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
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 individuals 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 HMRCs 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 guidancemy 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 economicalfor 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
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?
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 individuals 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 Governments 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
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 oclock 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.]
I shall be mindful of your strictures about brevity, Sir Nicholas
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 peoples 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
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 Governments 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 Ministers 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 gaina gain as small as £5on 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 Ministers comments on both the personal allowance and the withdrawal of the annual exempt allowance.
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