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Expat Briefing Editorial Team
05 September, 2014
"Non-doms" – those, usually wealthy, individuals resident in the United Kingdom but not domiciled there for tax purposes – tend to get a bad press. The common perception about them is that they pay very little tax despite having millions or billions parked offshore. The tax rules have changed recently however, and recent figures suggest that they pay a lot more tax in the UK than most people think.
The Remittance Basis
Traditionally, the UK has been a relatively favourable destination for entrepreneurs and company bosses to locate themselves, thanks in no small part to its tax rules. Foreigners who are resident in the UK, but not domiciled there (put simply, not born in the UK nor being a permanent resident there) do not pay UK tax on foreign income as long as it is not remitted to the UK. However, as the banking crisis left the Government with a huge fiscal black hole to fill, these advantages have come under attack. Firstly, the previous Labour Government introduced a GBP30,000 charge for the privilege of holding “non-dom” status, which was triggered after seven years of residence. In 2011, the charge was increased by the Coalition to GBP50,000 effective April 2012, although the residence threshold was extended to 12 years.
In return the Government waived the charge payable by non-doms for the remittance of foreign income or capital gains to the UK for the purpose of investing in a UK business. There were a number of strings attached though. Although the relaxed rules permit non-doms to invest in a business that they already own or work for, they are clouded by anti-avoidance provisions. Furthermore, investments cannot be made into partnerships and PLCs listed on the London Stock Exchange nor can investment be made into a residential property company whose primary business is lettings.
The Non-Dom Tax Contribution
Just because non-doms don’t pay tax on their foreign income doesn’t mean they get out of paying UK tax as well. Indeed, the remittance charge has raised a relatively small sum of money for the Exchequer – about GBP180m, which is just 2% of the overall tax take from non-doms – while the amount of income tax paid by non-doms reached a record GBP6.8bn in the 2011/12 tax year according to a recent study by Pinsent Masons, which used the latest available data. The revenue collected stood at GBP5.7bn in 2008-09, reaching GBP6.2bn in 2009-10 and GBP6.3bn in 2010-11.
A Broken Promise
When the Coalition Government changed the remittance basis rules, it promised no further changes for non-doms for the life of the five-year parliament, which will end in 2015. The Government recently went back on its word however, when HM Revenue and Customs (HMRC) announced in August 2014 that it is to withdraw its concessional treatment of commercial loan arrangements secured using unremitted foreign income or gains as collateral for a loan enjoyed in the UK. HMRC says that it is seeing large numbers of arrangements which are not considered to be commercial and are not within the intended scope of the concession.
Effective August 6, 2014, money brought to or used in the UK under a loan facility secured by foreign income or gains will be treated as a taxable remittance of that amount of foreign income or gains. If the loan is serviced or repaid from different foreign income or gains, the repayments of capital and interest will constitute remittances in the normal way.
The change repeals a concession made in guidance applied to loans made on commercial terms that were regularly serviced from a different source of foreign income or gains. To avoid tax being charged twice, in those circumstances, only the servicing payments were taxed, and the underlying collateral was not.
As a result of the repeal of this concession, taxpayers must notify HMRC if they have used foreign income or gains as collateral for a loan and not declared a remittance. HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the concession in the relevant guidance, provided that certain conditions are met.
The taxpayer must give a written undertaking by December 31, 2015, that the foreign income or gains security either has been, or will be, replaced by non-foreign income or gains security before April 5, 2016, or the loan or part of the loan that was remitted to the UK either has been, or will be, repaid before that date.
Understandably, the changes have, however, provoked a great deal of criticism from tax advisers and specialists in non-dom financial planning. For instance John Barnett, spokesman for the Chartered Institute of Taxation (CIOT), warned that protracted legal battles over the true interpretation of the new rules will be “inevitable.”
"When the current rules on non-dom remittances were introduced in 2008 the law was unclear but many people thought that the use of these funds as collateral for a loan did not give rise to a tax charge. HMRC practice until now has followed that view, but they are now saying they will charge tax in these circumstances.”
"Where different pools of unremitted foreign income and gains are used to provide collateral and subsequent repayment, HMRC are suggesting that both amounts should be charged to UK tax – a form of double taxation."
"Non-doms living in the UK are only taxed on their non-UK income to the extent that they bring it (remit it) into the UK. This change relates to a situation where a non-dom takes out a loan – in the UK or elsewhere – which they use in the UK, for example to buy a property. If that loan were repaid using foreign income or gains the law has always recognized that repayment as an indirect remittance."
"What is less clear is the situation where the offshore income or gains are used as collateral for the loan. In most situations the collateral is just a safety net and the loan will be fully repaid using other means. HMRC previously took a view that this should be treated as a remittance only in obvious avoidance cases. The withdrawal of this treatment could mean that there is a remittance, even if the arrangement was always that the loan would be repaid using monies already in the UK."
"This will cause significant practical difficulties for banks and their customers and generates significant uncertainty for them. These proposals leave a number of questions unanswered. For example, it is common for banks to have a right of set-off against all assets owned by a customer taking out a loan, so, even if the primary collateral is in the UK, the bank could also have offshore assets as secondary security. What would happen in this situation?"
Dominic Lawrence, a partner law firm Speechly Bircham, said: “HMRC have just pulled a screeching handbrake turn in relation to this practice” and warned that this change of position will have “serious implications” for non-doms who have borrowed against the security of offshore cash or investments, and used the borrowed money in the UK.
“For those who were contemplating putting such arrangements in place, there may well be no alternative to paying tax on the remittance of income/gains to the UK,” Lawrence observed. “However, advice should be sought on the possibility of identifying offshore capital that can be remitted without any tax cost, or at a low tax cost, e.g. due to double taxation treaty relief, the surprisingly wide exemptions for pre-2008 income, business investment relief, etc.”
The CIOT has said that it intends to raise its concerns about the proposals with HMRC in writing, and Barnett criticized the Department for failing to consult industry on the matter. He pointed out that given that non-doms were told that no further reforms would be introduced during the current parliament, this initiative will do little to "enhance the UK's reputation as a place to do business with certainty."
Tax Dodgers or Scapegoats?
It would probably take some effort to convince the man in the street that non-doms weren’t merely privileged foreign elite, living it up in their luxury Mayfair pads while the rest of the country struggles to make ends meet. But it is fairly safe to assume that they actually contribute more to the UK in terms of taxes paid and investments in businesses than they take out.
Jason Collins, Head of Tax at Pinsent Masons, agrees that negative portrayals of non-domiciled individuals are inaccurate. Commenting on the figures, he pointed out the amount non-doms pay in income tax has gone up by 19 percent in the last three years alone, making them "more important to the UK economy than ever." They also have "huge spending power, invest in UK businesses and create thousands of jobs in the UK."
Collins believes that following the credit crunch and the collapse in Government revenues non-doms were seen as a handy scapegoat. “Actually they have been major contributors to the public purse all the way through the recession," he countered.
According to Collins, the high level of income tax paid also illustrates one of the advantages of the UK's investor visa regime. It allows a High Net Worth individual, with at least GBP1m to invest in the UK, enter the country, and remain there for three years.
Indeed, there is a certain amount of evidence to suggest that recent changes to the remittance basis mean that the disadvantages of being a UK non-dom now outweigh the advantages.
In an interview with Wealth Briefing, James Quarmby, partner and head of private wealth at international law firm Stephenson Harwood, noted that the Government’s attitude towards non-doms and foreign investors in general is “slightly schizophrenic” in that they are encouraged with special visas on the one hand and clobbered by unfavourable tax rules on the other.
“There has been a trend for non-domiciliaries to leave because they feel unwelcome,” he said. “I have expatriated quite a few clients. It is mostly Asia and Middle Eastern people that have left, as well as some Russians.”
Recent figures also indicate that the number of UK residents with non-dom status is on the decline: the number of taxpayers registered to pay the annual remittance basis charge on non-domiciled taxpayers fell by a further 2,000 over the tax year ending March 31, 2011, and has dropped by 17% since the levy was introduced in 2008. However, the vast majority of long-term non-doms still in the UK (about 95% in 2012) seem to have opted not to pay the charge, and instead pay UK tax on global earnings. Given the steep increase in the income tax take from this group, perhaps this was the Government’s intention all along.
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