House of Lords - Economic Affairs

Select Committee on Economic Affairs Second Report

CHAPTER 4: RESIDENCE AND DOMICILE

155. The normal basis of taxing those who are resident and domiciled in the UK is the arising basis i.e. the person is taxed on worldwide income in the year in which it arises.

156. The remittance basis of taxation applies to those who are resident in the UK, but either non-UK domiciled or not ordinarily resident in the UK. Under this system, UK residents who have foreign income or gains (for non-domiciles) are not taxed on these until such time as they remit amounts in respect of those income or gains to the UK when they are taxed on the amounts remitted.

157. A person is treated as resident in the UK according to rules which are partly statutory and partly practice based on case law. The rules are summarised in the HMRC booklet IR20. Statutorily a person is always resident in the UK for a particular tax year if he spends 183 days or more in the UK in that year. Hitherto there have been no legislative rules determining which days had to be counted and this was set out in IR20: the normal rule was that days of arrival in and departure from the UK were ignored in counting the days spent in the UK.

158. A person regularly visiting the UK is also treated as resident here if after four tax years the visits during those years averaged 91 days or more for a tax year. Longer term visitors are treated as resident in the UK if they come to the UK for a purpose that means they remain here for at least two years.

159. Domicile is a general law concept distinct from nationality or residence. A number of factors contribute to determining a person's domicile, which can be summed up as being the place of a person's permanent home—where a person's roots are. A person can have only one domicile at any time and there are various aspects of the concept such as domicile of origin at birth, domicile of dependency for children and a domicile of choice which may be adopted, but it is quite difficult to change one's domicile and almost impossible for HMRC to show that someone has done so.

160. The most recent review of the rules relating to residence and domicile began in 2002. PBR 2007 announced the completion of the review and a package of reforms[48] "to make the system fairer while maintaining the UK's competitiveness". The package comprised:

UK residents who are non-domiciled or not ordinarily resident and have been resident in the UK for longer than 7 of the last 10 years having to pay an annual charge of £30,000 to continue using the remittance basis of taxation, subject to a de minimis limit
denial of personal allowances and the CGT annual exempt amount for those claiming the remittance basis, again subject to a de minimis limit
changing the day counting rules for deciding whether someone is resident in the UK so that days of arrival and departure would be counted
addressing anomalies in the present rules for the remittance basis which previously had allowed users to remit amounts to the UK without triggering a charge.

Consultation was promised on the detail and on a wider range of options, including specifically whether those who have been resident here for more than 10 years should contribute more. The proposals proved very contentious, with national press comment and at a more technical level.

161. HMT published a consultation document on 6 December 2007 and draft legislation was issued by HMRC on 18 January. The draft legislation proved even more contentious, particularly amongst the tax professionals. Dave Hartnett (Acting Chairman HMRC) wrote[49] an open letter on 12 February offering clarifications on the intention of the draft legislation by way of changes from the draft provisions as published. The letter stated that the Government was committed to retaining the remittance basis, however there were issues of fairness that needed to be addressed. The letter went on to explain why the Government was introducing the £30,000 annual charge and why loopholes in the present legislation were being addressed.

162. The Hartnett letter then went on to state that the Government's intention had always been that there would be no additional disclosures of information about a person's income and gains arising abroad, there would be no retrospection in the treatment of trusts, the changes would not apply to gains accrued or realised prior to the changes coming into effect, money brought into the UK to pay the £30,000 charge would not itself be taxable, and it would be possible to bring art works into the UK for public display without incurring a charge to tax.

163. The Budget 2008 set out significant changes to the draft legislation, incorporating, but going further than, the clarification/changes foreshadowed in the Hartnett letter:

the £30,000 charge would not apply to children
the charge should be creditable against foreign taxes where appropriate, in particular US tax
there would be exemptions for works of art coming into the UK and other relaxations for assets remitted to the UK
the de minimis levels would be increased from £1,000 (as proposed in the PBR) to £2,000; where a person had unremitted foreign income or gains of less than £2,000, the denial of personal allowances (and CGT annual exempt amount) and the payment of the £30,000 charge would not apply to them
the day counting rules would be modified so that a day would be counted only if a person was present in the UK at the end of the day, subject to an exemption for passengers in transit
there would be changes to the loophole closing measures, particularly for offshore trusts
there would be relaxations for foreign CGT losses, employee share schemes and offshore mortgages
the Chancellor gave a commitment that the rules in this area would not be substantially revised for the rest of this or the next Parliament.

164. The legislation for the amended proposals was published in the Finance Bill on 27 March. Clause 22 contains the changes to the residence rules, though the only changes that are made are to the limited statutory rules that presently exist. However the Explanatory Notes to clause 22, produced by HMRC, state[50] "The changes to the legislation introduced in the clause are in respect of the 183-day test only. However, where current HMRC practice requires the use of day-counting rules to determine residence for tax purposes, that practice will also be changed in line with the statutory amendment introduced in this clause".

165. Clause 23 and Schedule 7 introduce the changes to the remittance basis of taxation along the lines of the Budget announcement. The Explanatory Notes make it clear that the legislation in the Bill is not complete[51] "Some of the clauses in the published version of the Finance Bill 2008 are not wholly complete. The Government has said it wants to ensure these changes are comprehensive and workable. The areas where legislation is incomplete continue to be subject to ongoing discussions with interested parties to ensure the final legislation is comprehensive, workable and fair whilst delivering the overall policy. Further changes will be introduced by way of Government amendments during the course of the Bill".

General Handling

166. We asked our witnesses about the general handling of this policy initiative. John Cullinane (CIOT) thought that "In terms of the underlying policy reasons—which is, essentially, that if you have been here longer and have an increasing association with the UK you ought to be able to shoulder more of the tax burden—as a broad principle, I do not think many people would quarrel with that" (Q 56). However, he continued "but one of the unfortunate things is the way in which these proposals came in unannounced, caused brouhaha, and then were subject to a lot of compromises and have generally gone off at half cock. The result of all that is that any kind of genuine, rational, consultative look at the whole thing, to see how we can best give effect to this principle, that the greater your connection with the UK the more of a burden you should bear, has just been ruled out and we have a very complicated regime with as many anomalies as before" (Q 56).

167. Malcolm Gammie (IFS) commented on the "draft legislation that apparently went very much further and had a very much greater impact than had generally been anticipated" (Q 16). He summarised the problems as "I think that really the general uncertainty it generated as to what precisely the rules were going to be, how wide-ranging they were going to be, really led to the degree of outcry that there was and the publicity it obtained" (Q 16).

168. Francesca Lagerberg (ICAEW) thought that "There was a huge amount of concern and a lot of that has been reined back and all credit to the people who have done something about it. I think that was why it blew up in the way that it did" (Q 117). Chas Roy-Chowdhury (ACCA) suggested "that there should have been a more formed judgement made before the announcement happened which created the fuss, created the concerns, and then the original proposals tried to have the best of both worlds, the arising basis and the remittance basis at the same time, which is not the way to attract talent and keep talent in the UK" (Q 117).

169. Commenting for the City of London, Michael Snyder did "not really see the policy argument. I can see it in the sense that it is unfair if some people do not pay tax like others who live here but if the reality is that they will not then be here the Exchequer is no better off—indeed a lot worse off because of the indirect tax, the critical mass of businesses that we need to operate the international, financial markets here in London and indeed the foreign direct investment goes, so we are all worse off as a result" (Q 139). Ian Menzies-Conacher (BBA) considered that there was no "clearly thought out rationale" (Q 140). He thought that "on balance it would have been better to have deferred [the proposals] for a year to allow a lot of the detailed problems that they are now seeing emerge to be resolved properly" (Q 140). Though Michael Snyder, whilst accepting that he might be in a relatively small minority within the City, thought it important to have "certainty and closure now. It would be good if it could be closure with the right provisions in it as opposed to some of the wrong ones, in our opinion" (Q 138).

170. Ian Menzies-Conacher (BBA) was also concerned "that we are rapidly running out of time in the present Finance Bill. There are some very constructive discussions taking place with officials. Problems are being addressed but quite late on in the process. There is a great danger in practice, if you draft against rigid timetables, that we are almost as likely to put in new problems as solve old ones because that is the nature of drafting in a hurry" (Q 142). Ian Menzies-Conacher also thought that "We are tripping up against quite serious business consequences which did not have the time to be thought through properly" (Q 157).

171. John Cridland (CBI) saw "the furore over this issue was really in the New Year when draft clauses were available which made it clear that the application went well beyond what most stakeholders were expecting at the time of the Pre-Budget Report" (Q 181). Richard Stratton (LSEW) thought that these proposals had not been thought through sufficiently (Q 238). Simon Walker (BVCA) saw "the introduction of the changes to the non-domicile regime as having been a real shambles" (Q 298).

172. The above paragraphs record much harsh criticism of the way that this policy initiative was handled. Our private sector witnesses would not have used words like "a real shambles" if they did not feel strongly about this. Even though it was accepted that the proposals in the Finance Bill were much better than those published on 18 January, and presumably the amendments still to be made will make the legislation more palatable still, there is clearly much concern that the way in which this was handled will do lasting damage to the view that non-domiciles have of coming to the UK.

173. Officials resisted the idea that this had been badly handled, though they accepted that there had been much controversy surrounding the initiative and that, in some respects, the draft legislation had been out of line with the policy intention of Ministers. David Richardson (HMRC) said "… HMRC put out the draft clauses in January. What became very clear very quickly in January after these clauses went out were three things. The first is that there was clearly some misunderstanding of what the clauses did … The second thing … was that there were some detailed circumstances which the clauses did not address … The third category of issues … was ... that the impact of some of the provisions was out of line with the policy, which was to have a regime which was fair and internationally competitive" (Q 345). In support of their acting very quickly as a result of these issues, David Richardson pointed to the letter of 12 February from Dave Hartnett which clarified the immediate issues and that the "Chancellor announced the final shape of the package which had some further changes in it, again in response to the consultation period which went beyond the clarification in February" (Q 345).

174. David Richardson (HMRC) stated that "the Finance Bill contains all of the fundamental provisions in relation to the residence and domicile changes. All of the key substance is there. There are some clauses around some of the detail which were not included in the Finance Bill in time because we had not been able to get those ready in sufficient detail to be confident of them" (Q 345).

175. Whilst we hear what officials said to us, we cannot accept that there would be the strength of feeling on the handling of this initiative relating to residence and domicile if everything had proceeded as smoothly as they seek to suggest.

176. We recommend that, if they have not already done so, HMT and HMRC should carry out a full review of the reasons why there were so many difficulties in the development of this policy initiative. They should ensure that the lessons are learned so that these problems do not emerge in other initiatives.

177. We also recommend that if another policy initiative gets to the point where the legislation cannot be finalised for inclusion in the Finance Bill, that initiative should not be included in the Bill, or, if feasible, the part which is not finalised should not be included. We cannot support the approach of the Finance Bill's still being subject to much amendment at the time it is published, particularly when the proposals come into effect from the beginning of the tax year, as in this case.

Compliance Issues

178. Our private sector witnesses have brought home to us a large number of compliance issues which trouble us. Malcolm Gammie (IFS) was the first to alert us to these "Standing back and looking at all of those changes, inevitably if one is going to bring within the scope of United Kingdom tax a larger proportion of the income and gains enjoyed by individuals in this position the likelihood is that their tax affairs will become more complicated" (Q 1). He contrasted the implications for the wealthy with those of more modest means (Q 1). The ATT in their written evidence wrote[52] "What all will find is an overall increase in their tax compliance burden".

179. John Whiting (CIOT) refined the categories of non-domiciles affected by these proposals. He singled out a third category, those "higher up the income scale, perhaps employed by the archetypal city bank" (Q 67). So the compliance issues are likely to be different for the wealthy, the middle income executives and those of more modest means. This section looks at these three categories.

HIGH NET WORTH INDIVIDUALS

180. For the very wealthy, Malcolm Gammie (IFS) concluded that "whilst it will complicate their tax affairs, I am not sure their tax affairs will become, in terms of administrative and simplistic considerations, significantly more complicated than they probably already were. This is a highly specialised area in which most of the wealthy individuals will have separate professional advice and they will have been taking a great deal of that advice in recent times" (Q 1). This view was generally held amongst our private sector witnesses. For example, the view of Michael Snyder (City of London) was that "the difference that it will make to the very wealthy is irrelevant" (Q 149). Whilst the ATT accepted that[53] "There are those (the multi-millionaires) for whom an increase of £33,902 to their UK tax bill is a minor inconvenience and who will absorb these new provisions in their stride", they did point out because of the need to keep track of what is, and what is not, remitted to the UK their compliance burden will increase and "The new definitions (section 809K et seq) of situations which constitute a remittance will cause much confusion and not a few tribunal or Court cases".

181. David Richardson (HMRC) pointed out that the effect of these proposals on the wealthy will depend on the circumstances of any individual. "For the wealthy, the £30,000 charge is probably the most significant issue. They will have the option to pay that £30,000 and stay on the remittance basis … The wealthy staying on the remittance basis will have to apply the new, tighter remittance rules. That seems fair … The wealthy tend by definition to be quite well advised. Whilst the rules are complex in some respects, I imagine their advisers are well up to dealing with them. The other area probably of most concern to the most wealthy is the issue about non-resident trusts, which is an issue that we have responded to quite significantly as a result of the consultation process. Those provisions are now much more in line with what they were looking for. The answer to your question is it depends but the rules are as simple as they can be to deal with the complex affairs that perhaps some wealthy people have" (Q 353).

182. For high net worth individuals there are additional complexities in these provisions. This complexity is undesirable, even though these individuals will have access to the best professional advice.

MIDDLE INCOME EXECUTIVES

183. We now turn to the middle income earners, for example the City executive on a tour of duty in the UK. Michael Snyder was concerned about these people "what we are really concerned about frankly, the middle earners that are over here on secondments, not normally for two or three years these days as you will know, but who could be here for ten years or longer. They may not call it their international headquarters but it is de facto their international headquarters in the City. This is really important, so I think we have to just try and resolve a few of the issues that will affect those middle income earners" (Q 149).

184. John Whiting (CIOT) suggested that "it is the bank/the employer who is going to pick up the cost" (Q 67). Mervyn Woods (CBI) agreed with this confirming that he saw increasing employment costs as a consequence of denying personal allowances from day one on an employee's tour of duty in the UK (Q 194).

185. Ian Menzies-Conacher (BBA) was also concerned "The middle is the problem for employers because either they are an assignee from overseas in which case you will have to do a lot more paperwork for them … We do not know how the circle is going to be squared between the fact that you have PAYE ongoing obligations in relation to the current year which is impacted by an election that you are going to make after the year" (Q 153). The LSS wrote[54] "The potential loss of personal allowances will also result in increased compliance burdens for employers".

186. David Richardson (HMRC) pointed out that "The legislation in general does not impose any additional burden on employers. The legislation is essentially about an individual's liability to tax and the self-assessment system is the key vehicle for ensuring that" (Q 361). Though he went on to accept that some employers with foreign executives here choose to provide assistance to them through, for example, tax equalisation packages. "That is a matter for them. That is not something that the tax system imposes on them" (Q 361).

187. David Richardson (HMRC) pointed out that "If you take the example of a foreign executive over here who has a significant amount of foreign income, if they do not remit that over here, the only burden on them is that they will lose the personal allowance" (Q 361).

188. We remain concerned that there might be significant compliance burdens on those employers who have a large number of overseas executives working for them. If there are, they will be in sharp contrast to HMRC's programme to cut compliance costs which we commended in last year's report.

189. We therefore recommend that HMRC should monitor closely the effect of these proposals on UK employers over the next couple of years and take all possible steps, with the operation of PAYE for example, to ensure that their compliance burdens are minimised.

THOSE OF MODEST MEANS

190. It is the impact on those of more modest means—the migrant worker from Eastern Europe, for example—that was of most concern to our private sector witnesses. If that person has unremitted foreign income of less than £2,000 he will be entitled to the remittance basis automatically and personal allowances will not be denied. However, a person who has unremitted foreign income of £2,000 or more will need to make a decision as to whether to:

claim the remittance basis—in which case he will be denied personal allowances from the day that he arrives in the UK, or

be taxed on the arising basis—in which case he will be taxed on his worldwide income, including any foreign income and will have to cope with offsetting foreign tax against UK tax to prevent double taxation on income or gains.

191. Malcolm Gammie (IFS) put it this way "For those individuals with much smaller income and gains there is, of course, a considerable question which surrounds the £2000 de minimis exemption ... Precisely how it will be possible actually to administer that exemption and how Her Majesty's Revenue and Customs will actually be able to check whether people are doing this correctly is, I think, one of the more significant questions which arises from an administrative perspective in relation to these arrangements" (Q 1).

192. John Whiting (CIOT), who has a particular interest in these matters as a member of the Low Incomes Tax Reform Group, expressed his concerns this way:

"It is of great concern that we have here a provision that will affect a considerable number of the vast majority of non-domiciles who are not only unaware of the term "non-domicile" in many cases … but because of the situation back home … because of the work they do back home, or their summer job back home, or the rent on their flat, are suddenly losing their personal allowances … It seems unfair, at best, and, actually, totally impractical, because all the evidence we have gathered from talking to HM Revenue & Customs is that they are simply not geared up to cope with this" (Q 60).

The CIOT's written evidence underlined this[55] "The low paid, who will, in great numbers, unwittingly breach the new rules and so risk a future penalty".

193. In her response Francesca Lagerberg (ICAEW) agreed that there were problems for both taxpayers and HMRC in administering these provisions. "I think with de minimis it is very hard to see how that message is going to get across. English might not be the first language … and, yes, from a resource perspective, HMRC are going to police whether that £2,000 de minimis is being properly operated and that is a big ask … do they have the resources to do that, the training to do it and the understanding of the issues around it? It is a massive undertaking. We were very concerned about the compliance, the admin work placed upon HMRC and upon the taxpayer that that particular de minimis will bring" (Q 128).

194. All our private sector witnesses concurred. And they were also agreed that, in fact HMRC would not be able to cope. Isabel d'Inverno (LSS) said "I am sure that the Revenue, in relation to the lower paid, will have to simply ignore the issue because I do not see how they will have the resources to police it. That means that many taxpayers yet again will be in a non-compliant state through no fault of their own" (Q 224). Ian Menzies-Conacher agreed that "There will be substantial non-compliance with this" (Q 153). Richard Baron (IoD) addressed the point in a slightly different way "it is pretty unlikely that the Revenue are actually going to collect the money which might be due from people who have a foreign income of marginally over £2,000" (Q 187).

195. Malcolm Gammie (IFS) commented on another aspect of these proposals "The removal of the personal allowances and the Capital Gains Tax exemption effectively across the board I think was something which had not necessarily been anticipated, and because that affected a much broader population of individuals again it was going to raise questions both as to fairness and as to the practical way in which it could be administered" (Q 16). The removal of personal allowances is something that applies to everyone claiming the remittance basis whatever their level of wealth. Malcolm Gammie put it in this context because the number of non-domiciles falling into the lower income ranges is likely to be substantially greater than the middle income or the wealthy.

196. In commenting on this John Whiting (CIOT) expanded it into a related point "Indeed, we are still, even today. finding that they [HMRC] have not realised that there are issues when, for example, here in the UK we may try to deny a low-income person a personal allowance but under the double tax treaty they are still entitled to it, so they, therefore have to deny it on the one hand and then give it back again—all of which sounds hopelessly impractical even if it is fair, which we would argue it is not" (Q 60). Andrew Meeson (ATT) thought that to levy the £30,000 was sufficient to address the "purported abuse, as it were, … that the non-domiciliaries are in some way unfairly benefiting from sheltering their offshore income and gains from UK taxation" (Q 60) Then to go further and remove personal allowances "seems to be almost, to put it callously, putting the boot in when someone is down" (Q 60).

197. HMRC did not seem overly worried by the compliance issues. David Richardson (HMRC) thought that "In reality it is quite simple for most people … Although some choose to present it as complicated, I think it is nowhere near as complicated as some people might suggest" (Q 357). "There is the £2,000 de minimis which is equivalent to, if somebody has a foreign bank account with a five per cent return, something like £40,000 held offshore which is not an insignificant amount. If foreign income is below £2,000 they will be able to keep the personal allowance and stay on a remittance basis without further action. There will be no need for them to contact HMRC at all. It will simply follow naturally that their overseas income will not be taxable. In theory, that is simpler than the current provisions" (Q 355).

198. When asked how he expected people to decide whether or not to claim the remittance basis or to keep their personal allowance, David Richardson (HMRC) said that he "would expect them to go through a calculation of working out how much additional tax would they pay by losing their personal allowance and how much additional tax would they pay if they were on the arising basis and taxed on all their foreign income taking into account double taxation relief?" (Q 355)

199. Commenting on the HMRC resources that would be needed, David Richardson (HMRC) saw the "issue [as] about providing adequate guidance to people rather than about an issue of any significant increase in resource for HMRC. We are working on that guidance at the moment and we are looking at making sure that our contact centres fully understand the rules and advise people on what they should do. We are looking at a leaflet for migrant workers when they come into the UK to explain the provisions … We have started talking to the Low Incomes Tax Reform Group around making sure that we get publicity material that works for some of those lower income groups" (Q 355).

200. In our view HMRC are greatly underestimating the compliance difficulties for people of more modest means. We are firmly of the view that something further has to be done to make these provisions workable.

201. Two possible approaches were put to us by our private sector witnesses. The first was to raise the de minimis limit to a level where the vast majority of these lower income people are not troubled by these provisions i.e. the remittance basis would apply to them automatically so they would not be taxed on their foreign income if they did not remit it, and they would not lose their personal allowances.

202. Most of our private sector witnesses preferred this approach though there was quite a variation in the level to which they would raise the de minimis limit. For the ICAEW, Francesca Lagerberg said that they would raise the de minimis limit to a level round about the personal allowance (Q 129). Alex McDougall (ICAS) said that "the reason we suggested £5,000 instead of the original £1,000 was really … to try and equate it broadly to the level of the Personal Allowance" (Q 129). Richard Baron (IoD) said that he was "not sure what data the Revenue have on how many people would drop out of their tax net if they put it up to £3,000 or £4,000, the idea is to get it to a point where most people can say, 'I know my income from letting out my flat in Warsaw, or whatever it is, is definitely below that, so I am in the clear'" (Q 187).

203. Penelope Williams (LSEW) said that they "would say that de minimis levels of, say, £10,000 of income and perhaps a disposal consideration of four times the annual allowance for capital gains tax might be appropriate" (Q 224). Michael Snyder (City of London) thought the £2,000 limit ridiculous (Q 151) and that it should be raised to about £30,000 (Q 152).

204. John Whiting (CIOT) saw an alternative approach as preferable. "Undoubtedly the best answer is that this loss of personal allowance only trips in, along with the £30,000, after seven years" (Q 67). On this approach, the only people who would be denied personal allowances would be those who had been resident in the UK for longer than 7 of the last 10 years and for whom it was beneficial to claim the remittance basis i.e. their foreign income would be in excess of around £80,000 per annum and it would be beneficial for them to keep that income out of the scope of UK tax, pay the £30,000 charge and suffer the denial of personal allowances and CGT annual exempt amount.

205. The second approach, suggested by the CIOT, would allow personal allowances to everyone during their early years in the UK, independently of their level of income or gains. It would therefore apply to the wealthy and all the middle income executives. We can see the administrative attractions of this but it is likely to be more expensive than the option of simply increasing the de minimis limit. It would affect the Budget arithmetic to a greater extent and is therefore likely to be less acceptable to Government. In any case, our primary concern is with the lower paid.

206. In our view the provisions as drafted with a de minimis level of £2,000 are essentially unworkable in practice. To address this, we prefer the approach of increasing the de minimis limit. However, so far as we are aware, there is no detailed work on what the de minimis level should be to ensure that the great majority of these people are not troubled by these provisions and that HMRC is not burdened by compliance problems. Unless HMT/HMRC has some work of which we are unaware, or can produce some on a very short timescale, any increase will be a stab in the dark.

207. We recommend that the de minimis limit should be increased to a level to take a big majority of the lower paid non-domiciles out of the scope of these provisions. The Government should introduce an amendment to achieve this. If there is no better basis for estimating what that level should be, we recommend that in this year's Bill the de minimis level should be increased to the amount of the individual's personal allowance (which this year is to be £6,035).

208. We further recommend that HMRC should monitor over the coming year the effect of the increased de minimis level and, if it transpires that there is a large number of lower income workers still with compliance problems, the Government should provide a further increase in next year's Finance Bill, having established to what level the de minimis limit needs to be raised.

Detailed Issues

209. Particularly in the written evidence we have received, a large number of more detailed issues have been put to us as in need of change. This is against the background of some strident criticisms which have been made about the complexity of the legislation. As the LSS said in its written evidence[56] "The legislation is so complex that it will be impossible for most taxpayers to understand what the provisions mean. Although this may not be a problem for the well advised, those of lesser means will not be in a position to complete self assessment tax returns because of the complexities of the legislation … The complexity of the legislation seems to be out of all proportion to the tax it is intended to raise, and given the detailed record keeping requirements there will be a disproportionate compliance burden for taxpayers affected by the new regime".

210. This section of our report looks at what were put to us as the more important of these issues. But that is not to devalue the other issues and we hope that HMT/HMRC is carefully reading the evidence that we have received with a view to suggesting to Ministers changes that could be made to make the provisions work more satisfactorily. As Malcolm Gammie (IFS) commented in his evidence "on the highly technical aspects of these particular rules I think the Revenue probably had some difficulty in formulating exactly what changes they wanted to make" (Q 16).

211. One aspect which concerns us is not particularly technical. It involves the treatment under these rules of those who are in full-time education in the UK and the fact that when their education comes to an end they may already be approaching falling foul of the 7 years out of 10 rule and so be dissuaded from taking up employment in the UK. Many of our private sector witnesses were concerned about this.

212. John Whiting (CIOT) put it this way "We here in the UK try to attract overseas students to take A-levels, degrees, et cetera, probably in the hope that they will continue to work here, but you might just note that by the time they have done A-levels, degrees and had a gap year or whatever, they are virtually into seven years' residence, so that this new system is probably an incentive to go home at the end of it" (Q 67). Others made the same point. When asked what changes he would want to see, Ian Menzies-Conacher (BBA) said "The simple thing is we would like to see time spent in full time education simply disregarded in terms of calculating the seven years. Our problem is that we would like to recruit non-residents—Chinese, Indians—for obvious reasons. If they have been educated in the UK, that is absolutely ideal but by the time they have been educated in a UK university with an MBA they are starting to approach the end of the seven years before we have even got them on board" (Q 154).

213. For HMRC, David Richardson said that they "have noted all the points that have been coming up in your evidence and that people have given us … Obviously decisions on those matters are for ministers. They have all been brought to the attention of ministers" (Q 362).

214. We are persuaded that it is in the interests of the UK economy that something should be done for those in full-time education in the UK. We therefore recommend that the years spent by overseas students in the UK for full-time education should not count towards the test of whether they have been here for longer than seven years out of the last 10.

215. There is a clutch of other issues that have been raised by our private sector witnesses. We did not explore these in great detail with those witnesses, but they did identify for us which they saw as the more important:

the implications—suggested as unintentional—for all-employee share schemes and the need to include those subject to the remittance basis[57] (BBA[58], LSEW[59])
concerns with the detail of the remittance rules: their complexity (ATT[60] and more generally); property being brought into the UK (ICAS[61]); remittances by offshore trustees/companies being treated as remittances of the settlor/shareholder (City of London[62])
a bias in the legislation in favour of offshore trusts to the disadvantage of holding through offshore companies, or directly; a bias where gains are realised as against offshore income gains (City of London[63], LSEW[64])
the changes to the source ceasing rules are retroactive and could give rise to compliance problems in terms of producing evidence for a long-ceased source (CIOT[65], City of London[66])
concerns about the rules for mixed funds (City of London[67])
how PAYE will operate for subsequent years and on the transfer of securities to an employee (BBA[68], LSEW[69])
the implications for professional service providers—even if the concerns raised by the BBA are addressed, the problem might go wider (CIOT[70], LSEW[71])
the grandfathering of offshore mortgages (BBA[72], CIOT[73])
some concerns around the definition of 'relevant person' being too widely drawn (LSEW[74], ICAS[75])
some detailed drafting issues on ITEPA (LSEW[76])
aspects around the creditability of the £30,000 charge against foreign taxes (CIOT[77]).

216. We are pleased to hear that HMT/HMRC are discussing with Ministers the detailed issues which were raised with us. We recommend that, where necessary, HMRC should do all it can to discuss these issues with the professional bodies with a view to resolving them as rapidly as possible and that the Government should bring forward amendments as necessary, certainly not later than the Report Stage of the Bill.

A Statutory Definition of UK Residence

217. There was a universal view amongst our private sector witnesses that it would be better to have a comprehensive legislative definition of UK residence rather than continue to have to rely on case law precedent and HMRC practice as set out in the Revenue booklet IR20. Much of the written evidence set out the case for this as did many of our witnesses when they appeared before us. The written evidence by the City of London stated that[78] "The UK remains one of the few OECD countries without a comprehensive statutory code of residence for modern living and working practices".

218. John Whiting (CIOT) said "Certainly the CIOT is strongly in favour of a statutory residence test that can be applied mechanistically rather than by HMRC judgement" (Q 62). Francesca Lagerberg (ICAEW) agreed (Q 121) and Chas Roy-Chowdhury (ACCA) pointed to much material having been worked up in 2003 (Q 123).

219. Alex McDougall (ICAS) thought there would be uncertainty as to whether the new day counting rules applied to the extra-statutory guidelines (Q 124) and made the point that the guidelines rely on case law from a different era (Q 125). Alex Henderson (City of London) echoed this "There are two problems with relying on Revenue practice. One is that it is Revenue practice. It does not give certainty for the taxpayer that legislation gives. The other is that the Revenue practice draws heavily on the case law but the case law is now something like 100 years old and clearly has not adapted to modern living and working conditions with regard to residence" (Q 143).

220. Alex Henderson (City of London) went on to say that the issue "was raised as recently as last Friday [2 May] at the Finance Bill open day with HMRC who referred it back to the Treasury as a policy matter" (Q 144).

221. In their written evidence the ICAEW expressed the point this way:[79]

"The explanatory notes state that the Finance Bill change was introduced because 'the UK was out of step with … its international partners.' However, the more important reason the UK is out of step is because it is one of very few developed countries that does not have a statutory test. We believe that there are suitable models of statutory residence tests that the UK could use to develop its own rule. A suitable example is the Irish statutory residence rule, which was first introduced in 1994 ... and which we understand works well although we recognise that it is (by UK standards) quite generous. An alternative less generous model is the US residence test".

At our request, the ICAEW provided for us summaries of the Irish and US residence tests[80].

222. When the point was raised with officials, David Richardson (HMRC) said that "the existing rules have stood the test of time. They have been with us for an awfully long time and have worked reasonably well … Obviously this is a policy matter and it is something that normally I would expect the Treasury and HMRC to keep an eye on and listen to representations on" (Q 369). When pressed on whether legislation might be a possibility for next year, he responded that "It is an issue, like all parts of the tax system, that ministers and officials would want to watch. I would not give any commitment either way" (Q 370).

223. We were unable to glean from officials why legislation was not included in this year's package. They did not present the case for inclusion or against. It is disappointing that officials were less than forthcoming on this important issue.

224. We recognise that it will not be possible to include a comprehensive statutory definition of UK residence in this year's Bill.

225. However, we think this is something which should be taken forward as rapidly as possible so that Ministers are able to come to a view in good time before next year's Bill. We therefore recommend that HMT and HMRC should consult with the professional bodies over the coming months, building on the work which was done in 2003.

226. We further recommend that the Government should carefully consider the case for legislation in next year's Finance Bill to eliminate any uncertainties which are seen to be present in the current regime.

Addressing Defects and Anomalies

227. In his Budget Statement, the Chancellor promised that the rules in this area would not be substantially revised for the rest of this or the next Parliament. We do not take this to mean that there will not be legislation in coming Finance Bills to address defects in the current legislation. We think it inevitable that, given the evident pressure under which this legislation was produced, there will be such defects.

228. Our private sector witnesses pressed on us the case for addressing these defects. John Whiting (CIOT) said "HMRC and the Treasury, needs to commit to keeping this under review and making further changes" (Q 70). Jacob Rigg (STEP) was keen to point out that "having changes every single year, where things are tightened up or loosened inadvertently or what-have-you in a sort of hotchpotch manner, would not be good for the UK competitiveness. It would be incredibly damaging for us all" (Q 71). In response John Whiting confirmed that all he would be looking for was sorting out the anomalies (Q 71).

229. David Richardson (HMRC) was careful not to undermine the Chancellor's commitment not to make substantive changes: this was a very real commitment. But he accepted that the wording was drafted in the way that it was to allow some flexibility to address minor technical anomalies (Q 368).

230. We recommend that once the legislation has been enacted, a dialogue should be opened up between HMRC and the professional bodies and other interested parties to identify any anomalies or defects which prevent the legislation working as intended. An agreed way should be found of dealing with these. The Government should bring forward amending legislation as early as possible in succeeding Finance Bills.

48 2007 PBR CSR: Press Notices: PN1 Page 5 Back

49 HMRC letter from Dave Hartnett, Acting Chairman, 12 February 2008 Back

50 Finance Bill 2008: Explanatory Notes: Volume I; Clause 22 paragraph 17 Back

51 Finance Bill 2008: Explanatory Notes: Volume I: Clause 23&Schedule 7 paragraph 107 Back

52 Memorandum of Evidence by the ATT (Volume II p 16) Back

53 Memorandum of Evidence by the ATT (Volume II p 16) Back

54 Memorandum of Evidence by the LSS (volume II p 114) Back