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Dave Hartnett has issued a statement clarifying certain aspects of the proposed residence and domicile changes. The text of the letter follows.
'The Government's consultation on changes to the tax rules on residence and domicile closes on 28 February. In the meantime, there are four issues that have been raised, where I want to make clear what the Government's intention has always been and how it will be set out in the legislation to be brought forward.
'Under the current rules non-domiciles are able to enjoy the benefits of the remittance basis of taxation. This ensures that they need only pay UK tax on their foreign income when they remit it to the UK.
'The Government recognises the positive contribution of the remittance basis to UK competitiveness and is committed to retaining it. However, there are issues of fairness, which need to be addressed.
'First, the fact that people can be resident in the UK over the long term without making any contribution in respect of income they leave abroad.
'That is why the Government is introducing a £30,000 annual charge for taxpayers resident in the UK for more than seven years who want to carry on using the remittance basis.
'Second, loopholes in the current rules mean that income can often be remitted without being taxed. That is why the Government is taking action to close these loopholes.
'These reforms, announced in Pre-Budget Report 2007, retain the remittance basis while enhancing its long-term sustainability and maintaining the competitiveness of the UK as a place to work and do business.
'The consultation process will run to 28 February. However, I want to make clear that the Government's intention — which will be set out in the legislation to be brought forward — has always been to ensure that:
- those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances;
- there will be no retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect;
- money brought into the UK to pay the £30,000 charge will not itself be taxable; and
- it will continue to be possible to bring art works into the UK for public display without incurring a charge to tax.
'In addition, we will continue to discuss with the US authorities how the £30,000 charge can become creditable against US tax.'
These clarifications are largely self-explanatory, but as Andrew Hubbard of Tenon says, 'claims that Mr Darling has done a U-turn and significantly changed the plans announced in the Pre-Budget Report are inaccurate'.
He says that all that has happened is that 'HMRC sent a letter under Dave Hartnett's signature to the major professional bodies giving clarity on some of the disputed areas of the new rules. In essence there has been no change of policy'.
Tenon's Andrew Jupp says that the Government has said that it will remove 'some of the more absurd elements of the offshore trust rules, under which certain gains which were incurred years ago could become taxable next year.
They have said that this was never their intention and it was only poor drafting that caused the problem in the first place!'
STEP is still concerned that lack of detail will mean that advisers will not be able to dissuade clients from leaving the UK.
Deputy chairman John Riches says that 'in the absence of a decision to defer the introduction of the changes, it is impractical to get sufficient assurances to stem the flight of individuals and capital which we fear'.
Similarly, PKF's John Nugent says that 'the assurances respond to some of the more dramatic aspects of the recent media coverage (information on overseas assets, the impact on the Tate, etc), but other than perhaps offering not to tax old gains it does not promise anything on the fundamental problems regarding the proposed extension to certain rules on offshore structures that are the basis for the deepest concern among clients'.
In his opinion it is that legislation rather than the £30,000 fee that 'will lead to an exodus of the extremely wealth and/or disinvestment from the UK'.
It would be advisable to postpone the new rules until April 2009, is the opinion of many advisers. For example, Keith Johnston, director of policy at STEP, says that 'the only sensible option is now to defer any changes to the taxation of overseas structures until 2009' as this would provide enough time to consult properly on the changes'.
Likewise, the Chartered Institute of Taxation believes that it would be sensible to delay introducing some of the changes until April 2009 as this would give time for advisers and taxpayers to be able to understand and comply with the new rules and ensure that the drafting works as intended.
Emma Chamberlain, chairman of the institute's succession taxes adds: 'It is in everyone's interests to see the tax system work properly. Linked to the whole question of domicile is the issue of residence since both UK and non-doms (whatever their wealth) need to know whether they are within the UK tax net in the first place.
'For some time the CIOT has favoured a comprehensive statutory residence test similar to that adopted in Ireland. We would suggest that a proper consultation takes place on the legislation governing domicile and residence with a view to introducing provisions from April 2009.'
Questioning the wisdom of a civil servant setting out Government's intentions, Andy Wells of Mercury says that politics should left to the politicians.
He adds 'Mr Hartnett's statement is odd, as it asserts that the “intention has always been” that those using the remittance basis will not be required to make additional disclosures.
'One wonders how that can be so, when the CGT changes relating to offshore trusts in the draft legislation would bring currently tax exempt gains into the remittance basis, thus requiring trustees to keep extensive records that are not currently needed.
'Moreover, it is not really tenable to be suggesting that all the non-doms need to do is “declare their remittances and pay tax on them” as this implies that HMRC will not request any additional information to check their tax return disclosures (would anyone believe that?)'.
Andy says that the draft guidance 'contradicts Mr. Hartnett's statement that “money brought into the UK to pay the £30,000 charge will not itself be taxable”.
'In the “Frequently Asked Questions” at question 12, precisely the opposite is asserted' and these FAQs were still on HMRC's website after Mr Hartnett's announcement.
Overall, Andy says 'This is an extraordinary state of affairs! How is anyone supposed to know what the law will be?
'The only fair and reasonable solution is to defer the commencement date for 12 months, while HMRC and the Government get together and decide what they actually want to tax.
'It remains to be seen whether the Government will do the honourable thing and postpone this legislation until 2009'.
