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We have recently acquired as a client a British diplomat who has been assigned abroad and during that time he has let out his property in the UK. HMRC guidance is clear that the non-resident landlords scheme applies to diplomats the same as it does to other taxpayers:
The non-resident landlords scheme applies to members of HM armed forces and other Crown servants if they have a ‘usual place of abode’ outside the UK.
They are treated no differently from any other non-resident landlords, even though their employment duties overseas are treated as performed in the UK for the purpose of charging their salaries to tax. So if their absence from the UK is for more than six months, they are within the scheme.
However, it seems that they do not receive the same tax treatment as other UK taxpayers. The previous accountant has included in his tax return the net rental income which has been taxed at the higher rate because, for employment income purposes, British diplomats are deemed to perform their duties in the UK.
Surely this is a form of discrimination in that they do not appear to benefit from the rental income being taxed at the basic rate of tax while they are non-UK resident (period of non-residence exceeds a complete tax year, etc.). We are wondering whether an error or mistake claim could be made for previous returns.
Has anyone come across this before?
Query 17,565 – Discrete
Reply from Goldstone
The understanding by Discrete that the client is entitled to have UK rental income only liable to basic rate tax is inaccurate. Even if one receives the rent without deduction of tax, any profit made from letting the property remains taxable in the UK.
Non-UK residents generally pay tax on their UK income. However the UK income tax liability of a non-resident is subject to an upper limit, with no tax charged on UK bank and building society interest, UK dividends and state pensions paid to non-residents provided they do not claim any personal allowances (see ITA 2007, s 811 and s 825).
The mentioning of ‘the rental income being taxed at the basic rate of tax’ has been taken out of context and misunderstood. Yes, non-resident landlords that do not qualify under the non-residents landlord scheme to have their net rental income paid gross are, under the Taxation of Income from Land (Non-residents) Regulations SI 1995 No 2902, Reg 9(2) (‘Calculation of payment of tax by agent’), liable to deduction, by the collecting agent, of tax at the basic rate on the amount that results after deducting expenses as per Reg 9(3) from the income.
Perhaps the starting point for Discrete’s understanding of the client’s tax position is ITTOIA 2005, s 269 (‘Territorial scope of charge to tax’). Section 269(1) states that the ‘profits of a UK property business are chargeable to tax under this chapter whether the business is carried on by a UK resident or a non-UK resident’.
For example, a non-Crown servant non-resident with rental income of say £75,000, will indeed be liable to UK tax at the higher rate. Also, if that taxpayer has dividend income of £40,000, the liability on the latter source of income would drop out of the calculations, together with the use of the personal allowances for the year in question.
Reply from The Dude
Dealing with the tax affairs of British diplomats and members of the armed forces abroad can be a little confusing. A good basic guide to their tax affairs – and others – is contained in Tottel’s Guide to the Tax Treatment of Specialist Occupations.
The first point to make, as intimated by Discrete, is that the rules on determining residence status apply as to anyone else. So Joe Bloggs going to work abroad for more than a complete tax year in full-time employment for Smith and Co Ltd, and whose duties will all be performed abroad, would expect to be treated as non-resident in the UK and his earnings for that time would not be subject to UK income tax.
What is different about the employment income of diplomats and service personnel is ITEPA 2005, s 27.
Starting with the basics, ITEPA 2003, s 9 states:
‘The amount of employment income which is charged to tax under this Part for a particular tax year is … In the case of general earnings, the amount charged is the net taxable earnings from an employment in the year.’
Later on ITEPA 2003, s 27 deals with the situation where there are ‘UK-based earnings for year when employee not resident in UK’.
This section applies where there are ‘general earnings for a tax year in which the employee is not resident in the United Kingdom if they are:
(a) general earnings in respect of duties performed in the UK; or
(b) general earnings from overseas Crown employment subject to UK tax’.
Section 27(2) then explains that in such circumstances ‘the full amount of any general earnings within subsection (1) which are received in a tax year is an amount of “taxable earnings” from the employment in that year’.
The effect is that the overseas earnings of the Crown employee are deemed to be performed in the UK.
I think that this is the start of the crux of the issue that Discrete may need to explain to the client; i.e. that his tax position is the same as any other non-resident who has income from an employment where the duties of that employment are performed in the UK. In both cases the earnings are subject to UK income tax.
Subject to the deduction of personal allowances, etc, this will be chargeable to the basic, higher and additional (if we are talking about 2010/11) rate as applicable.
Before we go any further, it is important to note that the client is not resident but with deemed UK duties, rather than being deemed to be a UK resident, which in many cases – say if there were only income from employment and rental income – would give a similar effect for tax purposes.
Because the client is non-resident, the non-resident landlords scheme applies. Either tax will be deducted from the rent at the basic rate or the client may be eligible to receive the rent without deduction at source.
However, in the long-term this is fairly academic as the net rental income will be subject to UK income tax at the appropriate rate. And this would be the case even if the client were not a Crown employee.
I think Discrete is a little mistaken as to the operation of ITA 2007, s 811 which places a ‘Limit on liability to income tax of non-UK residents’. This states:
‘(3) The non-UK resident’s liability to income tax for a tax year is limited to the sum of amounts A and B.
‘(4) Amount A is the sum of:
(a) any sums representing income tax deducted from the non-UK resident’s disregarded income for the tax year (see s 813);
(b) any sums representing income tax that are treated as deducted from or paid in respect of that income; and
(c) any tax credits in respect of that income.
‘(5) Amount B is the amount that, apart from this section, would be the non-UK resident’s liability to income tax for the tax year, if the following were left out of account:
(a) the non-UK resident’s disregarded income for the tax year; and
(b) any relief mentioned in subsection (6) to which the non-UK resident is entitled for the tax year…’
So if we assume that the client also has dividend income and bank interest for the year this would be ‘disregarded income’ under s 813 which is:
(a) disregarded savings and investment income (see s 825);
(b) disregarded annual payments (see s 826);
(c) disregarded pension income;
(d) disregarded social security income;
(e) disregarded transaction income (see s 814); or
(f) income of such other description as the Treasury may by regulations designate for the purposes of this section.
ITA 2007, s 825 defines ‘disregarded savings and investment income’ basically as dividends, etc. from UK resident companies and stock dividends from UK resident companies or one of the following if not relevant foreign income.
- Interest.
- Purchased life annuity payments.
- Profits from deeply discounted securities.
- Distributions from unauthorised unit trusts.
- Transactions in deposits.
Discrete will note that income from property is not in this list, so that income and the earnings will be included in calculating ‘amount B’ in s 811(5) i.e. the amount that, apart from s 811, would be the non-UK resident’s liability to income tax for the tax year, if the above sources were left out of account.
Consequently, an error or mistake claim is not relevant here and I consider that the previous years’ tax returns appear to have been completed correctly.
