Supplementary memorandum by the City of
London
INTRODUCTION
1. This supplementary briefing note outlines
significant outstanding issues that remain at May 2008 to be finalised
as part of the substantial revisions to the taxation of residence
and domicile. The note has been produced by Alexander Henderson,
Partner, PricewaterhouseCoopers LLP for the City of London, in
consultation with Michael Snyder, Deputy Chairman of the City
Corporation's Policy and Resources Committee. It focuses on two
areas:
i) Points within the current published legislation
of particular concern.
ii) Points that are not within the legislation
but will require action or review in the future.
In each case an outline of the issue is given
together with a brief background technical description. This note
is not intended to be a comprehensive list of issues but concentrates
on areas on greatest significance.
ISSUES WITHIN
THE CURRENT
PUBLISHED LEGISLATION
Treatment of Offshore Companies
2. The treatment of non-domiciled individuals
who have interest in offshore companies will be significantly
worse than those who hold assets (including interests in offshore
companies through trusts). There does not appear to be a clear
policy reason for the distinction which incentivises non-domiciled
persons to complicate their affairs and discriminates against
those who hold assets personally. As part of the relaxation of
the original measures applying to more complicated structures,
grandfathering of gains prior to 6 April and taxation of gains
on UK assets on a remittance basis were introduced for trusts
but not for companies. The new statutory code that will apply
under s13 TCGA 1992 for non-domiciled investors in closely held
companies should be harmonised with the measures for taxation
of trusts under s86, s87 et seq TCGA 1992.
Connected party remittances
3. Non-domiciled persons who have invested
in overseas companies could find that use of funds in the UK (for
consumption of goods or services for that company or investment
in UK assets) is treated as a taxable remittance by them personally.
This is unfair since they may have no control over the activity
of the company and seems contrary to the interests of the UK as
it creates an incentive to avoid investing in or engaging with
the UK economy.
Mixed funds
4. The new regime needs to take into account
HMRC practice in the new statutory framework for the treatment
of mixed funds (ie bank accounts which contain funds which are
sourced from monies containing various types of income or gains).
The new regime includes new and complex statutory measures governing
mixed funds. However, it does not take account of HMRC practice
in SP 5/84 which was a simplifying measure to allow expatriate
employees to remit funds to the UK out of accounts into which
they had had earnings paid, without having to examine the source
of the funds on a daily basis. This is currently an acute issue
as it affects many employees in the City: the first monthly pay
day under the new regime has now passed and it not yet clear what
the legislation and practice will be.
POINTS REQUIRING
FUTURE ACTION
OR REVIEW
Residence test
5. No provisions have been brought forward
as part of the Finance Bill for a wider statutory framework for
deciding residence. A statutory test of residence would give greater
certainty to taxpayers and employers and should be brought forward
later.
6. The tests for residence in the UK are
a mixture of statute, case law and HMRC practice. Much of the
case law is very old and was developed in a time when international
communications were much less developed than currently. The UK
does not have a clear system for deciding residence laid down
in statute and is out of step with other major countries.
HMRC enquiries into taxpayers' affairs
7. It remains to be seen whether the new
regime will meet concerns that were expressed about confidentiality
of taxpayers' overseas affairs. It will be necessary to review
the extent to which HMRC use their general enquiry powers to seek
information from those who are non-domiciled, very wealthy people
(who are serviced by City institutions) and moderately wealthy
ones (who City institutions employ) have, inter alia, significant
personal security concerns about releasing details of personal
overseas assets to any party, including the UK Revenue authorities.
Some sympathy has been expressed with these concerns by HMRC and
specific disclosure obligations from the new regime have been
removed or reduced. However, much will depend on the extent to
which HMRC make enquiries into individual returns using their
existing powers. These enquiries normally take place with a time
delay of several years so the issue will remain a live one for
some time to come. Clearly HMRC have to have the power to make
enquiries into the tax affairs of non-domicileds as part of their
normal control procedures. The issue is the manner, frequency
and range of these enquiries into individuals' overseas interests
which may legitimately be outside the scope of UK taxation.
De minimis levels and difficulties of compliance
8. The de minimis levels for the
operation of the new regime (eg the £2,000 limit on overseas
income) are too low and need to be kept under review. While not
expected to be a problem for City employers/ees and spouses/civil
partners to comply (albeit with increased administrative burden),
a concern remains that across the economy as a whole the new regime
will apply to many temporary and migrant workers who may have
overseas earnings or rental income on the home they have left
behind but who will be unaware of their obligation to submit a
tax return. This is likely to cause a significant burden for HMRC
in educating and assisting these persons with their obligations,
processing their returns (and in due course adjustment to PAYE
codings). A fear remains that at best this will be an inefficient
use of HMRC resources over time and at worst it will institutionalise
non-compliance in a sector of the economy, neither of which will
help with confidence in the UK as a place to do business.
14 May 2008
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