Tax Update – January 2020
Andersen Tax UK – January 2020
At the time of writing, Brexit is only a few days away. With the UK poised to break away from the EU, we’re obviously intrigued as to what the future holds as far as the UK’s tax regime is concerned. Fears that the UK might become the next Singapore seem unfounded, but it hasn’t stopped politicians and billionaires finding some unusual common ground.
As has been widely reported, coinciding with the annual World Economic Forum in Davos, Switzerland (where tax is never far away from the top of the agenda – remember David Cameron in 2013 telling the multinationals to wake up and “smell the coffee”?), over a hundred millionaires and billionaires signed an open letter published on the website www.millionairesagainstpitchforks.com actually demanding that governments tax them more. The list of signatories includes film stars, entrepreneurs, fund managers – the type of people who will probably have availed of various tax breaks and incentives over the years to become… err millionaires. One might argue that such virtue signalling is to be applauded, but in the absence of specifics it rings hollow. How much is more tax and what would these saints deem a reasonable additional impost – a 60% income tax charge? A 70% rate – even more? What about wealth tax and inheritance taxes? Would we see our fellow billionaires relocating to countries with the most penal of tax systems? It’s an intriguing thought. Be careful what you wish for is a saying that springs to mind.
In a move that will undoubtedly be welcome by the millionaires is the news that Sajid Javid, the Chancellor of the Exchequer, plans to go ahead and reform Entrepreneurs’ Relief in his budget, scheduled for 11 March. Entrepreneurs’ Relief was introduced by Gordon Brown in 2008 and is apparently widely disliked by Treasury officials, and according to the PM makes already rich people “even more staggeringly rich”. This is unfortunate because in our experience the relief, which reduces the rate of capital gains tax on qualified disposals to 10%, subject to a lifetime maximum of £10mn gains, is very much an incentive to entrepreneurs who should be encouraged in return for the huge risks they take, the employment they create and the taxes their endeavours generate… Admittedly, the basic rate of capital gains tax is 20% – more than half of the top rate of income tax, so the pill might not be that bitter. We hope, however, that there is a consultation process rather than a knee-jerk reaction that would surely send an unusual message from this recently installed Tory government – one that almost looks down on/ignores the tremendous risks entrepreneurs take. More on this from a U.S. point of view in the next edition when we take a detailed look at the Qualified Small Business Stock rules.In this edition we focus on the U.S. and the UK with the following articles:
- Domicile: My permanent home – is it causing me tax issues?
- U.S./UK – Tax Relief for Dual Residents under the Double Tax Treaty
- IR35 – An update
The Andersen Tax Team
Domicile: My permanent home – is it causing me tax issues?
The unusually British concept of ‘domicile’ is arguably the most intriguing element of determining an individual’s tax position in the UK.
For the scholars amongst you, domicile, derives from the Latin word, ‘domus’ meaning ‘home’. The basic principle is that an individual’s domicile is the country that they consider to be their permanent home. But, how do you define a ‘permanent home’?
Domicile is nearly entirely based on common law and in the absence of reliable statutes, is often a very grey area. That, along with recent changes to the tax rules for non-domiciled individuals which increase their exposure to UK taxation, is why HMRC are rapidly increasing their enquiries into the matter.
How do I know where I am domiciled?
An individual’s domicile is not necessarily the same as their nationality, or the country in which they happen to be living; a person can be a British citizen who has been resident in the UK for many years and yet be domiciled elsewhere.
Under English common law, domicile can be acquired in one of three ways:
- domicile of origin (taken to be your father’s domicile at the time of your birth);
- domicile of dependency (unmarried children under the age of 16 take the domicile of the person they are considered a dependant of by law). The former (and very outdated) rule that meant the domicile of a married woman was solely dependent upon her husband’s domicile – remarkably even during widowhood or following divorce has long since been abolished, although it is still relevant for marriages that took place before 1 January 1974; and
- domicile of choice (an individual’s intention is to reside in a new country permanently and indefinitely).
Want to change your domicile? Good luck…
Acquiring a new domicile of choice requires extremely strong evidence. No single criterion will determine a change in domicile status. HMRC will take the balance of probabilities from looking at a number of factors including, business, social and family interests, ownership of property, voting rights, investments and residence. The case involving the Group Chief Executive of HSBC, Stuart Gulliver ( UKFTT 222) highlights just how important it is to be able to strongly justify your domicile – and how hard HMRC can challenge it!
But why does my domicile matter?
Having UK resident, but non-UK domiciled status opens a variety of interesting doors for an individual, including:
- only being subject to UK tax on UK source income and gains, provided all foreign sources of income are kept offshore and not brought into the UK, although, after year 7, you have to pay a charge to HMRC for this privilege. As might be expected, the rules around bringing money into the UK are complex, and you should seek advice if you are a non-UK domiciled individual thinking of bringing funds into the UK. This regime is available for the first 15 years of UK residency, after which you become ‘deemed domiciled’, explained below; and
- only being subject to UK Inheritance Tax on UK assets with the opportunity to shelter non-UK assets from UK IHT. With advanced planning, these benefits can be preserved even after you have become deemed domiciled, most commonly by setting up an offshore trust.
And why is this important now?
In April 2017, HMRC’s new deemed domicile rules came into force. Essentially, these rules effect anybody:
- who is non-UK domiciled but has been resident in the UK for 15 of the last 20 tax years; or
- who was born in the UK, has acquired a domicile elsewhere but is a tax resident in the UK.
HMRC will now consider these individuals as ‘deemed’ domiciled taxpayers, i.e. taxable on their worldwide income as it arises.
Fundamentally, HMRC have stopped long term non-UK domiciled individuals from benefiting from the tax advantages that non-domicile status holds, to much acclaim from some parts of the popular press.
We are coming up to the third tax year of these new rules being in place and HMRC’s domicile enquiries are on the rise with detailed domicile reviews becoming the norm. Additionally, the term ‘domicile’ can have a different definition outside the UK, often meaning residence, adding further complexities to an already difficult subject.
or Holly Fletcher on +44 (0)20 7242 5000 or
U.S./UK Tax Relief for Dual Residents under the Double Tax Treaty
The UK looks to tax any individual who is resident in the UK under the Statutory Residency Test (‘SRT’) on their worldwide income and gains. You can read more on the wonders of the UK SRT here.
Unsurprisingly, the rules in the U.S. are different. As well as operating on a calendar year basis, in the U.S. you are taxed on your worldwide income and gains if:
- you are a citizen (by birth or naturalisation);
- you hold a green card; or
- you meet the Substantial Presence Test, thereby being considered a resident alien.
This means that you don’t even need to be present in the U.S. during the year to be liable to pay tax in the U.S. A U.S. citizen or green card holder living overseas would still be required to file tax returns in the U.S. and pay tax on their worldwide income, as Boris Johnson found out.
So, what’s the problem?
If you are a U.S. citizen or resident alien, and you spend significant amounts of time in the UK throughout the year, then you may be UK resident under the SRT for that tax year, meaning you would be dual resident in the U.S. and the UK. The problem with becoming dual resident, is that both the U.S. and the UK will want to tax your worldwide income.
With appropriate forward planning, this double taxation can often be avoided. For example, an individual who has no plans to live in the UK permanently may be non-UK domiciled in the UK and may be eligible for the ‘remittance’ basis of taxation. This broadly ensures that most non-UK income and gains are only taxed in the UK if they are remitted (brought to) to the UK. They should, therefore, leave as much of their non-UK income outside of the UK as possible.
However, not everyone is eligible to be treated as a non-UK domiciled (“non-dom”) and not all non-doms are eligible for the remittance basis. Also, even non-doms who are eligible for the remittance basis will still be subject to UK tax on their foreign income, should they remit it to the UK, and in some cases, the income itself may not be eligible for the remittance basis at all.
Is there a solution?
A solution to help dual resident U.S. individuals safeguard their foreign income from UK taxation lies in the UK/U.S. Double Tax Agreement. Under Article 4 of this treaty, your residency status is determined by the following tests:
- you are a resident where you have a permanent home. If you have a permanent home in both the U.S. and the UK, you move on to the next test;
- where is the centre of your personal and economic life (work, family, investments, social life etc.)? If this cannot be clearly determined, you look to the third test;
- you are a resident where you are deemed to have your ‘habitual abode’. The definition of habitual has not been settled and it is judged on a case by case basis, which means it can be difficult to claim; and
- finally, if none of the above tests break the tie, the competent authorities of the UK and U.S. (high level Revenue officials) would settle the issue, provided you are a national of both countries. If you were only a national of either the UK or the U.S. and the question has not been settled by now, your residency would default to the respective country.
Provided one of these tests are met, you can fully or partially exempt your non-UK income as well as certain UK income, from being taxed in the UK. This can be done by completing Form HS302 (Dual Residency) when filing your Self-Assessment tax return.
The benefits of this process are clear, prevent double taxation whilst being able to spend time in the UK, what’s not to love?
Where HMRC get their upside from this claim, is that you must report what and how much income you are exempting from UK tax on Form HS302. Where the figures included are substantial, there is a greater likelihood of scrutiny from HMRC, which is something we have been seeing recently.
This means the facts and circumstances of your claim for treaty relief need to be watertight. Should HMRC successfully overturn the treaty claim to exempt your income, there could be additional tax to pay as well as interest and potentially penalties.
For any U.S. citizen or resident alien, keeping a record of your travels is absolutely vital. If you think you may potentially fall foul of the problems outlined above (or, if you only now know this is an issue and are certain you have!), then Andersen can help.
or Luke Jenkinson on +44 (0)20 7242 5000 or
IR35 – An update
Too much of a good thing
“Back in the day” there was a new trend where consultants of every stripe began providing their services via a company, allowing them to reduce their national insurance contributions.
The Government turned a “blind eye” to this as the people setting up the companies were showing entrepreneurial spirit and helping to grow the economy. The national insurance saving was their reward for doing so.
Trouble was (for the Government), the trend became mainstream and, in the Treasury’s eyes, too many people were taking advantage. As ever, there were also some who had to push the issue just a little too far – employed on Friday, contracted via a personal service company on Monday. This was nearly always instigated by the “employer” and not the employee, now consultant.
To try and reign in the more egregious cases, anti-avoidance legislation was brought in from April 2000 and is now known by the number of Inland Revenue leaflets that covered the legislation as IR35. This works by taxing the consultant as an employee, removing the national insurance benefit (amongst other things).
No, go ahead
The Government’s approach to this though, has been a little muddled, to say the least. The Treasury introduced a 0% Corporation Tax rate from 2002, seemingly encouraging people to incorporate and work this way, and then HMRC unsuccessfully tried to tax Mr & Mrs Jones, aka the Arctic Systems case, using legislation from the 1930s.
In addition to losing the Arctic Systems case, HMRC does not have a good track record in taking “IR35” cases to tribunal, as the delightful Lorraine Kelly will no doubt confirm.
Actually, definitely stop
The reaction from Government to all of this might have been expected – it introduced new rules for people working in the public sector. Under these rules, it is the client/end-user/employer (delete as appropriate) who decides whether the consultant is an employee or not.
At the time these rules were introduced, many people said that they would be extended (“thin end of the wedge” was often heard), and they were not wrong. The rules will begin to apply to many companies in April 2020. However, and to continue the muddling, the changes are not popular and with one eye on the election the Chancellor announced last November that the Government would review the new rules, dangling the carrot that they would be delayed, re-written or possibly even stopped.
No, I wasn’t
Now the election is out of the way the review has been announced. It is, though, more of a brief glance, than an in-depth holistic investigation. We wonder if this has anything to do with the fact that the Government now has a thumping majority. The review is simply looking at how to smooth the implementation of the new rules. Of course, scrapping the rules would really smooth the implementation, but assuming that does not happen, the announcement from the Treasury is the taxation equivalent of rearranging the deckchairs on the Titanic. The Government may be able to tweak the guidance, but there is not time for a wholesale re-write and they cannot do much about the “check employment status for tax” tool, as the lead times for HMRC projects are measured in years not days.
With only a matter of weeks before these new rules hit, time is running out to make wholesale changes if you have not taken any action yet. However, we can help you triage your intermediary contracts.
Those that are clearly outside IR35 can be left alone, those clearly inside need to prepare for employment, whilst borderline cases need to be reviewed, in detail, to see if they belong in either of the other two camps or if a view needs to be taken.