More about remittances

CURIOUSER AND CURIOUSER, as Alice said, and she may indeed have been referring to the tax remittance rules. Rob Kernohan's article 'Always read to the end!' (Taxation, 13 April 2006, page 47), and the Update item 'Foreign savings' (Taxation, 13 July 2006, page 397), concerning an HMRC note on foreign dividend income have both drawn attention to oddities in the changes to the rewrite of the remittance basis rules in ITTOIA 2005. What HMRC's note fails to spell out, presumably because HMRC felt it obvious, is that the dividend rate applies only to remittances of foreign dividends by higher rate taxpayers. Remittances by basic rate taxpayers do not even attract the savings rate, and are taxable at the basic rate.

How did this all come about? The technical answer appears to be clear. TA 1988, s 1A(1) taxes savings income at the savings rate unless it is taxable at the lower or higher rates. Section 1A(1AA) then excludes dividends from overseas companies from being savings income; s 1A(1A)(b) goes on to charge foreign dividends at the dividend ordinary rate, but s 1A(4) excludes dividends taxable on a remittance basis from s 1A completely, thus leaving them taxable at the basic rate. Section 1B(1) then says that dividends, including those from overseas companies, are to be charged at the dividend upper rate instead of at the higher rate. Although s 1B(2) defines the dividend ordinary rate, it appears that that is simply to confuse people, as there is no reference to that rate elsewhere in the section.

I can see no reason why higher rate taxpayers should be benefited and basic rate taxpayers penalised, but the effect of the provisions certainly seems to be that foreign dividends are taxed at the basic rate for basic rate taxpayers, but at the dividend higher rate for higher rate taxpayers.

Looking for logic

The logical answer is less clear. Indeed only Norman Lamont, who was Chancellor in 1996 when the savings rate was introduced (which is what excluded remittance income from benefiting from that rate), knows. My research on what happened in 1996 shows that, like Brer Rabbit, Norman he say nothing. Gordon Brown did helpfully say when he became Chancellor:

'It is essential that tax policy is based on clear principles … A tax system should also be well designed … without generating undesirable side effects; it must keep taxpayers' compliance costs to a minimum; it should avoid the less well off bearing an unfair burden; and attention must be paid to any implications for the UK's international competitiveness.'

As he retained Norman's treatment when introducing the dividend rate, we do therefore know that the distinction must arise from a clear principle that does not impose an unfair burden on those who are not higher rate taxpayers and that making the distinction minimises compliance costs.

Coach and horses

Perhaps of greater interest than the rewrite having accidentally imposed too high a tax charge on higher rate taxpayers on the remittance basis, is that it appears to have driven a coach and horses through the remittance basis itself.

TA 1988, s 65(4) stated that the arising basis for overseas income:

'shall not apply to any person who makes a claim to the Board stating that he is not domiciled in the UK'.

The effect of this was generally accepted to be that once a person claimed to be non-domiciled, the remittance basis automatically applied to him forever after, or at least while he remained non-UK domiciled.

ITTOIA 2005, s 831(1) in contrast is merely permissive. It allows a person to make a claim for a tax year for the person's relevant foreign income to be charged for that year on the remittance basis. The claim has to state that the person is not domiciled in the UK. While noting what Rob Kernohan says about the white space on the residence page, I think that completing the non-residence page of the tax return may well be of itself regarded as making such a claim. Against 'Dividend, interest and other savings taxable on the remittance basis' the foreign page states, 'See notes, p FN2'. The relevant note states:

'Individuals who … are either not domiciled or not ordinarily resident in the UK can claim for their foreign income to be charged on the remittance basis. Ask the Orderline for the non-residence page if you think this applies to you. If you claim the remittance basis enter only the amounts of income received in the UK.'

The declaration required on the non-residence page is 'I am not domiciled in the UK (and it is relevant to my income tax or capital gains tax liability)'. As it can be relevant only if the individual is claiming the remittance basis, it appears that HMRC regard ticking that box as making the claim under either or both of ITTOIA 2005,
s 831(1) or the corresponding capital gains tax provision, TCGA 1992, s 12(1).

Section 12(1) does not require a claim; the remittance basis is automatic, so in reality when a person ticks the box he may be intending to do no more than acknowledge that s 12(1) is applicable.

It is not clear what someone should do who does not wish to claim the remittance basis for income tax. I suggest crossing out the words 'income tax or' on the non-residence page.

Missing claims

Why should anyone not want to claim the remittance basis for income tax? Well, it appears that claiming it in some years but not in others can drop income out of charge to tax. See Example 1.

Over the four-year period in Example 1, John is taxable on £13,000 of income as opposed to the £19,000 that would have been chargeable under TA 1988, s 65. Surely this cannot be? The balance of the remittance in 2006-07 must have come out of the 2005-06 income so it ought to be taxable in 2006-07 when it was remitted. That would be logical. But it is not what the legislation provides. Section 832 says:

'(1) If a person makes a claim under s 831(1) for a tax year in respect of relevant foreign income, income tax is charged on the full amount of the sums
received in the UK in the tax year in respect of the income.

'(2) … it does not matter whether the income arises in the year for which the claim is made or arose in an earlier year in which the person was UK resident.'

If no election is made for a tax year, the income will be taxable under s 370 if it is overseas interest; s 403 if it is overseas dividends or s 688 in any other case. The charge under each of those provisions is on 'the full amount of the interest [or dividends or income] arising in the tax year'.

Of course, the change is not always good news, as Example 2 demonstrates.

Cessation

When the source ceases, does income earned before the cessation but remitted in a later year than that in which the cessation occurs still escape tax? Section 832 taxes 'relevant foreign income'.

Section 830(1) defines 'relevant foreign income' as 'income which arises from a source outside the UK' and is charged under specified provisions. Section 687, the 'sweep-up' provision, also charges tax on income from any source that is not charged to income tax under any other provision, so the source rule has been preserved and income remitted subsequent to the cessation of the source escapes tax.

All rather odd

There is a further dilemma for a basic rate taxpayer, but not for a higher rate one, which brings us back where we started. If the foreign income is dividend income and no election is made under s 831, it is taxable at 10% (see TA 1988, s 1A(1A)(b) and ITTOIA 2005, s 403 (which is part of Chapter 4 of Part 4)).

The same rule applies to other relevant foreign distributions, an expression which is not defined, which are taxed on an arising basis under Chapter 8, Part 5 (income not otherwise charged). Claiming the remittance basis increases the rate of tax from 10% to 22%, more than double the tax charge that applies in the absence of an election. Thus it seems reasonable to allow the taxpayer to choose year by year whether to elect, albeit that is unlikely to be the reason that the election was introduced, as in some years he may be a higher rate taxpayer but not in other years. It does not, however, seem reasonable to force basic rate taxpayers into a potential tax trap if they do not want to pay more tax than, presumably, Parliament intends.

Issue: 4071 / Categories: Comment & Analysis , Income Tax , Residence & domicile