UK Consults On Non-Dom Tax Changes

By Editorial 21 June, 2011

The UK government has launched a consultation on its changes to non-dom taxation, which include a hike in the annual charge, to be introduced alongside investment incentives.

The consultation fills out the package of reforms delivered by Chancellor George Osborne at his Budget in March. According to the government, the changes are designed to ensure that non-domiciles make a fair tax contribution, while simultaneously simplifying current tax rules and encouraging them to invest in the UK. Therefore, Osborne argued, his plans will end the uncertainty currently surrounding the taxation of non-doms.

Under the plans, there would be an increase in the annual charge for non-doms living in the UK, from GBP30,000 for those having resided in the country for seven years, to GBP50,000 for those with 12 years residence. The charge was first introduced under the previous Labour government, and Osborne expects to raise GBP200m from the hike in the coming years.

However, in return for this increase, Osborne also announced his intention to encourage investment by removing 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. In addition, the government has pledged not to introduce any further changes to the non-dom system during the life of the current parliament, due for dissolution in 2015.

Also in line with Osborne's statements, the government has published a further consultation, on its plans for a statutory residence test (SRT). There is currently no full legal definition of tax residence, which the government believes makes the rules unclear, complicated and subjective. In turn, this creates uncertainty for individuals about their residence status and is a deterrent to businesses and individuals considering investing in the UK. The consultation proposes a framework for the SRT and seeks views on its design and implementation, in order to address these issues.

Commenting on the consultations, David Gauke, Exchequer Secretary to the Treasury, said: “The government wants to ensure that the rules of our tax system are fair. That is why we are increasing the tax charge for those non-domiciles who have been resident in the UK for long periods of time. At the same time, it is important that skilled individuals and investors are encouraged to come to the UK from abroad and we recognise the fact that non-domiciles can make a valuable contribution to the UK economy. That is why we want to make it easier for them to invest in UK business.”

According to Sean Drury, international mobility partner at PwC, these plans "represent the biggest proposed changes to residency and domicile in 90 years". In general, the proposals have been welcomed, with Damian Bloom at the City law firm Berwin Leighton Paisner arguing that they demonstrate a welcome change in attitude, showing that the government is beginning to treat non-doms "as valuable contributors to the UK rather than unwelcome pariahs".

The increase in the annual charge is not being treated with alarm, given the government's overall message. Francesca Lagerberg, Partner and Head of Tax at Grant Thornton noted, "While the initial news of a GBP20,000 increase in a remittance charge may be seen as a red flag to those non-doms considering long-term stays in the UK, the government is clearly keen to send out a message that the UK is open for business. Therefore there will be encouragement to bring money into UK for non-doms who are investing in UK businesses".

The SRT has, however, been greeted with a more mixed response. Lagerberg believes that it has the potential to provide greater clarity, and Drury argues that "a clear, simple, business-friendly test can only be positive for companies and their employees fathoming potential tax obligations through their UK connections". On the other hand, Bradley Phillips, head of tax at solicitors Herbert Smith, warned that while an SRT is a good idea in theory, the government's proposals do not necessarily simplify the UK's tax system, and may force greater administrative burdens on businesses. Drury also pressed for a reduction in the complexity surrounding elements of the proposals.

The consultations remain open until September 9. The government will then publish draft legislation for comment later in 2011 with a view to including final legislation in Finance Bill 2012.

Tags: Individuals | Expatriates | Tax | Investment | Business | Law | Entrepreneurs | Equity Investment | United Kingdom | Legislation | Tax Rates | Tax Reform | Regulation |


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