Further memorandum by the ATT
RESIDENCE AND DOMICILE
The Association of Taxation Technicians (ATT)
is delighted to have the opportunity to present its evidence on
this topic to the Sub Committee for their consideration.
RESIDENCE—CLAUSE
22
Clause 22 amends three existing provisions by
amending the manner in which an individual's presence in the UK
is to be calculated. The three provisions are: sections 831 and
832 of the Income Tax Act 2007; and section 9 of the Taxation
of Chargeable Gains Act 1993.
These three sections deal solely with individuals
who are "present in the UK for some temporary purpose only,
with no intention of establishing permanent residence in the UK",
and (broadly) provide that overseas income, earnings from employment
whose work is carried out overseas, and capital gains on the disposal
of chargeable assets, will only be taxable in the UK if the individual
spends at least half the tax year in the UK.
Clause 22 does not therefore amend the law with
regards to individuals who are already established as resident
in the UK, and in particular with regard to individuals who are
seeking to terminate residence in the UK. In this respect it may
be regarded as a relatively minor amendment. So far as its scope
extends, it is nonetheless an appreciable simplification.
The two income tax provisions are aligned so
that in each case the individual is treated as not resident if
he spends less than 183 days in the UK; the capital gains tax
provision (which currently talks in terms of months) is amended
so that the individual is resident only if he spends 183 days
or more in the UK. In all cases, the test for whether a given
day counts as spent in the UK is clarified.
Under the new test, an individual is not present
in the UK unless he is present at midnight on that day. Furthermore,
he is not present in the UK if he spends midnight in the UK simply
because he is in transit between other locations.
A valid mark of success in tax legislation is
whether it can easily and clearly distinguish between its legitimate
targets and the innocent bystander. The new "transit"
test appears to cope admirably, since it contains sufficient flexibility
to enable its disapplication in cases of genuine abuse—for
a midnight not to count as UK presence, the individual must have
arrived that day as a passenger, must depart the next day, and
in the intervening time must "not engage in activities that
are to a substantial extent unrelated to the individual's passage
through the UK". Thus, business "commuters" who
fly into the UK for meetings or to sign contracts will rightly
be attributed with a day of UK presence, whilst travellers who
merely choose to break their journey in the UK will not.
This level of clarity and simplicity stands
in contrast to the clutter of statutory and extra-statutory guidelines
still surrounding the residence status of those individuals seeking
to sever their established UK resident status. Those guidelines
were harshly criticised by the Special Commissioner in her October
2006 ruling on Gaines-Cooper (SpC 568). If Clause 22 is to be
the initial step in a wholesale simplification and clarification
of how residence status in the UK is determined, we welcome it
heartily. If this is merely a single step, which clarifies one
small aspect of residence but leaves the greater mess unresolved,
we still welcome it while regretting the lost opportunity.
REMITTANCE BASIS—CLAUSE
23 AND SCHEDULE
7
Clause 23 introduces Schedule 7, which in turn
amends the Income Tax Act 2007 by inserting a new Chapter A1 into
Part 14 of that Act.
The background to this legislation is the long-established
and much-discussed "remittance basis", whereby an individual
who is resident in the UK but either not domiciled in the UK or
not ordinarily resident here is not taxed in the UK on income
and gains arising overseas unless (and to the extent that) they
are remitted into the UK. Discussion of the merits or otherwise
of this basis of taxation is outside the scope of this submission,
which is solely concerned with the issues of administration, clarification
and simplification; the Sub-Committee will in any event be aware
of the lively debate on the subject and of the widespread public
confusion over its application.
The new legislation begins from the basic premise
that—in the absence of the remittance basis—all income
and gains of a UK resident individual, wherever they may arise,
are subject to the scope of UK tax.
An individual may keep his overseas income and
gains outside the scope of UK tax (without need of a formal claim)
in any tax year when his "unremitted foreign income and gains"
is less than £2,000. He may also do this if he is a minor
or has been resident in the UK during no more than six of the
preceding nine tax years, as long as he has no UK income and remits
no overseas income into the UK during the year. These two provisions
(new sections 809C and 809D) have the effect of relieving from
a UK tax compliance burden three types of individuals:
— those who, while resident in the
UK for a brief period, have little or no UK economic activity
and who keep their non-UK wealth entirely offshore;
— the children of economically-active
UK residents as long as they themselves bring no overseas income
into the UK; and
— long-term UK residents with negligible
overseas incomes (or those with substantial overseas incomes,
virtually all of which is remitted to the UK and taxed here).
Individuals who are not able to take advantage
of either section 809C or section 809D may only have the benefit
of the remittance basis if they make a formal claim under section
809B. This claim, if made by an individual who is either under
18 or has not been resident in more than six of the preceding
nine tax years, involves the forfeiture of the personal allowance
and the CGT annual exemption but no more stringent costs. Otherwise,
in addition to forfeiting these tax-free allowances, a claimant
under section 809B is required to "nominate" overseas
income and gains which will be subject to the notorious £30,000
"levy".
The manner in which the levy works is not entirely
straightforward. The income and gains "nominated" by
the taxpayer are not themselves subject to the remittance basis.
Instead, they are subject to a minimum tax liability of £30,000.
(First compute the tax due on the nominated income on the normal
"arising" basis; then compute the tax due on the same
income if the remittance basis had applied; the difference between
the two is the "relevant tax increase". If the relevant
tax increase is less than £30,000, the liability is increased
by the shortfall).
We appreciate that one of the reasons for computing
the "levy" in this manner was a desire to make it easier
for the £30,000 charge to qualify for overseas double taxation
relief—such relief is possible under most treaties against
the liability upon a given source of income or gains, whereas
a free-standing charge would be unlikely to qualify. The chosen
mechanism, however, is neither simple nor clear.
One would imagine, having come so far, that
all this was complex enough; one would, however, be mistaken.
There follows (as sections 809H to 809Y) a sequence of sections
of astounding complexity and opacity designed to identify when,
to what extent, and in what order, funds are deemed to have been
remitted into the UK. The purpose of this is to prevent individuals
from remitting their "nominated income and gains" (upon
which they have paid the £30,000 levy) instead of other income
and gains. To quote from the explanatory notes: "this is
to ensure that all untaxed and unremitted income and gains are
treated as remitted to the UK before any nominated income or gains
upon which the [remittance basis charge] has been paid".
We do not propose within this submission to
dwell upon the detail of these clauses. Suffice it to say that
they introduce a large number of provisions, complicated in purpose
and supremely complex in execution.
REMITTANCE—SUMMARY
The overall effect of this massive Schedule
is easily expressed: individuals who have been resident in the
UK for at least seven of the preceding nine tax years, and who
do not wish to be taxed in the UK on their worldwide income and
gains, will be obliged instead to suffer the following liabilities
in addition to UK tax on those income and gains they remit into
the UK:
— An additional amount of up to £2,174
on their UK-sourced income (as a result of foregoing the personal
allowance).
— An additional amount of up to £1,728
on their UK-sourced gains (as a result of foregoing the CGT annual
exemption).
— An additional £30,000 on their
non-UK income and gains which are not remitted into the UK.
The alternative is to suffer UK income tax and
CGT on an arising basis on all their worldwide income and gains.
In either case, relief is potentially available under
double taxation agreements against the overseas liabilities. If
the overseas tax rates are higher, there will probably be no net
increase in the individual's overall tax costs; if the overseas
rates are lower, the additional UK tax will represent a net increase
in global tax costs.
The decisions which this will force upon individuals
are not always straightforward. 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. Others, providing they can obtain sufficient relief
under double taxation provisions against their overseas liabilities,
may find the new provisions adding little to their global tax
costs. Others yet will find these new provisions adding significantly
to their global tax burden.
What all will find is an overall increase in
their tax compliance burden. As well as keeping track of
what is remitted into the UK, individuals will need to keep track
of income and gains which are not remitted into the UK in case
these are needed to replace remittances out of "nominated
income and gains". 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.
We suspect that the increased compliance burden
will fall disproportionately upon the less well-off among the
non-domiciled community—the genuinely rich will be able
to retain £30,000 worth of "nominated income" permanently
outside the UK, and so will never need to worry about section
809H et seq).
Overall, even if one accepts the need to place
severe restrictions on a tax basis which has long been a part
of the UK tax system, Schedule 7 appears to be a cumbersome means
of achieving this end, which will lead to lead to increased compliance
costs.
It is hoped that the comments made in this submission
will be helpful to the Sub-Committee, although we shall be pleased
to answer any questions which the members have.
April 2008
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