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We know where you live (well, actually, we’re not too sure). By Simon Sweetman

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19th Oct 2007
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Simon Sweetman looks at the "arbitrary" tax proposals for the non-domiciled; a lot of people will be paying the wrong amount of tax - and it will be lawful, or will it?

The pre-budget report in general seems to have had a much more hostile reception than in my view it deserved, probably on the basis that the losers in any change squeal loudly and the winners say nothing. But the one thing that really deserves a hostile reception is the non-domicile proposals. It beats me why Darling and Osborne should argue about whose idea it was: I would have expected them both to have been pointing at each other saying “it was him what thought of it”. I know that when I spoke to people at a conference about Osborne’s plan when it was announced there was a consensus that it was a daft idea.

The wrangle about how many people there are in the UK who are resident but non-domiciled is probably irrelevant. It would appear that about 100,000 tick the box on their tax returns, but as anybody born outside the UK and at a pinch anyone whose father was born outside the UK could mount some sort of argument for non-domiciled status the top end figure might be about 7 million. Most of them, of course, will not have substantial income outside the UK.

As I understand it the proposal is that if you pay your £30,000 you are absolved from paying tax on or even declaring your worldwide income, but if you do not then you are taxable on it all (and so presumably must complete a tax return). And you no longer have to worry about whether you remit money to the UK – some of the rich will probably save the £30,000 in accountancy fees. A similar agreement with Mr Fayed was overturned by the courts, but this new idea would of course have statutory force, which their ad hoc arrangement with him did not.

All the same, I suspect this will not play well with European law. It is arbitrary taxation and, one suspects, may be related to the fact that the new slimmed down HMRC would not have the ability to police the non-domiciled properly if they were brought squarely into the tax net. It discriminates against the UK domiciled, who cannot choose to hide great wealth offshore in exchange for a token payment, and it is unfair to the less well off and genuinely non-domiciled, whose tax burden has been increased somewhat but whose administrative burdens have been increased by rather more.

The government have told us that they want everyone to pay the right amount of tax. So why they should choose to bring in a law that makes sure that a lot of people will pay the wrong amount?

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By barryhallam
19th Oct 2007 19:06

The £30K is an additional tax

My understanding is that the £30k levy was in addition to any tax that might be due on remitted income or capital gains. It is not intended that Non Doms can pay £30K and remit what they like without further tax being due.

Or have I got it wrong?

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By AnonymousUser
22nd Oct 2007 12:35

Barry is right
Barry's right about remittances, if the PBR note is to be beleived - PBRN 18 para 6 'only be able to use the remittance basis if they pay an additional charge of £30,000'.

But Simon's spot on that this is the most obnoxious element of the PBR. In fact, I think it is the most obnoxious piece of tax legislation that I can remember, because it strikes at the whole principle of an income tax system where people pay according to (surpirse, surprise) their income. I'm covering it in this week's comment article.

Mike Truman
Editor, Taxation magazine

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By User deleted
22nd Oct 2007 18:39

Disgraceful
Being what Simon refers to as the "genuinely non-dom and less well off", I am outraged by this piece of proposed legislation.

1 - it is immoral
any non-doms supposedly pay tax on their income in their respective countries (unless they have enough money to chuck on their accountants, in which case £30k is probably neither here nor there, no doubt they will have a scheme ready)

2 - administratively it sounds like madness
am I calculating right that this means probably an extra 6.9 million tax returns? How much is it going to cost the government to process these v. the income they will get from say £10 interest overseas each??? Especially in the current economic migration this sounds barking to me. I would be interested in their revenue / cost estimates (if they've done one...)

3 - it puts a significant cost burden on "Joe Average" non-dom to pay for accountants to trail through the double-taxation legislations, do tax returns, etc. for the sake of declaring small income / gains from their respective countries.

4 - even assuming that we are talking rich oligarch "avoiding" tax here, how many have considered the economic benefits these people bring to the country? Maybe we should thank them for that, rather than try and grab more with these tactics. Does anyone know of any rich oligarchs who are a burden to this country by claiming benefits / using the NHS, etc? I doubt it.

Just for reference, I have lived here for over 10 years, never claimed a penny in benefits, paid my taxes, don't smoke, drink, don't have money stashed away in offshore accounts that now suddenly may be taxed, and I don't expect the English to live by my native country's rules. I would like to think that I am just as committed to the country as someone who was "born and bred" here. I really would like the country to be run by reasonable folk who have some sense and appreciation for the people in this country, their efforts, and have something back in return for our taxes, rather than having to watch every penny being wasted and then listen to someone coming up with imaginative schemes to raise yet even more tax to waste. Moan over.

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By Paul Soper
22nd Oct 2007 19:37

Good for some...
Let's remember that Mo Al Fayed had an agreement to pay £240,000 pa for this right so I assume he will be breaking open the champagne. If you are a seriously rich person this is peanuts, I suspect this is set at this level to frighten off the smaller beneficiaries and deter the newbies who sudden discovered non-dom status in the wake of the offshore amnesty - which we believe will double the number of claiming non-doms from 112,000 to about 250,000.

The denial of personal allowances to a taxpayer claiming remittances on offshore income would seem to be in direct contravention of article 43, freedom of establishment and is such a tokenistic gesture as to be insulting.

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By User deleted
22nd Oct 2007 20:38

Bed and Breakfast, income to capital conversion
Hi Barry,

I am sure you are aware of bed and breakfast and cessation of source rules. So, the total tax is £30k and those who are rich enough to pay the £30k will no doubt be remitting 'capital' (and income which is now called capital) only.

I think the £30k is probably avoidable as well by ensuring that only capital is remitted (which is not taxable anyway) and all incomes to be generated in trust/roll up bonds etc. These can then be collected when they decided they want a different lifestyle.

Anon - the first £1k of non dom foreign income is exempted, so I think 80% of non dom would be OK.


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By ianfay
22nd Oct 2007 20:42

Is it time for a more radical look at the taxation of non-doms?
I now practice in New Zealand, and both New Zealand and Australia have recently introduced new rules for the taxation of 'temporary residents'. In New Zealand, a new resident is only taxed on their New Zealand source income for the first 4 years they are in New Zealand. In Australia a 'temporary resident' is only taxed on their Austraian source income (a New Zealander can live in Australia indefinitely as a temporary resident!).

Neither approach uses the archaic concept of domicle or the remittance basis.

If the UK is serious about reforming the rules in this area, then I do not understand why the remittance basis should be retained. Surely there can be very few (if any) non-domicle UK residents that ever remit non-UK source income. Why not simply move to a source basis of taxation - temporary residents in the UK would be taxed only on their UK source income. The debate can then move to defining temporary residence, including whether a 'fee' to retain this status is fair taxation. This modernisation really would result in a considerable simplification of the rules and a reduction in the compliance costs faced by non-domiciled UK residents.

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By AnonymousUser
23rd Oct 2007 08:10

RESIDENCE AND DOMICILE
It seems the Anglo-Saxon world only makes this distinction in taxation law. Code Napoleon does not. so there is a gulf of understanding, when it comes to conversing with experts in the other code.

iIhave several cases where the client is domiciled UK by origin, but has been living and operating outside the UK for 3 to 10 years and has confirmed in writing that he has no intention of ever returning to live here. DOM 1 AND R 85 forms have been submitted on several occasions, but the Rennue`s policy seems to be to refuse to give a ruling and await aprecipitating event-like death-before responding. thgis cannot be just or fair to people who are seeking to organise their lives.

It may be because of the manpower shortages metioned in the article, but this does not excuse it. Has anyone else had similar experiences?

i agree that the idea is a non starter. Eventually the modern emphasis must shift almost compltely to indirect taxation, when these and many other irritating and artificial distinctions become meaningless.

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By AnonymousUser
23rd Oct 2007 11:07

Fairness vs. Revenue
The real question is: If they pay tax on this income in their home country, shouldn't the £30,000 be ameliorated in some way? Most people DON'T pay tax in their home country, but they sure as heck do in the US of A. And if we're going to pay £30,000 on our already-taxed US income, we sure as heck ought to be able to subtract the US tax we paid. I have one client who pays over $100,000 a year in US tax on her US income; which is currently all exempt from UK tax as it's not remitted. She is sooo not able to leave the UK as she's a curator at a specialist museum. There isn't a similar museum in the USA she can work in. Even if there were, how often does a curatorship open up?

Food for thought: What is a temporary resident? Most countries use a definition of between 1 and 5 years. 7 is really quite generous.

More food for thought: If we complain that the £30,000 is an unfair tax under EU law, they may scrap the idea of domicile and remittance taxation altogether and just have a 7 year temporary residency. All the rich people will leave (save my museum curator), and the rest of us will face further tax increases across the board.

My personal opinion is that as long as my husband and I have the same domicile, I don't care if I pay more or less income tax. The annoying thing would be if we had different domiciles and had to deal with inheritance tax issues. I hope that never comes to pass.

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By leechurchett
24th Oct 2007 08:24

Non Doms & Remittance Basis
1) Will R/NOR Non Doms get caught on their Case III earnings? If for example, an indivudal has been in the UK then becomes not resident then comes back to the UK?
2) Will it be better to sell shares and buy back in this tax year to get the 10% UK tax and to rebase for the 18%?
3) Will the £30,000 be available as a FTC on US tax returns and what fun we will have resourcing the US source income and gains to get the correct credit under the DTT!
4) Will US tax exempt muni bond interest and such like US investments get caught?
5) Is the 7 year period 7 years of UK tax residence or 7 years from the date the person arrived here?
6) How will HMRC check the overseas income and gains of individuals not filing in their home countries?
7) Will the Non UK contract of Dual Contract individuals get caught?
8) If an offshore gain is made in this year and not taxed on a Non Dom because it is not remitted here but is remitted next year, how will the remitted gain be calculated? This may be problematic for US citizens claiming FTCs where the gain and tax do not match up.
9) I am sure that the Internal Revenue Service will have something to say about the US tax not flowing into their coffers as a result of additional FTCs being claimed on US source income. I can see an amended DTT in the distance!

All these questions and more will probably not be answered in the draft legislation. Yet another well thought through policy!!!

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By robertcl
26th Oct 2007 14:01

When tax systems collide
I have a client of Swedish origin who was previously married in Sweden but later divorced. He has two children from the former marriage for which he shares custodyship with his divorced wife. He now lives in the UK and is married to a British citizen and has no intention of ever moving back to Sweden.

Sweden apparently likes to tax their citizens on their worldwide income regardless of whether they are resident there or not if they fall through a number of tests. One of those tests is apparently family of some sort that spend some of their time in Sweden, and another is the ownership of property in the country and a third one any kind of financial interest in the country. There are a number of other tests as well. My client falls through on two of those tests and has to pay Swedish taxes, which are among the highest in the world, on his UK income while paying UK costs of living, which are among the highest in the world. My client is left with the worst of two different systems.

Surely there must be a rebate from the £30,000 for cases like these.

Moreover, perhaps now would be a good idea to align the UK tax year for both companies and individuals with that of most other countries, i.e. the calendar year, now that taxes has to be matched between countries much more than ever before. I have so far been unable to persuade any foreign tax authority to issue certificates of taxes paid per April 5.

On a historical note the UK tax year used to be the calendar year, until the UK went from the Julian calendar to the Gregorian calendar. The calendar year changed but the tax year did not.

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By johnruis
26th Oct 2007 15:19

Non-dom
So if I tick the "Non-Dom" box in the Tax Return will I have HMRC expecting £30,000 from me? It is impossible to prove a negative ie that I have no overseas income. How is this going to work in practice for ordinary people?

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By daveforbes
26th Oct 2007 14:23

Swedish dilemma
I don't know much about this - I am not an accountant - but can your Swedish client not just fill in a tax return and claim foreign tax credit relief, reducing his liability to 0. The £30,000 is only if you refuse to complete a tax return with your worldwide income.

P.S. The Gregorian/Julian calendar change only made 11 days difference, moving the tax year from the 25th March to 6th April. Between 1582 and 1752 I can imagine the announcements - "We will shortly be arriving in France. Please adjust your calendars by 11 days".

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By markshgate
26th Oct 2007 16:43

domicile of choice or birth
The current rules for domicile are not based on statute.

We all are born with a domicile dependent on our place of birth, or that of our father, unless our parents were unmarried, then it would be based on the mother's domicile.

A domicile of choice is possible, but without a ruling there are no certainties. Every case would depend on its individual merits.

Simply put non domiciles pay income tax on non uk source income/capital gains on a remittance basis.

Different rules apply for IHT.

Clearly all the recent arrivals in Britain from the EC are non doms, and the estimate of potentially 7 million in total is probably not unreasonable.

Most of the non doms do not even receive income or capital gains offshore of 30,000GBP. Indeed this is borne out by the evidence that very few so register.

There would be major changes required to change the legal framework .

I would also suggest that all those of the 7 million who are non doms and have not declared the fact are technically in breach, and, as the law stands currently need to be investigated by HMRC.

I wonder which party will be foolhardy enough to suggest this.

I watch the debate with interest.

Andy Marks

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By verstage
27th Oct 2007 18:03

change to 90 day calculation means more caught by UK tax net
Now that the days of travel are counted as days spent in the UK, then anyone attending, say, 4 meetings a month in London involving an overnight stay will be classed as UK resident. Presumably these people too will have to pay the £30,000?

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Richard Murphy
By Richard Murphy
27th Oct 2007 20:19

I agree with Mike Truman
This legislation lacked all principle

I offered a principled alternative on the domicile issue here http://www.taxresearch.org.uk/Blog/2007/10/15/just-imagine-my-pre-budget-speech/

On the related Capital Gains Tax issue (and they are related by private equity) I offered fuller comment at the request of the TUC, here. http://www.taxresearch.org.uk/Blog/2007/10/21/capital-gains-tax-after-the-pre-budget-report/

My point is simple: a principloed option was available, and it wasn't taken. Left and Right are combined in condemnation. Is that a first?

Richard Murphy

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By Paul Soper
27th Oct 2007 22:47

Ah hah!
I think it's true to say that the only countries in the world using the remittances basis are ourselves, the Irish and Cyprus - its continuation is, if this is so, bizarre, but no wonder that we are a tax haven for every other country! Of course that's probably not such a bad thing which explains its continuation.

The tax year in the UK was never the calendar year as the concept of a calendar starting on 1 January was an alien concept before 1752 in this country - the year changed by reference to the Church calendar, whereas days and months were more sensibly linked to society.

Just as an aside acts of parliament are still numbered by reference to the years of the monarchy concerned, or certainly were till recently.

And a point not mentioned before (!) the Law Commissions in both England and Wales and separately in Scotland advocated fundamental reform of the law of domicile in 1987 which would have removed the problem which this tries to address and would take the concept from a hangover of our feudal past - as it is at present - to a more sensible modern concept of the place of a person's residence intention, children acquiring the domicile of the country they are most closely connected with, and adults changing their domicile when their place of permanent residence alters. It pointed out that the advantages for many aspects of law, from inheritance to contract were great and outweighed the more minor effect it would have from a taxation point of view - their comment not mine. Are we trying to reform the wrong thing?

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By daveforbes
29th Oct 2007 11:42

dates dates and more dates
Prior to 1752 the first day of the tax year was new year's day - just new year's day was the 25th March. An odd concept for us these days - for example "what was the date of the day before 25th March 1620 ?" that would be 24th March 1619. Or even more bizarrely which comes first ? 24th March 1620 or 26th March 1620. That would be the 26th March by nearly a year ! I question whether this was "more sensible" than the current system ! ( .. and be careful about the use of UK - I think Scotland made the change in 1600 )

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