Taxpayers Advised To Handle With Care New UK Non-Dom Guide

by Jason Gorringe, Tax-News.com, London

03 April 2009

What started out as a simple concept - to charge individuals for the privilege of maintaining their non-domiciled tax status in the UK - has turned out to be a compliance nightmare for taxpayers with the release of HM Revenue and Customs's latest guide for non-doms, which runs to over 400 pages.

The long-awaited guidance, released on March 31 - just five days before the end of the tax year - sheds new light on the rules that affect non-UK domiciled individuals from April 6, 2008, when the new GBP30,000 charge was introduced. However, given the length of the guidance, tax advisers are warning affected taxpayers to take great care in using it.

Matt Coward, Director of Personal Tax Services at PKF said: “As far as individual taxpayers are concerned this guidance is too much and too late – as well as being potentially misleading, or incorrect in some circumstances."

He added: “The guidance confirms that many individuals, who had not previously had to worry about their tax status because they only have modest funds overseas, will now have to consider their position very carefully. Many may take one look at the guidance and feel obliged to submit a tax return unnecessarily, seek professional tax advice over these complex rules or, regrettably, decide to ignore the issue completely.”

HMRC’s new 85 page booklet HMRC 6 replaces booklet IR20 - its long established guidance on residence and domicile issues for self-assessment taxpayers. Although the new guidance is more detailed, tax advisers take issue with some of the statements made.

Coward continued: “Some paragraphs of the guidance seem to introduce new elements to the rules established through case law – at the very least this could lead unrepresented taxpayers down the wrong path. The flowcharts aimed at helping individuals self-assess their domicile status could be dangerous. Unless you are already an expert in this area, using them could produce an incorrect answer and taxpayers should not use them in isolation to determine their tax status."

He added: “In other parts of the guidance, the tone of HMRC’s commentary could be perceived by taxpayers as threatening. If eligible individuals are deterred from making a claim, they could end up paying more tax than they are legally required to."

According to PKF, HMRC’s new internal manual on the remittance basis runs to 274 pages of guidance, but still envisages that its officers will get help from its Offshore Personal Tax Technical Group. Although there are some relaxations – for example where an offshore bank does not follow a taxpayer’s specific instructions – other concessions, on when a tax return is or is not required, could lead to taxpayers in the same circumstances not being treated equally.

Coward said: “These rules are clearly too complex. It is a pity that what started out as a simple concept to charge UK-resident non-domiciled individuals a fee for maintaining the benefits of their tax status has produced over 100 pages of legislation, more than double that in guidance notes, and caused uncertainty for over 18 months.

He concluded: “I am sure that we can regard this guidance as ‘a work in progress’ – soon to be updated to give a clearer position. But even then, it will still be very difficult for individuals to self-assess their tax liabilities correctly, based on these complicated rules."

Traditionally, those resident but not domiciled in the UK pay full tax on their UK earnings, but only pay tax on their foreign income if it is remitted back to the UK (the so-called 'remittance basis' of taxation). But changes introduced in last year's Finance Act have brought in a GBP30,000 (USD42,000) additional annual charge for the privilege of retaining non-dom status. Taxpayers have to pay this charge along with any other tax resulting from income declared on their annual tax return, but only if they have been resident in the UK for seven out of the last ten tax years. Non-doms can forgo this charge if their overseas income amounts to less than GBP2,000 per year, or if they opt out of the residence basis of taxation and allow their worldwide income to become taxable in the UK.

One in four resident but non-domiciled taxpayers in the UK who responded to a recent poll by KPMG regarding these changes to the tax regime said that they have made the decision to leave the country. Nine in ten of the respondents felt that the new rules have damaged the UK’s reputation as a place to do business.

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