Once is Happenstance?

Comment

Once is Happenstance?

MIKE TRUMAN asks whether UK domicile and residence laws will ever be reformed.

MR BOND, THEY have a saying in Chicago: "Once is happenstance, twice is coincidence, the third time it's enemy action."' Auric Goldfinger was talking about his meetings with 007, but as a man with an obsession for moving his wealth from country to country he might have applied the maxim to the proposals for reform of the UK's laws on residence and domicile that gather dust on Treasury shelves. In an issue of Taxation that is concerned with all things 'ex-pat', it seemed appropriate to ask whether this is going to change any time soon, or whether 'enemy action' has again killed off all prospect of reform.

Statutory definition

The statutory definition of liability to tax based on residence now contained in TA 1988, ss 334-336 has been part of the legislation ever since the Income Tax Act 1842 'temporarily' reintroduced it. Much of the wording is unchanged, indeed much of it is cribbed from the Income Tax Act 1799 which first introduced the new-fangled tax to pay for the Napoleonic wars.

I say 'definition', because that is what I believe it to be. In simple terms the original legislation seems to have said that if you were a British subject and your residence (i.e. your home) was here, but you were out of the country for a temporary purpose only, you remained liable to tax. However, you were not liable to tax if you were only here for a temporary purpose and with no intention of establishing a home, unless you were in the country for at least six months of the tax year.

Some time around the 1920s, both statute and case law took a disastrous wrong turn, and started to interpret the word 'residence' as a term of the art rather than a reference to where people lived. From then on, the statute has had less influence on the development of the rules for residence than the case law, and both are far less important than Inland Revenue practice.

The prime source for the residence rules is IR20, a booklet which has a decidedly shaky relationship with the statute and case law on which it is meant to be founded.

First reform proposals

Not surprisingly, there have been attempts to reform it. The government issued a consultative document in 1988 proposing a rolling three-year test that is very similar to that used in the USA (see page 61). You would have added together the days in the UK for the tax year (INCLUDING days of arrival and days of departure), plus one third of the days in the UK in the previous tax year, plus one-sixth of the days for the year before that with a 183 day limit.

The basis of taxation would also have changed. Domicile would cease to be a factor for tax, and the remittance basis would have been supplemented by an 'intermediate' basis of taxation for residents who had been non-resident for at least seven out of the last fourteen years. Dependent on the number of years of residence, a certain percentage of worldwide income and gains would have been liable to tax, if that gave a greater liability than the remittance basis. Once the taxpayer had been resident for the majority of the last fourteen tax years he would be deemed 'fiscally connected' with the UK and taxable on his worldwide income.

None of these proposals saw the statute book. Consultation was undertaken, and somehow they just withered on the vine. The only provision that did eventually get legislated was a proposal to extend the concept of 'fiscal connection' to those who went abroad for, say, less than three years. This, extended to five years, became TCGA 1992, s 10A ten years later in 1998. Surprisingly, the original proposal recognised the need to extend this to certain income receipts such as the disposal of copyright for a lump sum. By contrast, s 10A is solely a capital gains tax anti-avoidance section, leading to the unusual concept of needing to convert capital into income for tax avoidance purposes.

Second reform proposals

The second proposal to change the rules was tangential — a proposal to change the law on domicile, which would have had a knock-on effect for tax. In 1991, the government announced that it intended to introduce new legislation based on a Law Commission report in 1987 'when a suitable opportunity arises'.

The main change that would have affected tax liabilities was the proposal to abandon the doctrine of revival of domicile of origin, which states that when an adult abandons a domicile of choice without acquiring a new domicile, his domicile of origin revives. The anomalies this creates are illustrated by Example 1.

Example 1

Question: Zoe is born in Scotland to Scottish domiciled parents, and therefore has a Scottish domicile of origin. In her mid twenties she leaves Scotland, vowing never to return because it is too hot (sic ...), and settles permanently in Alaska. However, in her late fifties she decides that she would like to live somewhere warmer. She sells up in Alaska and sets off for a leisurely journey to Florida, intending to make a permanent new home there. Unfortunately whilst out walking in Washington (State) she is eaten by a grizzly bear. Where is she domiciled on death? (N.B. the correct answer is NOT 'inside a grizzly bear ...')

Answer: On leaving Scotland and settling in Alaska she acquires a new domicile of choice there. Leaving Alaska, she abandons her domicile of choice, and would have acquired one in Florida if she had settled there. However, she never got to Florida and so cannot be domiciled there. Her domicile of origin therefore revives, and she dies domiciled in Scotland, even though she has not been there for over thirty years and has no intention of returning.

The proposal was that an existing domicile for an adult should continue until a new domicile of choice was acquired. This would have been problematic for those who had originally acquired a domicile of choice in the UK but then later abandoned it without acquiring a new domicile — they would fall back within charge to UK inheritance tax.

But again, after much consternation and planning for all eventualities, nothing happened.

'Twice is coincidence?'

So why did neither proposal result in legislation? It is here that the story descends to the status of a nod and a wink to those in the know. Legend has it that the shipping industry made strong representations to the Chancellor at the time. An article by Michael O'Brien, 'Shindy with the Sheiks' in Taxation, 9 January 1992, page 435, suggests another wealthy and influential group that might have complained.

But there is no need to see this as a conspiracy of the wealthy to protect themselves. The latest round of consultation on the third proposed reform of the rules for residence and domicile is centred on the background paper issued by the Inland Revenue in April 2003, which sets out clearly the potential problems with a 'squeeze them until the pips squeak' approach:

The group that they are talking about is set out starkly in the background information. Based on a survey of the larger employers, some two-thirds of the 75,000 employees estimated to be claiming remittance basis (mostly on the grounds that they are resident but not domiciled) were working in the financial services industry. This, therefore, was the industry implicated in the rumours about the delay that followed the third attempt at reform.

Enemy action?

The first hint that reform was in the air came in Budget 2002, when the Chancellor announced that he intended to tackle the well-known residence and domicile problems, and that a consultation paper would be issued with the 2002 Pre-Budget Report. When the promised paper did not materialise, word had it that the City of London had told the Chancellor that any attempt to impose tax on worldwide income for non-domiciled expatriates (especially Americans) working in the City would lead to the mass emigration of the financial services industry. Amsterdam was the most-touted destination initially, because of its generous approach to the taxation of expatriates. Subsequently Geneva was mooted, purportedly on the grounds that the Swiss are amenable to individually negotiated rates of tax.

It is hard to say how much truth there was in any of these rumours — all the discussions were held on a strictly confidential basis. But, perhaps to the surprise of some, a consultation paper was produced in Budget 2003.

Third reform proposals

Strictly speaking, the 2003 paper did not contain any proposals for reform. However, it gave several examples of anomalies and problems, from which it is possible to glean a number of possible reforms. On the downside, there are some old familiar favourites which are seen as getting excessively favourable treatment:

• long-term residents who are not domiciled;


• non-domiciliaries who can arrange to remit untainted capital rather than income or gains;


• those who take advantage of the rule that the day of arrival and departure is ignored, by making lots of short visits;


• short-term visitors, where generous rules make them resident only from the start of the fifth year provided that they do not breach the 183 day rule.

On the other hand, there was also recognition of the problems faced by some affected by domicile or residence rules, at least by comparison with tax rules in other OECD jurisdictions (of which the paper gave brief details):

• the need for absence to span a complete tax year in order to be non-resident;


• the lack of any discounted tax rate for expatriates in the UK for a limited term (compared, for example, with the generous rules that apply in the Netherlands);


• the liability to tax on remittances of income and gains even when these are being brought into the UK in order to fund entrepreneurial activity.

These examples indicated that any firm proposals for legislation which came out of the discussions might well be more even-handed than the previous two attempts, which were solely designed to counter perceived abuses. It was no longer possible to respond that the Treasury was not living in the real world of global companies, rootless workers and tax competition between jurisdictions.

Third time lucky?

It has been more than eighteen months since the consultation paper was issued, and a deathly hush has descended. The Pre-Budget Report for 2003 said that the issue was still under review, but nothing was announced in the 2004 Budget. Nevertheless, the consensus seems to be that these proposals have not gone away. It is perhaps unrealistic to expect that a government which will probably be seeking re-election within the next nine months would want to handle this hot potato just now — it would not want to campaign against a backdrop of the City threatening to bring in Pickfords, nor against a claim that it had been over-generous to fat cats. But who knows how the landscape will look by the time we get to F (No 2) A 2005 ….?

Issue: 3980 / Categories: