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  • Stuart Fowler

Non-doms: HMRC clarifies its intentions

My view that the risks of a counter-productive exodus of non-doms are greatly exaggerated is not shared by my friends in finance. They know because they know or employ people who are planning to leave. My view is purely economic, based on objective assessment of impacts (as a function of categories or people, the size and balance of income sources and how they are taxed back home). Apparently this misses the point: we have scared and upset them and we can’t put the genie back in the bottle. If true, I have to revise my assumption the people most affected, in finance and business services in London, are brainy, rational, wealth-maximising people, as implied by their great earnings power and economic indispensability.

The Treasury has issued a letter clarifying some misunderstandings of the Government’s purpose. It may defuse some of the more emotive aspects of the original legislation and therefore these concessions are potentially significant. The test will still be the revised drafting itself but taking them at face value we should anticipate that a more logical appraisal will temper exaggerated fears of the impact of these proposals. Here’s the letter and my explanation.

HMRC’s statement “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 7 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.

  • 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.”

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:

In my first blog item I did not go into detail of the proposals and I only need to now as a context for understanding whether this is really a U-turn. The first two points mainly apply to trusts and were clearly of concern to many wealthy non-doms and advisers. The second two are not particularly significant in expected impact.

Without any explicit exclusion the original draft legislation could imply that details about any offshore trusts would need to be reported to HMRC whether there were taxable remittances or not. This reporting requirement could attack non-doms where privacy mattered (including due to information sharing between fiscal authorities) but has been specifically excluded by the letter.

The original wording also suggested that remittances from trusts after the tax change could be treated as being partially the distribution of realised gains before the change (and as far back as 1998). This retrospection will not apply. Apart from breaching a general principle, this is also affected by the change in the approach to ‘mixed funds’ that will treat realised gains as coming out ahead of base cost (but still after income from employment and savings income). This will typically increase the amount of money brought in that is chargeable to tax.

Apart from the emotive aspects associated with disclosure of sources and retrospective taxation, I do not see why these changes should greatly alter people’s calculations of relative advantage. If I am right it is hard to view them as proof of caving in to lobbying let alone as an admission the entire initiative is wrong but they do look like a sensible response (and early) response to consultation with professional advisers.

Since HMRC want us to believe they never intended these effects in respect of trusts, we cannot expect the Treasury to revise its estimates of numbers of people. Their estimate remains 4,000 people opting for the remittances basis and 4,000 people leaving, out of 115,000 ‘known’ non-doms. The main explanation for the low proportion in each category is the seven-year threshold. I assume the Treasury can estimate this breakdown reasonably well.

Next comes a judgement of relative advantage based on known past UK-source and remitted foreign income, although the latter is complicated by closing the loophole that allowed bank interest to be capitalised (which also affected the gross number of non-doms known to HMRC, because they may not have needed to file a return). The Treasury estimates that £680 million of the expected 2009/10 take of £800m will come from the loophole closing and £120 million from the levy.

It is also working on the view the largest group affected are Americans. This is why the US authorities’ approach to the treatment of the levy, as a tax credit or not, affects the calculation of relative advantage. As I explained in my first item, this calculation is otherwise a simple function of the difference in tax rates.

Those who argue this was a policy made in haste to validate a decision made without planning ignore the available basis for estimates, the known sources of uncertainty around the numbers and the many years this has been under review by the Treasury. The timing may have been spurred by the Conservatives but that is not quite the same thing.