September 2, 2014

Changes to UK tax residency rules

HM Revenue & Customs (HMRC) has published its draft legislation covering changes to the taxation of non-domiciles and the counting system for determining tax residency. This counting issue could affect those expatriates who spend much time in the UK.

Changes to tax residency rules

HM Revenue & Customs (HMRC) has published its draft legislation covering changes to the taxation of non-domiciles and the counting system for determining tax residency. This counting issue could affect those expatriates who spend much time in the UK.  

An individual will be treated as tax resident in the UK for a tax year if they either spend 183 days or more in Britain for the tax year, or if they are spend an average of 91 days or more there per annum measured over a period of four tax years.

For any expatriate who spends close to these numbers of days in the UK and wishes to remain a non-UK tax resident, keeping track of the exact days you fly in and out of the UK is very important. Until now, HMRC did not count a day of arrival or departure as a day in the UK. This would mean, for example, that if you landed Britain on a Monday morning and flew out again on a Friday evening, you would only have spent three days there.

Under the new proposals, both the day of arrival and departure will count.  In the above example, therefore, you would now be counted as spending five days in the UK. 

The draft legislation says:
Treat as a day spent by the individual in the United Kingdom any day on which the individual arrives or departs from (or both arrives in and departs from) the United Kingdom.
But in determining that issue do not treat as a day spent by the individual in the United Kingdom any day on which the individual's presence in the United Kingdom is solely that as a passenger in a part of an airport or port not accessible to members of the public.
In simple terms, this means:
 

  • Any day arriving or departing the UK will now be treated as a day in the UK, regardless of the time you arrive/depart.
  • If you take a connecting flight through a UK airport and remain in the transit area/departure lounge, that day will not count.
    However, if you arrive at Heathrow and travel to Gatwick leaving that same day, it WILL count.
    If you (for example) arrive at Heathrow and have a meeting at Heathrow Hilton, leaving that same day, it WILL count.
  • The draft legislation will be put to Parliament in the 2008 Finance Bill.  Subject to the Bill becoming law it will take affect from 6 April this year.  However, the legislation is at the consultation stage and so these rules may be amended before it is put to Parliament.  We will advise on the final new regulations once they are confirmed. 

Changes to the taxation of non-domiciles

In this case, non-domiciles refers to foreign nationals working in the UK, rather than British expatriates who have cut ties to the UK to the extent they are no longer considered British domiciled. 

Under the draft legislation, HMRC will levy a £30,000 charge on non-domiciles who have been in the UK for seven out of the previous ten years if they want to continue to escape tax on their offshore income.

Currently, non-domiciles who are resident in the UK pay tax on their UK income, but are exempt from tax on their foreign income and gains provided it is kept offshore. Tax is only paid on these earnings if they remit it to the UK. 

Under the proposed new rules, individuals who are resident but not domiciled, or not ordinary resident, in the UK will be required to make a claim in order to access this "remittance basis" of taxation for income and chargeable gains, unless the unremitted income is less than £1,000. Those who opt for this remittance basis will lose their entitlement to personal allowances and the capital gains annual exempt amount. Those who have been in the UK for over seven years will need to pay an annual charge of £30,000 to be able to continue to access this remittance basis of taxation. 

Again, this is still draft legislation so may change following consultation, especially since the proposals have not been well received. Leading tax advisers fear that it would result in many wealthy foreigners leaving the UK, and Britain benefits economically and otherwise from these foreign workers. US citizens in particular, who are already taxed on their worldwide income even if they live outside the US, will be severely impacted.

The Treasury has estimated that up to 3,000 wealthy non-domiciles would leave the country to escape the new rules, but tax experts fear it could be much more than this.  

Changes to Revenue's tax collection powers

At the end of 2007 new legislation came quietly into effect in the UK giving HMRC new powers under the Police and Criminal Evidence Act 1984 (PACE 1984) to reclaim unpaid taxes.

 

From 1 December, certain provisions of PACE now apply to criminal tax investigations carried out by HMRC officers. HMRC officials now have new powers of search, seizure and arrest in relation to unpaid tax. The tax department can also force banks, lawyers and accountants to hand over information relating to suspected serious tax fraud. HMRC has already been advertising for criminal investigation officers, probably to provide more manpower for the task.

The timing of these new powers works well for HMRC as it continues to shift through the disclosures it received under last year's Offshore Disclosure Facility, to confirm that the disclosure is accurate and complete.

Its officers will also be trawling through all the information disclosed by high-street banks on their offshore clients last year, particularly those whose affairs look suspicious but who did not use the Facility to come clean.

HMRC is also currently in talks with 150 banks and financial institutions in a bid to gain further customer details and information about offshore banking activity.

 

First published in April 2008.
Some information contained within this article may have changed since it was first published. Homes Overseas strongly advises you to seek current legal and financial advise from a qualified professional.

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