8 November 2010
Historically, the UK hasn’t made it easy on non-doms. Sophie Dworetzsky explains that the sounds coming from the new coalition Government represent an opportunity to sort out the morass of tax regulations
The UK’s approach towards non-domiciliaries has in recent years been characterised by the duality at the heart of the global community’s approach towards taxation and offshore financial centres. The UK’s policymakers are no doubt aware that, as well as their global counterparts, they need to balance the need to achieve greater tax transparency and support recession-stricken tax revenues against the danger of deterring wealth creation through uncertainty or an excessive administrative and compliance burden.
A number of notable announcements were made in the coalition Government’s emergency budget on 22 June, but within the more headline-grabbing statements, perhaps at least as important will turn out to be the discussion document entitled ’Tax Policy Making: A New Approach’.
This sets out proposals to achieve ”simplicity, stability and predictability” in the process of formulating tax policy and drafting the ensuing legislation. Consultation will be a key cornerstone of the new approach and will be included at every stage, from policy formulation to legislative drafting.
Clearly these are all good things, and if this discussion paper indeed does herald a new approach leading to greater simplicity and stability, it will be warmly welcomed. A good testing ground will be the approach adopted for the latest review of the taxation of resident non-doms (RNDs), also announced in the emergency budget.
This is all the more important given the uncertainty during the long years of the previous review and the way in which the current rules governing the taxation of UK RNDs were implemented in 2008 and the upheaval this created.
A little history
The UK has offered favourable taxation for RNDs since 1798, when income tax was first introduced. Broadly, the remittance basis means that offshore income and gains are not taxed unless remitted onshore.
A review of the tax treatment of RNDs was announced in 2001 and very little happened until 2007, most likely triggered by George Osborne’s proposal that a £25,000 charge be applied to RNDs to fund Conservative proposals for a £1m nil-rate band for inheritance tax.
2008 and all that
The 2008 changes caused significant trauma, in no small part because of the way the process was handled. Draft legislation published in January 2008 contained a series of radical, completely unexpected and ill-thought-through proposals and imposed potentially very significant compliance burdens. Thanks to significant lobbying by and consultation with the professions, somewhat more reasonable legislation was implemented through the Finance Act 2008.
The key changes are that all RNDs who have been resident for more than seven out of nine years have to pay £30,000 annually to be taxed on the remittance basis, and the rules relating to what constitutes a remittance were broadened considerably. A number of other changes have been made, beyond the scope of this article.
Is that so bad? Well, yes and no. While the £30,000 charge could have been higher, and is comparable to flat tax regimes in Switzerland and other countries, the results of the 2008 changes are more subtle and widespread than they first appear.
The confusion surrounding what exactly the changes would be (and a corresponding lack of draft legislation) until long after 6 April 2008 left many RNDs feeling a keen absence of stability and predictability. Additionally, the technical complexity of the new rules imposes costly compliance burdens on those who quite rightly want to make sure they pay the right amount of tax.
At least as importantly, many RNDs felt they were no longer being welcomed to the UK and that the £30,000 charge represented the thin end of the wedge. The review announced in June can only add to this concern.
One can debate the potential outcome of the new domicile review, ranging from removing the remittance basis after seven years’ residence (proposed in the Lib Dem manifesto), increasing the £30,000 charge, abolishing the remittance basis, or simply making no change (neither of which seem likely), but at this stage the only certainty is that this very uncertainty is damaging.
It is worth remembering that, while everyone must of course pay their fair share of tax, and clearly there is a large deficit to be addressed, RNDs contribute significantly to the tax take, eg from onshore income, onshore expenditure, and business revenues generated. At least as important is that a large number of RNDs work in the financial services sector in the City, while many others establish successful businesses in the UK. At a time when the City has matters including the EU funds directives to contend with, and UK businesses are still addressing the lingering effects of the downturn, every effort should be made to avoid tarnishing the attraction of the UK as an attractive environment for RNDs.
And there lies an important point. Although there has not been an exodus of RNDs since 2008, equally, most advisers are of the view that fewer RNDs are coming to the UK, which is a more worrying point given the wider contribution made to the economy by RNDs.
If the UK is to remain competitive in terms of attracting the best talent, the remittance basis must be preserved and the rules governing it simplified. It is to be hoped that the promising statements made in the discussion document are given full effect in the proposed non-dom review. It is essential that a clear scope and timetable for the review is announced shortly and that appropriate consultation is included at every stage. This is an early chance to get it right - let’s hope the new Government grasps the opportunity.
Sophie Dworetzsky is a partner in the wealth planning team at Withers