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
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
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 oclock, I repeat again that it has been agreed across the Committee that we adjourn our deliberations at 7 oclock. Whoever is on their feetMinister or shadow spokesmanneeds 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.
(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..
New clause 5Definition 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 oclock, 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 Governments 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 Halsburys Laws of England in preparation for this debate. One of the casesI think it was Reid v. Inland Revenue Commissioners, in 1926established that even if one sells ones 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.
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 UKs 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 Tauntons 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
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 individuals 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 ones 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 ones son will meet it. I do not know whether that applies to any
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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