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KEY POINTS
- The main 'prongs' of the new legislation
- Will the rules be properly understood?
- How will the rules affect the typical taxpayer?
- The effects on tax equalisation and double tax relief
- Will HMRC be able to cope with the new rules and returns?
Dear Dave,
In that I am one of your biggest fans, I trust that you will forgive the familiarity. I have gone on public record on many occasions, not least in this esteemed journal, with my support for the good ship HMRC and all who sail in her.
I did, however, feel that I had to write to you at this critical time to express my concern that your vessel might not only be shrinking at the behest of your Treasury masters but, in the near future, sinking.
There has been an incredible media focus on the new legislation relating to what the whole country now knows as 'non-doms'. Sadly, the fourth estate has collectively missed the point.
They have focused on the super-rich, citing examples such as the owners of football clubs. Indeed, even in Parliament the figure that is being bandied around for the number of people affected by this legislation is 116,000.
With 4.3 million people born overseas according to the 2001 census, mass immigration from Europe since then and a definition of domicile that would not only include the vast majority of these individuals but also many of their children and those coming to the UK to work for short periods, the real figure of those affected by Chancellor Darling's new legislation might well be ten times that figure.
This letter is not going to consider the moral question about why those who have lived in the UK for donkey's years and might well even have been born here should enjoy a different tax status from poor devils like your correspondent who pays tax on every penny of his income from around the world (those Banco Santander shares).
Realistically, either the UK might better have chosen the American route and declared that for every UK tax resident worldwide income would be taxed or, alternatively, accepted the current position.
In the first case, the money would have been well worth collecting; in the second it would have been business as usual.
This letter will outline some of the problems that nobody has apparently so far considered in connection with a piece of legislation that seems to have been introduced without as much detailed research regarding the practical implications for your organisation as used to be the case in the past.
A quick reminder
Ignoring the complicated bits, there are broadly three prongs to this new legislation.
- Anybody covered by this legislation who is resident in the UK must decide whether they wish to be taxed on a remittance or an arising basis.
- If they choose the remittance basis, they will lose their personal allowances (including blind person's allowance), their annual capital gains tax exemption and some more minor reliefs, for example relating to life assurance policies.
- If they have been resident here for seven of the previous nine tax years then if they choose the remittance basis they will pay an additional tax charge of £30,000.
De minimis
As a result of one of the finest moves in his 2008 Budget, the Chancellor increased the proposed de minimis limit from £1,000 to £2,000. This will take many more people outside the scope of this legislation and is greatly to be welcomed.
By the end of this letter, it may well be apparent that a figure of £5,000, £10,000 or even £50,000 might have been more cost-effective.
Tracking down sources
In order to administer this regime, it will be necessary for your staff to monitor millions more entries on tax returns and an appreciably larger number of tax returns than has ever been the case in the past.
Worse, most of the entries that are of interest for these purposes will relate to sources of income from other countries.
Tax inspectors will have two different problems here. First, where people have made declarations on their tax returns, it will be necessary to check that the number of zlotys or yen is correct and that nothing is missing. That is going to be a hard task requiring the talents of the multilingual as well as the financially astute.
Far harder will be the job of going through the records of every person who is not domiciled in the UK and claims that they have no overseas income or possibly that their overseas income not remitted to this country does not exceed £2,000 in any tax year.
I have no doubt that you and Chancellor Darling have cooked up a computer program that can immediately identify all sources of unremitted income and bash out assessments, if not actually bashing down doors. I would suggest that if they really have the ability to do this, your computer programmers might be better and more lucratively employed helping out NASA or Bill Gates.
If the computerisation is not feasible, then there are only two possibilities. Either HMRC will have to trust (non-)taxpayers to self assess correctly or, alternatively, face the prospect of mass tax evasion — more through ignorance than any deliberate intent.
If nothing else, without producing incredible amounts of literature, TV adverts, etc. in every language under the sun, there is a serious risk that many prospective victims will not even be aware of their obligations.
With cuts to HMRC staff, this must be a real concern to all taxpayers. There is nothing worse than paying your own portion and then seeing others flouting the law.
The super-rich
While there has been much media comment about the prospect of mass emigration from the UK, anyone with billions to spare is hardly likely to be that fussy about shelling out the odd £30,000.
Certainly, in my limited experience, those who can afford it might resent this charge, but they are unlikely to give up their businesses and lifestyle for a few quid, particularly where they might well obtain tax relief for it elsewhere anyway.
To that extent, you are to be congratulated on a clever piece of legislation in that, in many cases, all that is actually happening is that a tax liability that was previously paid in another country will be imported to our glorious homeland.
The ordinary bloke
That's all fine and dandy and while the rich and their professional representatives might bellyache, the man in the street is probably secretly pleased if Greek shipping magnates, oriental potentates and Russian or American owners of football clubs pay a bit more tax to the Exchequer.
The real problem with the non-doms legislation is with the million or so other people that are going to be trapped in its nets, more or less like dolphins caught up with the tuna.
It might be helpful to come up with a few examples of ordinary blokes like you and me who are likely to drain HMRC resources in the coming tax year and on into the future. Please forgive me if any of these might seem like stereotypes.
The Polish plumber
Journalists hark on and on about the numbers of plumbers who have come across from Poland. They may be mythical, but they present a useful case study for these purposes.
Typically, this gent (or indeed lady) might well have left behind a bank account in Warsaw earning a bit of cash but also an apartment that they let, as well as earnings for a few weeks of work at home.
Assuming that the combined income from these sources exceeds £2,000 in any tax year, these individuals will be obliged to choose between declaring their worldwide income as taxable in the UK or ticking the box and losing their allowances, although as I have already pointed out, this will not happen for the best part of a year after they have earned the income.
The Indian smallholder
It is common for families on the Asian subcontinent to invest in land or property. While they might make little income from this source, periodically families might sell their interests or pass them on. Under UK tax law, such transactions will be subject to capital gains tax and will therefore need to be returned.
Young Americans
David Bowie sang about them and there are always many keen to have a couple of years' worth of experience in one of the world's major financial centres.
They could well spend a great deal of their time working overseas and therefore qualify for the exemption relating to income of those not ordinarily resident in the UK. In the past, the only entries that they needed to put on their tax returns related to employment income, since their investments were in overseas banks and other institutions.
In future, on the basis that their overseas earnings not remitted to the UK will be measured in tens of thousands of pounds, they will lose their UK personal allowances, even though these are usually provided for by law.
Russian billionaires
It is probably fair to say that enough has already been written about the plight of these individuals. Certainly, when one considers that there are only at most a handful of them residing in the UK, whether or not they are obliged to pay a £30,000 tax levy for which they will get double taxation relief anyway is hardly of great consequence when compared with the significance of winning the Champions' League.
Knock-on effects
The Government is naive if it believes that the effect of this legislation will stop with the categories referred to. The writer's major area of work in this context is with companies that employ people like the 'young Americans'.
Many of those companies will operate what is known as a tax equalisation process. This means that the detached employee, i.e. the person who has been seconded to the UK, is guaranteed that his net pay will not alter regardless of changes to tax legislation.
Therefore, if he loses his personal allowances, then it is the employer who is obliged to foot the bill.
Even where there is no tax equalisation, employers may well feel under pressure or a moral obligation to give affected employees a pay rise. Economists will explain that this could have an inflationary effect in that the cost will be passed on to customers.
This is bad enough for those who come here for a couple of years and are not ordinarily resident in this country. The impact could be far greater, where individuals have been resident in the UK for long enough to face the £30,000 charge or alternatively, are obliged to declare their worldwide income here.
The calculations
This is a true nightmare scenario. Typically, individuals, their employers and HMRC will not know the taxation position until at least October and more probably January (depending on how and when the return is submitted) of the year following the tax year in question.
This is because the decision to be taxed on the remittance basis is included on a self-assessment income tax return that does not need to be submitted until that time.
Then, if a tick is put in the box, an adjustment will be required to claw back the tax. This is tricky enough anyway, but for those attempting to sort out tax equalisation, is likely to cause absolute chaos, since these calculations tend to be circular at the best of times.
Double taxation relief
Following protests at the original legislative drafting, changes have been made with the intention of ensuring that the £30,000 can be offset against tax in other countries, especially the United States.
If that is the case, then the economic impact is to put £30,000 into Chancellor Darling's back pocket that would otherwise have finally rested with his American, French or other counterpart. This is very good news for the British economy, but will cause immense confusion.
The problem for the vast majority who are not fat cats and merely get a little rental income from home or benefit from a two-year stay in London is completely different.
They will have much smaller obligations and, in addition, will end up bearing the cost of losing personal allowances or paying tax on overseas income. In the former case, this is the real cost, in the latter depending upon circumstances, it may once again be covered by double taxation relief.
The impact on HMRC
Mike Truman has written prolifically on the problems caused by cuts in numbers at HMRC and I have also weighed in. It seems reasonable to assume that if everybody affected by this legislation complies with it fully then there may not be a problem.
There could be millions more tax return pages and at the very least, hundreds of thousands more tax returns but if they are all completed perfectly and the taxes paid, the Exchequer does get richer.
Sadly, Santa Claus did not bring me my Caribbean island and yacht last year and the chances that come the end of 2008-09 the situation in the last paragraph comes to pass is even less likely.
The first problem that individuals will encounter is understanding their own obligations. Unless information is provided in many languages, this will be an issue and if anybody tries ringing an 0845 number to get help, they will either get a dialling tone or, one rather cynically fears, somebody with less than a year's training and no knowledge on the subject.
That means one thing. Tax returns will not be completed correctly, if at all. This brings the system into disrepute and also suggests that unless large teams of Inspectors are deployed to investigate non-doms, possibly hundreds of millions of pounds of tax will never be collected.
It is perhaps instructive to note that until Parliamentary sub-committee discussions on the Finance Bill, the only real consideration of this legislation related to the impact on the super-rich. I'm sure that you will be able to reassure me about your organisation's ability to monitor and collect all of the tax that arises through these changes.
Indeed, presumably it is only a matter of time before you announce an impending recruitment drive with the intention of getting another 10,000 fully trained staff available for the tax return season.
A plea
Mr Hartnett, you may well not have as much influence as you would like over UK fiscal policy, but to the extent that you do have the ear of the Chancellor, or even his most recent predecessor, please think of the (relatively) poor man when implementing legislation in future.
So often, radical suggestions are proposed and then shot down in flames by the City fat cats and their representatives. The effect is typically that the mega-tax charge that was going to hit the super-rich is watered down or forgotten, while the average Joe ends up paying more tax or in this case filling in many additional tax return pages.
The idea of shifting tax from overseas into UK coffers is desirable, although your equivalents abroad may not agree. With the serious risk that your organisation is stretched beyond breaking point, one can only imagine that you are currently tearing your hair out and cursing whoever came up with a plan that you do not have the resources to implement.
Next time, wouldn't it be great if tax legislation was fully thought through? Or maybe it was?
Very best wishes,
Philip Fisher
Philip Fisher heads the Employment Tax and Rewards team at PKF (UK) LLP, this article reflects his personal opinion which is not necessarily the view of the firm. Philip can be contacted at philip.fisher@uk.pkf.com.
