UK Delays Residency Test

By ExpatBriefing.com Editorial 09 December, 2011

The recently published 2012 Finance Bill offers a mixed bag to the UK's non-domiciled individuals, imposing on them a higher annual charge but delaying the introduction of a planned residence test for a year.

In a Written Ministerial Statement, the Exchequer Secretary to the Treasury, David Gauke, said that the draft legislation includes the core reforms to non-dom taxation. The package comprises the introduction of a higher GBP50,000 annual charge, a new relief to encourage business investment and technical simplifications to some aspects of the existing non-dom rules. Conspicuously absent, however, was the expected creation of a statutory residence test (SRT), the introduction of which is to be postponed until 2013.

Three main changes are included in the Bill. The first change affects the annual charge, currently set at GBP30,000 for those non-domiciled individuals wishing to be taxed on the remittance basis and who have resided in the UK for more than seven years. Under the new system, non-doms who have been resident in the UK for at least 12 of the previous 14 tax years will face an annual levy of GBP50,000. The original charge will also remain in place.

The charge was first introduced under the previous Labour government, and Chancellor George Osborne expects to raise GBP200m from the hike in the coming years. The system will operate in the same way as before. In each tax year, resident non-doms will have a choice whether to pay the charge or to be liable to UK tax on their worldwide income and capital gains, and will be able to opt in and out of the remittance basis from year to year.

Secondly, the legislation removes the charge to UK tax on overseas income or capital gains remitted to the UK for the purpose of making a commercial business investment in an unlisted company or a company listed on an exchange-regulated market. This will mean that, from April 6, 2012, non-doms will be able to remit their overseas income or capital gains to the UK tax-free, where they do so for the purposes of making a ‘qualifying investment’. The government believes that this measure will remove this disincentive to bring funds into the UK to invest in trading and commercial property companies.

Also crucial, however, is what the legislation does not introduce. Held alongside the consultation by the government on the changes detailed above was a separate discussion on the establishment of an SRT. Under the current regime, there is no full legal definition of tax residence. When it launched these consultations in June, the government said the lack of definition makes the rules unclear, complicated and subjective, and creates uncertainty for individuals about their residence status, thus deterring businesses and individuals considering investing in the UK. A proposed framework for the SRT was set out, under which both the amount of time the individual spends in the UK and the other connections they have with the UK would be taken into account.

However, according to Gauke, the consultation "raised a number of detailed issues which will require careful consideration to ensure the legislation achieves its important aim of providing certainty for individuals and businesses". Non-doms and expatriates will now have to wait for the introduction of an SRT in Finance Bill 2013, which will then take effect from April, 2013, instead of the April, 2012 introduction date originally intended. The legislation will also introduce any reforms to ordinary residence at the same time. Gauke said this will give enough time to consult thoroughly on the detail of these changes well in advance of implementation, adding that the government remains committed to the form of SRT set out in the consultation.

The proposed changes have brought a mixed response from tax and business advisers, however. Carolyn Steppler at Ernst and Young suggested that the increase in the remittance basis charge "could result in a leak of talent overseas" and further undermine the UK's economic competitiveness.

"Many more non-doms will have to face the full force of the UK tax rules and may leave the UK as a result. Non-doms are essential to the UK economy and the cost for some of them of remaining in the UK will nearly double overnight," she observed.

Disappointment was also expressed at the government's decision to postpone the SRT. Geoffrey Todd of the law firm Boodle Hatfield noted that the new rules "were generally welcomed by taxpayers and advisers and so it is unfortunate that the current system, which is based on case law and HMRC practice, will continue for another year".

On the other hand, KPMG welcomed the delay, arguing that while it could represent continued uncertainty, there are also positive elements to the decision. David Kilshaw, chair of private client advisory, argued: “Introducing a statutory residence test is a fundamental change to the British tax system and it’s crucial that the authorities get it right. Some British expats may react with dismay to the delay as they potentially face another year of uncertainty. But if the end result is a workable, well thought out and sensible test that will stay in place for years (if not decades) and which improves the UK’s attractiveness as a destination for overseas visitors, that is arguably a small price to pay."

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