Jane
Kennedy: We must consider what de minimis should be
applied to the remittance basis, alongside our decision that it is not
fair that a taxpayer should have access to both their personal
allowances, if they pay tax on the arising basis, and an allowance when
they are using the remittance
basis. Amendments
Nos. 50 and 51 together seek to raise the limit on the unremitted
overseas income beyond which individuals lose access to their UK
personal allowances and instead face the £30,000
remittance-basis charge. The Opposition amendments are unnecessary. We
have increased the limit beyond which a remittance-basis user pays the
charge. Our original proposal was £1,000. In direct response to
the representations that we received, we felt it was reasonable to
double that, in effect, to £2,000.
The hon.
Members for Taunton and for Fareham are concerned about whether that is
in the interest of low-income migrant workers. I reassure the Committee
that low-income migrant workers who have more than £2,000 of
unremitted foreign income and gains for the year are unlikely to pay
more tax as a result of the new rules on the remittance basis. It is
worth remembering that to earn £2,000 of interest on a foreign
bank account would require about £40,000 of capital invested in
that income
at an interest rate of about 5 per cent. I think hon. Members will agree
that that is a substantial sum of
money. Mr.
Greg Hands (Hammersmith and Fulham) (Con): It strikes me
that a migrant worker could well have £40,000 in a bank account.
About 6 per cent. of my constituency is Polish, and many of those
people are saving back home to build a house or some other kind of
property. It seems to me not impossible that £40,000 could be a
realistic sum to have in a bank
account.
Jane
Kennedy: We need to keep clearly in mind that the de
minimis limit we are discussing does not refer to income in the UK. It
refers to the income that the worker leaves offshore. I know the hon.
Gentleman understands that, but I do not think it is always fully
understood.
I shall deal
in more detail about the work being undertaken to ensure that the
greatest possible clarity and assistance is given to those who may be
concerned about the impact of the proposal. It is important to remember
that individuals have a choice about paying tax using the arising
basis. There are a number of decision points, depending upon individual
circumstances, when it may be in the individual’s interest to be
in one place or the other.
All the
advice I have received leads me to conclude that the majority of
migrant workers with modest earnings will be better off using the
arising basis, as they will be able to claim relief from foreign tax
paid. HMRC will provide additional targeted help and guidance for this
group of taxpayers. A limit set at the level of the personal allowance
as proposed by the amendments would cost us around £40 million a
year.
Mr.
Hoban: The Minister suggested that it may be beneficial
for migrant workers to be taxed on an arising basis, and talked about
the work that HMRC will do to ensure that they are aware of these
issues. Does that mean, for example, that HMRC is going to produce
easily comprehensible guides to double tax
treaties?
Jane
Kennedy: I will come to that in a moment, but I want to
address one or two other points that have been raised. The hon. Member
for Dundee, East, who is temporarily not in his seat, asked whether
people not claiming the remittance basis would be affected by the de
minimis limit. This is an example of the misunderstandings that exist,
which it is helpful for me to
clarify. Such
individuals would not be affected by the de minimis. They would be
opting for the arising basis of tax, and therefore would not be
affected. Following from that, there are many decisions for people to
make. The legislation works by applying the arising basis
automatically. Resident non-domiciles, and migrant workers in
particular, would have to claim the remittance basis. If people do not
claim, there is no complexity and they are on the same tax basis as the
vast majority of UK citizens. The vast majority of low-income migrant
workers are either under the £2,000 limit, or better off on an
arising basis.
The hon.
Member for Hammersmith and Fulham talked about the Polish workers
living and working in his constituency. I, too, have significant
numbers in my constituency, and they make a great contribution to
Liverpool. Is it not fairer that someone with that much offshore income
back in their home country should make a contribution, when other UK
residents are taxed on income well below that level?
Questions
have been asked about HMRC’s ability to cope. Although the new
rules will apply from 6 April this year, it is important to remember
that individuals will not need to make a claim to the remittance basis
for this tax year until after April 2009 at the earliest, and the first
filing date for paper returns will not be until 31 October
2009. There is time, therefore, to put in place new procedures and
resource, as needed, to ensure that HMRC administers the new rules
effectively.
HMRC is
updating all the guidance on residence and domicile, and there will be
several layers of guidance including material aimed at providing
simple, non-technical explanations of the concepts and rules. HMRC will
consult stakeholders on the guidance—my officials met the Low
Incomes Tax Reform Group yesterday to take forward work on the
guidance. We are aware of the concerns, and are working hard to address
them. The
hon. Member for Fareham asked whether the extra-statutory concession
A11 would apply. In our brief discussion of extra-statutory concessions
yesterday, I indicated that a great deal of work going on. The
concession will continue to apply, but if we are to consider a
statutory residence test, it would be appropriate that such discussions
take account of the extra-statutory concession A11, as we will want to
consider any split-year treatment as part of that
dialogue.
Mr.
Hoban: Will the Minister confirm, therefore, that for
somebody who comes to the UK part-way through the tax year, their
earnings in their normal place of domicile will not be counted towards
the £2,000 de minimis limit, as the extra-statutory concession
A11 will continue to apply until the statutory residence
test?
Jane
Kennedy: I can confirm that if the extra-statutory
concession applies to such an individual now, it will continue to
apply.
HMRC
will rely on a range of approaches to avoid the problems of compliance
described this morning. Its guidance will help people to make the right
choices, and it would not be sensible for HMRC to seek to enforce the
collection of small amounts of tax. That would not be
economical—for example, it will not spend £500 to collect
£100.
Mr.
Hoban: As I understand it, the default position will be
that people will be taxed on an arising basis. How will HMRC work out
whether that basis is appropriate and that people are complying with
the rules? Somebody might be taxed on their earnings in the UK on an
arising basis and claims for personal allowances, but might not have
declared, for example, that they are earning £3,000 in rent on
their flat in Warsaw. How will HMRC identify those facts and ensure
proper
compliance?
Jane
Kennedy: With regard to amendment No. 402, HMRC is
required to administer all taxes efficiently and in the least
burdensome way possible, and that
already includes the sort of cost-to-yield ratio calculation that we
have just been discussing. I do not see a case for separating out, as
proposed in the amendment, as part of the tax system for those already
being reported on, and we do not believe that there will be an increase
in the administrative cost of the remittance basis as a result of
implementing the reforms. As I said, HMRC will provide support and
guidance for migrant workers and other low-income groups, and we are
working with key stakeholders to ensure that that is targeted
appropriately. The
hon. Gentleman will know that individuals will be required to
self-assess. HMRC will not increase its surveillance or policing of
resident non-domiciled communities. The system will be based on the
normal procedures of individuals being required to self-assess their
liability to pay tax.
Amendment No.
49 would mean that the level of the limit was reviewed annually. Again,
that is unnecessary. The Committee will recognise that any future
increase in the level of the limit would be enacted in a Finance Bill
and would be subject to discussion and debate at that time.
Amendment No.
361 would exempt someone from having to make a claim for the remittance
basis if they have less than £2,000 income or gains arising in
the
UK.
Mr.
Browne: Would not it be helpful if, between Budgets, the
Chancellor had come to the House to raise the personal allowance owing
to an error in a previous Budget? Should not there be some scope in the
legislation to allow adjustments to be made in such
circumstances?
Jane
Kennedy: The short answer is
no. On
amendment No. 361, people with no income or gains are permitted to
access the remittance basis without a claim, as I said. Introducing an
exemption for £2,000 could create tax avoidance possibilities.
Individuals have a choice between keeping their personal allowance or
claiming the remittance basis. The amendment would give people a
£2,000 personal allowance with the remittance basis, which would
disturb the balance of fairness that we have sought to
achieve. On double
taxation treaties, it depends on the individual’s circumstances,
their home country and the nature of the tax treaty with that country.
Unless there is a specific example that might illuminate that and to
which I could respond on Report, having considered it, I cannot give
much more than that general response. It will depend on the
circumstances of a particular individual and the terms of the relevant
tax treaty. I have answered most of the points that have been raised,
but I am sure that we will return to some of these
issues.
Mr.
Browne: The number of amendments to the schedule that have
been tabled indicates the confusion in the Government’s mind
about this whole area of taxation. I agree with the view that has been
expressed by others, including the hon. Member for Cities of London and
Westminster, that there are practical issues relating to implementation
and information to employers and employees about the consequences of
the arrangements and the potential revenue implications. Different
people have different ideas about what is “fair”, but
several members of the Committee have expressed concerns
about the impact of the proposals on people with low and low-to-middling
incomes who are making a contribution to our economy.
There is only
so much that we can do in Committee to save the Government from
themselves, and I am content to have made those opinions available to
the Minister. She is, of course, within her rights to ignore them and
suffer the consequences later. I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn.
The
Chairman: Order. I feel bound to tell the Committee that
there are 10 minutes before we break, and when we reassemble at 1
o’clock we have three hours. We have a further 10 major debates
on schedule 7, and then we will discus new clauses. I suggest that hon.
Members bear that in mind when they are speaking and when deciding
whether it is appropriate to
intervene. Amendment
made: No. 340, in
schedule 7, page 152, leave out lines 1 and
2.—[Jane
Kennedy.]
10.15
am
Mr.
Hoban: I beg to move amendment No. 362, in
schedule 7, page 153, leave out lines 1 to
12. I
shall be mindful of your strictures about brevity, Sir
Nicholas—
Jane
Kennedy: Hear,
hear.
Mr.
Hoban: I said
“mindful”. There
is a point of disagreement between us and the Government. The
Government decided that, as part of their rules for the taxation of
resident non-domiciles, they would no longer benefit from personal
allowances. That cropped up in the previous debate. Our point is that
people with relatively modest overseas income could end up paying tax
on all their income, without the benefit of any personal allowances.
Furthermore, because of the way in which the provision is structured,
they might also lose their annual exempt amount under capital gains
tax. That could lead to them being taxed on relatively small gains if
they have already used their de minimis limit of
£2,000. There
will also be an issue for companies. The Minister said that people
will, by default, be taxed on an arising basis and will be able make
their claim for remittance basis when the tax year has ended, but
clearly employers will assume that people qualify for personal
allowances and will tax them on that basis, so either the individual
will have to repay the benefit from that tax allowance, or part of the
way through the yea they will elect the remittance basis and advise
their employer
appropriately. A
compliance cost for business will arise from the loss of personal
allowance and people’s decision about that. That will add to the
burden on companies. The Association of Labour Providers, a body that
has not previously been cited during our proceedings, has highlighted
some of the challenges that will arise when people move between the UK
and other territories. It pointed out that 52 per cent. of registrants
under the Department for Work and Pensions scheme were in temporary
employment, and 57 per cent. said that they
intended to stay for less than three months, while only 12 per cent.
said that they intended to stay for more than a
year. That
demonstrates some of the challenges for migrant workers in complying
and for employers in, for example, providing advice on whether workers
should be taxed on a remittance basis or retain their personal
allowances and be taxed on an arising basis. We discussed those points
during previous debates, and I shall not reiterate them. To make it
easier for those individuals, it may be better to reinstate the
personal allowances and to lift the burden rather than changing the de
minimise limit, as was proposed in the previous group of
amendments. Another
issue goes back to double taxation treaties. John Whiting suggested
that although these rules withdraw personal allowances, they may have
to be reinstated under some double taxation treaties, which again adds
to the confusion and complexity that taxpayers will have to navigate.
It would be helpful if the Minister would indicate whether taxation
treaties will be able to override the withdrawal of personal
allowances. If so, it might be easier for the Government to return to
personal
allowances. My
final point is about capital gains tax. The Government’s
proposals not only exclude the personal allowance, but take away the
annual exempt allowance. In terms of the compliance burden on HMRC, the
current reporting requirements for CGT are linked to the annual exempt
allowance. If the annual exempt allowance for resident non-domiciles is
removed, they will need to report any gains that they make. That will
lead to a disproportionate increase in the administrative burden on
both HMRC and the taxpayer.
I note the
Minister’s comments in the last debate about HMRC not pursuing
relatively small amounts of tax, but in theory a taxpayer would be
required to report a relatively small gain—a gain as small as
£5—on overseas property, for example. They would need to
complete all the CGT pages of the tax return and would potentially pay
CGT of 90p on a £5 gain. By wiping away the annual exempt
allowance, we are in danger of increasing the burden on the taxpayer,
requiring them to submit more forms than strictly necessary to comply
with the rules. That is the impact of the abolition of personal
allowances, and I am grateful for the Minister’s comments on
both the personal allowance and the withdrawal of the annual exempt
allowance.
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