Mr.
Hoban: The Financial Secretary referred to the exemptions
that appear under double tax treaties where funds are brought into the
country for somebody to live on. Is she saying that where there is a
conflict between a double tax treaty and the rules around residence and
domicile, the double tax treaty will override the rules on residence
and
domicile?
Jane
Kennedy: It will depend on the terms of the
double-taxation treaty and on the circumstances of the individual, but
I anticipate there will be few occasions when there will be conflicts
of this nature. I did want to respond to the point that the hon.
Members for Fareham and for Taunton both raised about the fears that
some big employers in the City had about recruiting and retaining some
of the excellent students who come from abroad to train here and may in
the course of their studies come close to the seven years. It would be
wrong
to start making exemptions in that case, just as it would be virtually
impossible to start making exemptions for the banker described by the
hon. Member for Fareham, or an industrialist who may have been here for
some time, involved in one of our big multinational corporations. To
make that sort of exemption is quite wrong. If we have what we are now
providing—a fair system that is far less complicated than it
used to be, but none the less addresses the concerns that were being
raised among citizens of the UK who did not have access to the
remittance basis about the fairness of the loopholes that were
undermining the system—then we have something that will work. It
is clearer—I am not saying that it is the clearest piece of
legislation ever, but it is much clearer than it
was.
Mr.
Browne: Can the Minister answer the question that her hon.
Friend the Member for Wirral, South put to me, which is whether any
estimate has been made of the financial impact on the British higher
education sector of the proposals being brought forward by the
Government?
Jane
Kennedy: I have not asked for any specific piece of work
to do that, but I am confident that the impact will be very small. If
the hon. Gentleman and my hon. Friend the Member for Wirral, South
wish, I can certainly inquire further, but I believe the numbers of
students affected will be very small. The Russell Group, or any other
institution of higher education, ought not to be concerned about the
implications of this
clause.
Stewart
Hosie: The Minister is absolutely right in terms of those
individuals who have a minimum of £1.6 million to be
parked overseas, but thinking about the sort of student who may be
funding themselves through university, who may have a modest remittance
coming in, more than the £2,000 threshold, they would then lose
all their UK tax allowance for a very small remittance coming in from
overseas to help them with their university fees perhaps. Is there not
a real issue for people working their own way through university with a
small remittance coming from overseas, perhaps from family, to help
them pay their fees, that they would then be hit by this additional
taxation because their allowances would go, which they need to work
their way through their
studies?
Jane
Kennedy: I think I can reassure the hon. Gentleman.
Individuals have to make choices and a resident non-domicile does not
have to use the remittance basis. They can choose not to do so, in
which case they are treated as any other taxpayer in the UK. Therefore,
if they were in full-time education, their income would be considered
as that of any other student in the UK would be considered. As I have
said, we do not have double-taxation agreements with every country in
the world, but we have one of the largest, if not the largest, numbers
of double-taxation agreements around the world, so the vast majority of
students who come to the UK to study would be protected by the terms of
their double-taxation treaty agreements.
I hope the
hon. Member for Dundee, East will accept that I do not believe there is
a cause for concern here. The only reason for opting to use the
remittance basis and having to consider paying the charge is if one has
offshore funds of £80,000 or more. With anything less than that,
in the circumstances he has described, one would simply consider
oneself to be here as any other taxpaying resident in the UK for tax
purposes. Mr.
Browne: I was not seeking to make another speech. I
thought that was a useful discussion, and I hope the Minister will take
the opportunity to keep the issue under review and ensure that there is
not a damaging impact on the higher education sector within the United
Kingdom. On that note, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
The
Chairman: To ensure that there is no confusion as we
approach 7 o’clock, I repeat again that it has been agreed
across the Committee that we adjourn our deliberations at 7
o’clock. Whoever is on their feet—Minister or shadow
spokesman—needs to resume their seat to allow the hon. Member
for Waveney, the Government Whip, to move the question that further
consideration be adjourned. I hope that is
clear.
Mr.
Hoban: I beg to move amendment No. 360, in
clause 22, page 12, line 40, at
end add— ‘(9) The Treasury
shall lay before the House of Commons by 31 December 2008 a report
setting out the basis of a statutory residence rule to replace the
existing
rules.’.
The
Chairman: With this it will be convenient to discuss the
following: Clause stand
part. New
clause 5—Definition of
residence ‘(1) An individual is
resident in the United Kingdom for income tax purposes
if— (a) during the tax
year in question the individual spends (in total) more than 31 days in
the United Kingdom; and (b)
during the three-year period that includes the tax year in question and
the two tax years immediately preceding it the individual has spent (in
total) 183 or more days in the United Kingdom,
including— (i) the total
number of days spent in the United Kingdom in the tax year in
question, (ii) one-third of the
days in the tax year immediately preceding the tax year referred to in
sub-paragraph (i), and (iii)
one-sixth of the days in the tax year immediately preceding the tax
year referred to in sub-paragraph
(ii). (2) An individual found
to be resident under subsection (1) shall be liable for income tax on
both their UK income and capital gains and any foreign income and
capital gains remitted to the United
Kingdom. (3) In determining
whether an individual fulfils the definition of residence under
subsection (1) treat each day the individual is physically present in
the United Kingdom as a day spent by the individual in the United
Kingdom. (4) But in determining
that issue do not treat as a day spent by the individual in the United
Kingdom any day on which the
individual— (a) arrives
in and departs from the United Kingdom on the same
day; (b) is present in the
United Kingdom for less than 24 hours for transit
only; (c) is present in the
United Kingdom by virtue of being employed as a crew member of a
foreign vessel;
(d) is unable to leave the United Kingdom on the
same day owing to a medical
condition; (e) is enrolled in
full-time higher education in the United
Kingdom; (f) is an exempt
individual. (5) The Treasury
shall, by regulations, define an exempt
individual. (6) Regulations
under subsection (5) shall be made by statutory
instrument. (7) A statutory
instrument containing regulations under subsection (5) may not be made
unless a draft of it has been laid before and approved by resolution of
the House of Commons. (8) On
the coming into force of this section, Chapter 2 of ITA 2007 shall
cease to have
effect.’.
Mr.
Hoban: Thank you, Sir Nicholas, for your guidance on
timing. I will endeavour to finish before 7 o’clock, hopefully
at a point that does not cause the Committee any inconvenience in terms
of other Members
speaking. The
heart of the amendment is to probe the Government’s thinking on
where they might be in terms of considering a statutory residence test.
It is worth bearing in mind that while clause 22 may give the
appearance of being a statutory test, it certainly is not. We have a
situation where a taxpayer will know with certainty that, if they spend
more than 183 days in the country in one year, or more than 91 days per
year over four years, they will be residents. What they cannot be
certain of is whether, if they spent fewer days, they would not for
some reason be treated as resident. Unfortunately, it is not as cut and
dried as that.
We are in a
case law system, and case law has built up around these issues. I had a
quick peek at “Halsbury’s Laws of England” in
preparation for this debate. One of the cases—I think it was
Reid v. Inland Revenue Commissioners, in 1926—established
that even if one sells one’s house and furniture and lives in
hotels in the UK, as long as one spends time in the UK annually, one
could be deemed a resident. In this case, the period of time was three
to four months, the bank account was in London and the personal effects
were here. The fact that one does not have a property here does not
necessarily mean that one is not resident. There is an example in which
someone stayed in a hotel, but was deemed to be resident. There are all
sorts of rules around this matter which make it quite
complex. Emily
Thornberry (Islington, South and Finsbury) (Lab): I am
surprised to hear that the hon. Gentleman is so shocked that people can
be resident without owning property. A very large number of my
constituents live in Islington without owning their
flats.
Mr.
Hoban: The point I was making was that actually the rules
are not clear, and that the fact that one may not have a home in the UK
does not mean to say that one is not resident in the UK if one comes to
visit. In some circumstances, an individual might have a home in the UK
but not be deemed resident in the UK, despite visiting frequently. If
someone has an abode here, they might still be in a situation where
they are not deemed resident. I have to give way to the Minister. I do
not want to take up too much time. I am conscious of the
hour.
6.45
pm
Jane
Kennedy: It may be helpful to the hon. Gentleman if I tell
him that I am not unsympathetic to the case being made for a statutory
residence test. However, there is no consensus at the moment from those
groups lobbying for such a test as to what a test would look like. I
have asked for work to be done to see whether one can be
developed.
Mr.
Hoban: I knew that the Minister was sympathetic to the
idea before I started. I understand that she has been engaged in
discussions with advisers. I want to say why I believe that there is a
strong case for a residence test, because it is important that people
understand some of the issues. I shall want to raise other points on
clause stand part.
Guidance
produced by the Inland Revenue in IR20, which is quite a thick
document,
states: “This
booklet sets out the main factors that are taken into account, but we
can only make a decision based on your residence status on the facts in
your particular
case.” There
is some uncertainty about how the rules apply. The 91-day rule has its
complications. Although it is meant to have a four-year duration, those
who have been in the country for an average of 91 days during the
previous four years are treated as being resident from the fifth
year.
However, the
booklet also states
that “you
are treated as resident from 6 April of the first year if it is clear
when you first come to the UK that you intend making such visits and
you subsequently actually carry out your
intention.” Intention
is a key part of this. It is not only about whether people are resident
here, it is also about what they intend to do. On that subject, there
is an interaction between the clause and schedule 7.
Residence is
clearly an important concept, given that it drives whether or not one
is liable to pay the £30,000 charge. There is much uncertainty,
and people feel that it undermines the UK’s competitiveness as a
place to do business.
The UK is
one of the few major countries without a statutory residence rule.
Although the consultation document on residence points out that the UK
has been relatively generous about the number of days that people can
stay in the UK without being resident, that generosity is undermined by
the fact that the rule itself is non-statutory. As a consequence,
people will want to avoid inadvertently becoming resident and thus
might well spend fewer days in the UK. They will want to ensure that
they are well within the rules and cannot be deemed to be treated as
being resident here.
That is why
it is important to consider the matter, and I am grateful that the
Minister gave us an assurance in her intervention. I was generous in
the amendment in giving the Government until 31 December 2008 to
collate the report, as it will enable the consultation to be done
properly. There are different models for statutory residence tests.
Both Ireland and the United States have drawn up their own tests. The
hon. Member for Taunton’s amendment to new clause 5 is based on
the US test, but there are others.
I wonder
whether the Minister has considered whether the new test should be
retrospective, or whether the Government would consider having simple
transitional
reliefs. The US test requires going back three years in calculating
whether one has spent more than 183 days in the country. If the test
was introduced now, would it apply over the past three tax years, or
would it come fully into effect in three years’ time? Those are
the types of issues to which the Minister has alluded, but they are
difficult to resolve. I shall not
talk at length about the case, given that the Minister has indicated
her desire to consider it. However, I wish to raise some points on
clause stand part. First, IR20 allows a disregard on the number of days
spent in the UK if the individual or a family member falls ill during a
visit that requires individuals to extend their stay in the UK. Will
that concession apply following the introduction of these changes? I
suspect that that might fall into the category of extra-statutory
concessions, a subject that was debated earlier today. It would help if
the Minister were to assure us on that.
I wish also
to speak about the applicability of the changes. The changes in the
clause affect residents of narrowly defined areas by amending section
831 of the Income Tax Act 2007, which deals with the foreign income of
individuals resident in the UK for a temporary purpose. Is it the
intention that in the absence of statutory residence rules these
changes will apply to all aspects of IR20? If so, when will a revised
version of IR20 be
ready? Thirdly,
I want to discuss the in-transit rule in the clause. Such rules were
introduced because the Government decided that the day of departure and
the day of arrival could no longer be excluded from the day-counting
rules because of changes in international travel. They changed the rule
so that when an individual was in the UK at the end of the day, that
day was counted towards residence. That meant that people in transit
would be covered by the rules. An international traveller spending the
night at Heathrow before catching his flight the next morning to New
York would find that day counting towards his days in the
UK. The
Government have responded to the outcry generated by that rule with
proposed new subsection (1B)(b), which states that if somebody is in
transit, the day does not count towards their residence test
if “the
individual does not engage in activities that are to a substantial
extent unrelated to the individual’s passage through the United
Kingdom.” Helpfully,
paragraph 17 of the explanatory notes on the clause tries to address
what “substantial extent” means. Somebody who is in
transit through the UK and attends a business meeting in Canary Wharf
does engage in activities that
are “to
a substantial extent
unrelated” to
his passage through the UK. However, somebody who unexpectedly bumps
into a colleague in the foyer of an airport hotel, has a drink with him
and talks about business does not engage in such activities. The casual
encounter is okay, but the formal meeting is not. I wonder whether we
will see an increase in casual encounters in airport hotels as a
consequence of this
measure. Some
more extensive guidance on this measure might help. I gather that
spending most of the day seeing one’s grandchildren who live
near Gatwick while en route between Guernsey and New Zealand will not
meet the test, but having a meal at an airport hotel with one’s
son will meet it. I do not know whether that applies to any
members of the Committee, but it is apparently an important distinction.
I am not quite sure what happens if one’s grandchildren also
come to eat at the airport hotel. I suppose it depends how long the
meal lasts and how good the service is as to whether it passes the
test. The
concession is well intentioned and it is the right way to go, but I am
not sure how straightforward it is to implement. Doubtless, case law
will develop along these lines. We have received one representation
saying that the examples in the explanatory notes do not refer to the
modern form of business in which people may communicate by computer
over things like Skype, video conferencing and so on. If one
participated in a video conference from a hotel in Heathrow while
awaiting a flight to New York, would that be a formal meeting? That
might sound rather
pedantic.
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