Student Loans - Nick Yassukovich BA(Hons), ATII looks at student loan repayments for non-residents

Student Loans

NICK YASSUKOVICH BA(Hons), ATII looks at student loan repayments for non-residents.

The last time I wrote about student loans I was a reporter for my Student Union newspaper, covering the demonstration in London against their introduction in the Autumn of 1988. Later, colleagues at my first job in London told me, in no uncertain terms, of the great traffic jam it caused. However, I do not expect anyone to march on Parliament (as happened then) as a result of the issues I intend to explain in this article.

Student loan régime

The new loan repayment régime was introduced in SI 2000/944 Education (Student Loans) (Repayment) Regulations 2000 and all references in this article are to these regulations unless otherwise stated. An excellent analysis of the operation of the rules, is provided by Sarah Bradford's article 'Student Loans - The New Régime' in Taxation, 8 June 2000 at pages 248 to 250. In this article, I shall concentrate on the treatment of non-United Kingdom resident borrowers, which, in my opinion, contains many areas of difficulty.

The regulations apply from 5 April 2000 and affect only students who entered higher education in or after September 1998. Loan repayments will be linked to income and be administered by the Inland Revenue. For employees, the appropriate amounts of loan repayment are withheld by the employer as part of the pay-as-you-earn system (Part IV) using the amount liable to National Insurance contributions as the income base. The self-employed are required to compute their repayments on their self-assessment return (Part III). For non-residents a third repayment mechanism might apply (Part V) and it is this scheme I shall examine.

The non-resident provisions

The non-resident provisions apply only to persons resident outside the United Kingdom, taking the word 'residence' to have the same meaning as it has in the Taxes Acts (paragraphs 53 and 54 of the Regulations). While the concept of non residence in the United Kingdom is familiar, there are few references in the Taxes Acts to residence outside the United Kingdom.

There is section 334, Taxes Act 1988, which refers to 'occasional residence' abroad. Ibid., section 42A refers to 'any person who has his usual place of abode outside the United Kingdom' in the context of collecting tax due on Schedule A income, but this is a different concept from residence as defined for income tax. In general, references to residence in the statutes are concerned only with residence or non-residence in the United Kingdom. Indeed the Inspectors Manual does the same and refers to 'absence abroad' and having a home abroad, but rarely to 'residence abroad' (paragraphs 25 to 50 of the Regulations).

Although an odd concept to a tax adviser, it will not necessarily be so to the general population. Furthermore a reading of some tax cases does give the concept some not insignificant history. In Rogers v Commissioners of Inland Revenue 1 TC 225, Lord Inglis said 'a man must have a residence somewhere' which suggests that if someone is not resident in the United Kingdom, he must be resident abroad (this, I believe, must be disputable given certain fact patterns). Dave Clark of Reed v Clark 58 TC 528 fame was advised by his accountants to establish residence in the United States under United Kingdom income tax principles. In that case the General Commissioners found that he had in fact done so and, in the High Court, Mr Justice Nicholls made references to residence abroad when commenting on what is now section 334, Taxes Act 1988, although it was not an issue for him when considering the application of ibid., section 18.

I made enquiries at the Department of Education and the Environment, which after consulting the Inland Revenue, offered a letter of explanation. This explained that borrowers should refer to case law, sections 334 to 336, Taxes Act 1988, and Inland Revenue booklet IR20 to help them decide whether, on the balance of the facts in their circumstances, they were resident outside the United Kingdom as defined for income tax.

Given the voluminous nature of case law and the paucity of statute law in this area, I am minded to consult IR20 for the most part, especially in respect of employees. This booklet usefully outlines some mathematically based rules for determining residence in the United Kingdom in certain circumstances, thereby avoiding the high level of subjectivity to be found in the ordinary meaning of the word residence.

There are rules for breaking residence in the United Kingdom when you depart to live abroad (outbound rules), and also for establishing residence in the United Kingdom when you arrive (inbound rules). However, the differences in the way these two sets of rules work are pronounced, so which should be used? Use of the inbound rules to decide whether the individual becomes resident abroad does, however, mean it is possible to be non-United Kingdom resident and simultaneously not resident anywhere else. It would also be possible to be resident abroad while still resident in the United Kingdom. On the other hand, if the intention is that the outbound rules be used, on the assumption that an individual must be resident abroad if not resident here (again, an assumption I dispute), then surely it would have been more straightforward if the regulations referred only to non-United Kingdom residence.

Unfortunately in Reed v Clark, Mr Justice Nicholls declined the opportunity of validating, by reference to IR20, the General Commissioners' findings that Mr Clark was resident in the United States under United Kingdom law.

However, most borrowers will be a bit more sanguine about this issue than I am, and will use their common sense to decide whether or not they are resident abroad.

Potential problems

An example will help to illustrate the wider problems of these regulations. Jo Graduate is assigned to Paris from London for 22 months beginning on 1 November 2003. Jo graduated from Redbrick University in June 2002 and is still paying off her student loan. She remains liable to United Kingdom National Insurance under European Union Regulation 1408/71 Article 17.

Where is she resident?

To determine her liability to income tax, Jo should be able to take advantage of Extra-statutory Concession A11, which will deem her to be non-United Kingdom resident during the period in Paris, as the contract of employment abroad spans a complete United Kingdom tax year (2004-05). However, she must still count the days spent back in the United Kingdom to ensure she does not fail the 183-day and 90-day rules outlined in that concession. She must also determine whether or not she is resident abroad for the purposes of the loan repayment regulations.

What are her obligations?

Assuming that Jo becomes resident abroad for the year ended 5 April 2005, she must notify the Secretary of State for Education because that period of overseas residence exceeds three months (paragraph 54(1)). If she fails to supply this notice on a timely basis, the Secretary of State may impose an increased rate of interest on the loan for the period of the failure (paragraph 55(3) of the Regulations).

But when can she be said to have so failed to give notice? The Department of Education and the Environment accepted that she may not know she is resident until many months after the period of residence starts because the split year treatment of Extra-statutory Concession A11 might not be open to her. In this instance, she need only register as an overseas resident when she knows for certain that she is. However, greater clarification of how late you can be in giving notice would certainly be helpful, given the large potential penalties.

How much will her repayments be?

Once she has given notice of her residency in France, the Secretary of State will demand a monthly repayment to be made directly to him. In the first instance, this will be an amount equivalent to the payments she would make if her income liable to National Insurance was £42,800, i.e. £246. However, Jo may choose to make an application under paragraph 56(3) to tie her repayments to income. The monthly instalment will then become:

• one twelfth of her annual gross income in excess of £10,000; less
• any amounts of income, which would be subject to repayment deduction under the normal domestic rules, i.e. through pay-as-you-earn, or on the self-assessment form (paragraph 56(4)).

Jo will need to estimate her 'gross income', either in deciding whether or not to make this application in the first place or because the Secretary of State will request the information (paragraph 54(2)(d)). The definition for these purposes is found at paragraph 53 and includes 'gross income from all sources before deductions for or relief from tax or other statutory charge'. As an expatriate employee, her income might include the following components:

• base salary;
• bonus;
• cash allowances for the extra cost of living in Paris;
• accommodation in Paris;
• relocation costs;
• tax equalisation allowance or reimbursement of French tax liabilities.

Some of these Jo will be able to estimate herself by reference to her assignment contract and the company's policies. However, she will definitely need tax advice if she is to estimate the French tax reimbursement. It is to be hoped that her company is well advised and has already prepared an estimate of the combined tax costs.

Suppose that she has been told by her employer that all her income will be subject to National Insurance while abroad. She could then request that her direct repayments be set to nil, since she will remain within the student loan repayment procedures under Part IV of the regulations and repayments will continue through payroll. After 12 months, Jo will have to reapply for her direct payments to be set to nil, even though her repayment deductions via payroll will continue regardless (paragraph 56(5)).

So far so good, but as she could not estimate her gross income, she is unable to calculate how much her payments will be and so cannot budget properly over the next 22 months. Certain items of income, such as accommodation benefits, might be put through payroll intermittently (for administrative convenience) giving her large loan repayments out of income that she has received not in cash, but in kind. Most awkward will be the loan repayments due out of the company's reimbursement of her French income tax liability. This will create a personal cash flow problem when she must make repayments of a loan out of income that she has not, at least in any sense that she can understand, actually received and does not comprehend.

A sting in the tail

It will probably be a relief to Jo to return to the United Kingdom and find herself with graduate loan repayments she can understand and for which she can budget; that is, say, until her French tax liability for the year of her return (2005) is put through payroll a few months after she has returned to the United Kingdom, giving her another large, surprise repayment liability. Her experience of this régime abroad will have confused her; required her to understand the intricacies of French tax law; may have exposed her to a penal rate of interest and made her unable to budget her expenditure. Finally it will have given her a nasty surprise just when she thought the whole matter was completed.

Does it really matter?

From one point of view, there is no issue of true concern here, since the employees concerned are just repaying loans, not suffering an actual tax charge. Whether these repayments are reduced by an international assignment or increased is purely an issue of cashflow.

However, it is worrying that yet again employees (and indirectly employers) are being forced to deal with complex and convoluted rules. This does not fit at all well with the Government's claim of creating an administratively simple and equitable student loan repayment régime.

The equivalent Australian system, I am given to understand, allows expatriates to avoid their loan repayments, but I believe that even these regulations would benefit from some revision in respect of their application to non-residents. For those eager to keep their repayments to a minimum, deductions in respect of income that is received in kind will be harsh. Even cash-based expatriate allowances will cause a theoretical problem, as many are calculated not as employee reward but as reimbursement of additional living costs incurred abroad. Furthermore, the rules governing when the non-United Kingdom resident regulations apply are too opaque, and may be subject to variations in their applicability to broadly similar fact patterns. Consequently they might expose innocent taxpayers to large penalties.

Nicholas Yassukovich is a manager in Arthur Andersen's Human Capital practice, based in Reading. The views he expresses, and his interpretation of the regulations, are his own and do not necessarily reflect those of the firm.

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