no accurate way of assessing
how many expatriate workers are resident in the
United Kingdom under current rules. A Treasury
paper published in the April 2003 budget revealed
that the Inland Revenue had 16,000 individuals
on its database who declared a total income of
GBP800 million which stayed out of the Revenue's
clutches by being remitted overseas. However,
the accounting profession believes the figure
is in reality much higher.
Then
in May of that year, perhaps the most famous,
now ex-non dom was in the news when permission
for a full-scale investigation into the tax affairs
of Harrods owner, Mohamed al Fayed was granted
at the Court of Session. Lord Reed rejected claims
that a tax investigation initiated following the
ending of the 'forward contracts' tax break for
super-wealthy foreign-domiciled UK residents,
constituted an abuse of power on the part of the
Inland Revenue.
Explaining
the reasoning behind his decision, the judge observed
that: "Mr al Fayed works as a director of major
companies, but does not appear to be paid a salary.
He lives in expensive accommodation, but he does
not appear to own or rent it."
"The
natural inference from the evidence is that a
great deal of effort and ingenuity has gone into
creating networks of offshore companies, trusts
and other entities in order to minimise liability
to tax." He concluded: "In the face of such opaque
and sophisticated arrangements, it is important
the Revenue should be able to ensure UK tax liabilities
are accurately assessed."
However,
the 'pre-budget' statement in late 2004 contained
no proposals for any change to the non-dom regime,
and it may be that the Treasury has been unable
to find a satisfactory way of 'improving' it which
doesn't also disadvantage the economy.
When
the Budget arrived in March, 2005, this view was
confirmed as for yet a further year the Chancellor
put off any change to the highly favourable tax
regime they enjoy.
The
Treasury said: "The Government is continuing to
review the residence and domicile rules as they
affect the taxation of individuals and will proceed
on the basis of evidence and in keeping with its
principles. It would welcome further contributions
to the debate, which will then be taken forward
by the publication of a consultation paper setting
out possible approaches to reform.
Delivering
his 2006 budget speech, Mr Brown repeated his
'holding statement' of the previous year with
regard to the taxation of non-doms.
Rumblings
from both sides of the debate continued throughout
the year, but still no concrete action had been
taken by the government by the beginning of January
2007.
Later
that month HM Revenue and Customs felt the need
to clarify its position on the issue of tax residence
in light of the most recent court case on the
matter, and issued the following statement:
"The
recently published decision of the Special Commissioners
in Robert Gaines-Cooper v HMRC (SpC 568) has attracted
some attention from tax practitioners and their
clients. In particular, some commentators have
suggested that the decision in Gaines-Cooper means
that HMRC has changed the basis on which it calculates
the ‘91-day test’. This is incorrect."
"The
‘91-day test’ is set out in Chapters
2 & 3 (‘Leaving the UK’ and ‘Coming
to the UK – Short term visitors’)
of the booklet IR20: Residents and non-residents.
This guidance is clear that the ‘91-day
test’ applies only to individuals who have
either left the UK and live elsewhere or who visit
the UK on a regular basis. Where an individual
has lived in the UK, the question of whether he
has left the UK has to be decided first."
"Individuals
who have left the UK will continue to be regarded
as UK-resident if their visits to the UK average
91 days or more a tax year, taken over a maximum
of up to 4 tax years. HMRC’s normal practice,
as set out in booklet IR20, is to disregard days
of arrival and departure in calculating days under
the ’91-day test’."
It
continued:
"In
considering the issues of residence, ordinary
residence and domicile in the Gaines-Cooper case,
the Commissioners needed to build up a full picture
of Mr Gaines-Cooper’s life. A very important
element of the picture was the pattern of his
presence in the UK compared to the pattern of
his presence overseas. The Commissioners decided
that, in looking at these patterns, it would be
misleading to wholly disregard days of arrival
and departure."
"They
used Mr Gaines-Cooper’s patterns of presence
in the UK as part of the evidence of his lifestyle
and habits during the years in question. Based
on this, and a wide range of other evidence, the
Commissioners found that he had been continuously
resident in the UK. From HMRC’s perspective,
therefore, the ’91-day test’ was not
relevant to the Gaines-Cooper case since Mr Gaines-Cooper
did not leave the UK."
- "HMRC
can confirm that there has been no change to
its practice in relation to residence and the
‘91-day test’. HMRC will continue
to:
- Follow
its published guidance on residence issues,
and apply this guidance fairly and consistently;
- Treat
an individual who has not left the UK as remaining
resident here;
- Consider
all the relevant evidence, including the pattern
of presence in the UK and elsewhere, in deciding
whether or not an individual has left the UK;
- Apply
the ‘91-day test’ (where HMRC is
satisfied that an individual has actually left
the UK) as outlined in booklet IR20, normally
disregarding days of arrival and departure in
calculating days under this ‘test’.
"
The
HMRC Brief concluded:
"The
guidance provided by booklet IR20 is general in
nature. If, on the facts of the matter, a dispute
arises over the application of this general guidance
and the parties cannot resolve their dispute by
agreement, the Commissioners will determine any
appeals. The Commissioners are bound to decide
the legal issues by reference to statute and case
law principles rather than HMRC guidance. Where
a dispute relates to particular facts the Commissioners
will consider the evidence and make findings of
fact to which they will apply the law."
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