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I have no idea how many words it will take to capture the essence of what I want to say but I can state at the outset of this article — an article which I hope will be more than just a rant — what my conclusion is.
Simply put, I have come to the conclusion that all UK resident taxpayers in receipt of income and/or capital gains should be exposed to the burden of taxation on the same basis (nb, patent applied for). As is the situation in so many other countries, a resident's place of domicile should not be a factor in determining UK taxation. If a change from the present system would harm the economy, is there not another option?
1997 and all that
Since the general election in 1997, tax advisers have been awaiting the outcome of the Chancellor's review of the tax treatment of UK resident, but non-UK domiciled individuals ('non-doms'). Gordon Brown had made clear his intentions if elected. The more seasoned readers will have been waiting to see if the so-called 'economic benefits argument' put forwarded by the non-doms' lobby would eventually win the day. We understand that previous Chancellors have walked away having gone to the brink of a disaster for the country's economy by encouraging a mass exodus of wealth and talent from the UK by changing our tax system.
As a reader of Taxation it is more than likely that you will already know that individuals domiciled outside the UK do not need to pay income tax or capital gains tax on the gains derived from their overseas activities — providing they do not remit the funds back to the UK while still resident here. Not only this, but I and fellow tax planners take advantage of ways to effectively use these overseas funds to good effect within the UK without technically making 'remittances'.
Non-doms can borrow from abroad and often invest into the UK property market through offshore trusts. There exist special rules taxing Irish income arising to UK resident Irish domiciled individuals, but that is another story (not least whether the rules in question breach EU law by discriminating against the Irish).
On the BBC 2 programme 'Newsnight' some weeks ago, a man wearing a red tie — and therefore possibly Labour — was saying words to the effect that collecting full taxes from 'eighty thousand' or so non-doms was not a priority for the Government. Unfortunately, Jeremy Paxman was not doing the interview; consequently much was left unsaid.
There is little point in running through the various government discussion papers and initiatives taken by the Chancellor since 1997 or quoting the words of the Chancellor leading up to the 1997 election, but it is reasonably safe to assume that the threat of the many multi-billionaire individuals leaving the country with the consequential huge loss to the economy is such that the rules for taxing non-doms will never be changed in the foreseeable future.
Indeed, the non-dom tax rules have remained so well established under this Chancellor that, according to the 'Newsnight' programme, the website of the Department of Trade and Industry alerts potential overseas businessmen as to how they could live in the UK and avoid paying the same taxes as someone with a UK domicile; one might say a form of positive discrimination?
One small step for the Exchequer
It is fair to say that the Chancellor has not been totally inactive on this front. In 2005 he acted to close one option. As indicated above, non-doms do not normally pay capital gains tax on capital gains made on assets situated outside the UK. It was accepted by HMRC that, while normally registered shares in a UK registered company were located for taxation purposes in the UK, so-called 'bearer shares' held in a UK registered company (the owners of which do not have to be recorded in the register of the company) were considered to be situated for tax purposes where the shares certificates themselves were situated. For obvious reasons, such shares were referred to as the non-doms' 'flexible friend'.
The location of the shares could be easily changed and, providing the bearer shares certificates were located otherwise than within the UK, a UK resident non-dom would pay no UK capital gains tax on disposing of his or her bearer shares in a UK registered company.
Yes, there was a stamp duty cost but, essentially, the creation of bearer shares in a valuable company provided a route by which one could put an otherwise bolted horse back in its stable and then start tax planning using the overseas asset rule for non-doms. The Chancellor extinguished this luxury by changing the law with effect from on or after 16 March 2005 (F(No 2)A 2005, s 34, Sch 4) deeming all shares and securities of a UK registered company to be situated within the UK wherever the share certificates were to be found. He did not go further.
The above change was not a major blow to non-doms because it only impacted on those non-doms who had not sought timely UK taxation advice about how to structure their investments in UK companies.
A convincing argument against change?
I am told that one cannot examine this issue from a taxation standpoint alone. It is my recollection that the Chartered Institute of Taxation and other professional bodies urged the Chancellor to be cautious because of the major adverse economic results which could be expected should the UK's tax rules as regards non-doms be changed.
I do not know what authoritative research has been carried out or whether the warnings about the overall loss to the economy are purely anecdotal, but let us assume that the Government spokesman interviewed on 'Newsnight' was so persuasive in his argument that we all become convinced that the status quo as regards non-doms should be maintained. How can we have a fair taxation system which copes with and welcomes non-doms to the UK, yet does not discriminate against a large number of people domiciled in the UK?
Could it be that the Government is staring the solution in the face, but has yet to recognise it?
It has recently been rumoured that the Chancellor is of a mind to exempt from UK corporation tax the profits of UK resident companies derived from overseas trading activities and overseas investments. It sounds like a good way to encourage the economy! Of course, this story could be just another example of government spin going wrong, but let's pause for a moment and focus upon the following question.
If we assume that the positive discrimination in favour of non-doms is brought about because of necessity; i.e., the Chancellor must not do anything which would encourage these individuals to move abroad because of their overall contribution to the economy, is it not time to change the UK taxation system so that there is just one rule governing overseas interests for income tax and capital gains tax purposes?
Should we not take one of two courses.
- Exempt from income tax and capital gains tax those gains derived by all individuals, wherever domiciled, from overseas activities and remitted to the UK? (Perhaps in a similar way to the above-mentioned rumoured changes to UK corporate taxation.)
- Failing this, should we adopt the reverse policy and state that all individuals will be taxed identically as regards both UK and overseas gains — they will only be taxed in the UK if they are silly enough to bring the money back to these shores? We might well need to tweak the meaning of 'remittance' and create more anti-avoidance rules, but the end result might be a more equitable system.
Of course, if (1) and (2) cannot be allowed, we could just change the rules so that all UK resident individuals are taxed on worldwide income, as is the case in many other countries, and see what happens.
We live in a global economy after all, don't we?
How many non-doms?
I was amused to hear the Chancellor's spokesman on 'Newsnight' estimate the number of non-domiciled individuals and I wondered if he had any concept of what was meant by 'domicile'. Did he know, for example, that an individual normally obtains at birth his domicile of origin which is usually considered to be the same domicile as that of his father and does he understand how difficult it is for the authorities to show that a domicile of origin has been displaced?
It is a fact that very few people explore technically their domicile position, yet they may well fall to be treated as domiciled outside the UK if they only knew the rules. For example, the adult children of immigrants, be they born and educated in the UK, may well have plans for their futures about living in their parents' country of origin or, say, in Australia or Canada and who might therefore not see the UK as being their natural home.
Immigrants from war-torn areas of the world may be yearning to go 'home', but are unaware of the tax ramifications of their position. One does not lose one's overseas domicile simply by becoming valued members of the community, having a successful career or business in the UK, or by holding a British passport.
Voluntary taxpayers?
The rules for determining one's 'domicile of origin' or 'domicile of choice' are just that, 'rules', albeit laid down largely by case law. In particular, first and second generation immigrants who don't ascertain their domicile in accordance with the strict interpretation of the position and who fail to structure their investments wholly or partly overseas may well be, in essence, voluntary taxpayers in the UK.
Perhaps, if the rules are to be left unchanged, the Government should do more to explain the relative ease of establishing an overseas domicile where, say, the domicile of both parents of an individual is located overseas. Possibly, HMRC should produce a leaflet entitled 'Are you sure you know where you are domiciled (you could be paying too much tax)?' Has not the DTI already shown the way? This is what open government is all about, is it not?
Do I not also remember a minister talking about joined-up government in 1997, or was that an episode of 'The West Wing'?
Kevin Slevin is a Fellow of the Chartered Institute of Taxation and a former council member thereof. Kevin advises practitioners on their clients' tax planning and tax disputes. He can be contacted by e-mail at: kevin@slevinassociates.co.uk.
