UK: Weekly Tax Update - September 28, 2015

Last Updated: 6 October 2015
Article by Tina Riches

1 General news

1.1 Government nearly consults on tax reform of non-domiciliaries

The Government released and then promptly withdrew the promised consultation on the taxation of non-domiciliaries (non-doms). Two key proposals are that (i) non-doms who have been resident in the UK for 15 out of 20 years will be deemed UK domiciled for tax purposes and (ii) individuals born in the UK with a UK domicile of origin will regain that domicile status if they return to the UK. Changes around offshore trusts are also mentioned, but will take place at a slower rate.

Note: These comments have been prepared on the basis of the version of the proposed consultation placed in the public domain online and almost immediately withdrawn, although we understand that there are unlikely to be any substantial changes to the final version. However, the following notes must be treated with due caution. We nevertheless anticipate that many taxpayers will be interested in the draft document. We reproduce the original link for reference.

The consultation was proposed to remain open until 28 October 2015.

Following the announcement in the summer Budget, this is the first of two consultations on the taxation of non-doms to be issued. This is intended to inform legislation to be introduced in Finance Bill 2016. The second, a consultation on the property held through offshore structures, is being taken more slowly and will be published later with a view to introducing in Finance Bill 2017.

As far as this consultation is concerned, the Government has broadly two objectives. The first is to tax long-term resident non-doms in the same way as locals. The second is to prevent those born in the UK with a UK domicile of origin, but subsequently becoming non-dom from accessing the favourable non-dom status on a return to the UK.

Objective 1: Taxing Long term residents

As has been well trailed, the proposal is that those who have been resident for 15 out of 20 tax years will become deemed domiciled. Split years of residence will count as one of the 15 years of residence. Six years' non residence will shake off deemed domiciled status.

The broad intention is as far as practicable for the individual to be treated as if they had actually acquired a UK domicile. There will however, be special treatment under the Transfer of Assets Legislation (ITA 2007 Part 13 ch.2) and detailed special rules for offshore trusts.

The favourable treatment for long-term residents with up to £2000 of offshore income is proposed to be abolished, even in the face of the additional administrative burden for the taxpayer.

There are consequential implications for inheritance tax where the deemed domiciled period of 17 out of 20 tax years will be reduced to 15 out of 20. Other amendments including changes to the spouse IHT election for non-doms will be reviewed.

Objective 2: Those born in the UK with a UK domicile of origin

The Government's clearly stated intention is that those born in the UK with a UK domicile of origin will not be able to take advantage of non-dom status on a return to the UK. The Government's rationale is that the non-dom tax rules are for the benefit of the internationally mobile to live and work in the UK. Its view is that it should not be available for returning non-doms who were both born in the UK and had a UK domicile of origin.

It is not explained why the pure accident of having been born in the UK should make a difference, though it does say it has some sympathy for representations suggesting a short period of residence be disregarded; that could be a quid pro quo for widening the scope to those born outside the UK. On balance, it has come out against this approach so far.

1.2 HMRC and Accelerated Payments Notices

HMRC say they have raised £1 billion from 25,000 Accelerated Payment Notices (APNs) since they were first issued in August 2014 to counter schemes caught chiefly by the DOTAS regime. Financial Secretary to the Treasury David Gauke was quoted as saying that the Government will not tolerate tax avoidance. The fuller picture is that the Government has introduced this 'demand side' reform as part of a structured campaign to reduce the attraction of tax avoidance as set out in a detailed paper 'Tackling tax evasion and avoidance' published in March this year.

Users of DOTAS registered schemes who have not yet received APNs should note that HMRC has firmed up on its intention to issue 64,000 further APNs by 'the end of 2016.' HMRC also says this will bring forward £5.5 billion revenue by March 2020. It is not clear whether this is a gross or net amount given that there may be disputed tax to repay; the release admits HMRC only win 80% of the cases. Nor does the note explain how this much larger figure is to be reached given that it is a reasonable inference that HMRC will have rightly concentrated on securing the best return possible early. It seems reasonable also to infer therefore, that the £1 billion collected is well short of the amount ultimately due under the APNs to date.

1.3 Liechtenstein Disclosure Facility (LDF) Statistics

LDF statistics have been published for collection of tax up to August 2015. The yield for LDF settlements so far is in excess of £1.1bn. This is well below the originally forecast £3bn.

1.4 Extension of transitional periods for withholding under FATCA

The US Internal Revenue Service (IRS) is to amend the FATCA regulations to extend certain deadlines in the 2014/2015 transition period. The amendments are:

  • the deferral of the start date of gross proceeds withholding on certain payments under the transitional rules, from payments made after 31 December 2016 to payments made after 31 December 2018;
  • the deferral of the start date of withholding on foreign pass-through payments made to a recalcitrant account holder or a non-participating foreign financial institution (FFI) to the later of 1 January 2019 or the date the final regulations are published;
  • the extension of the availability of limited branch and limited FFI status until 1 January 2017 (it is currently scheduled to be unavailable after 31 December 2015);
  • the extension until 1 January 2017 for sponsoring entities to register their sponsored registered deemed-compliant FFIs and sponsored direct-reporting non-financial foreign entities (NFFEs), and to continue to rely on sponsoring entity global intermediary identification numbers (GIINs).

Other changes will:

  • end the mandatory requirement to apply the pro-rata rule for collateral that secures both grandfathered and non-grandfathered obligations;
  • amend the definition of a grandfathered obligation to include any obligation that gives rise to substitute payments and is created as a result of the payee posting collateral that is otherwise treated as a grandfathered obligation;
  • ease reporting of information under a Model 1 intergovernmental agreement (IGA) for which the obligation to exchange is operative, by treating FFIs as complying with FATCA even if the relevant partner jurisdiction has not exchanged 2014 information by 30 September 2015, provided the partner jurisdiction notifies the US competent authority before 30 September 2015.

FFIs in jurisdictions yet to sign a model 1 agreement with the US will be regarded as deemed compliant provided the jurisdiction shows a firm intent to implement that agreement and any information otherwise reportable by 30 September 2015 is exchanged by 30 September 2016 together with all other information to be exchanged by that date. In addition to being of interest to those FFIs resident in the affected jurisdictions, these two points will also be of interest to other FFIs in determining whether their counterparty is a participating or non-participating FFI.

The note states that prior to the issuance of the amendments, taxpayers may rely on the provisions of the notice at the link below.

1.5 Guidance notes on UK/CDOT information exchange agreements

HMRC has issued guidance notes dated 14 September 2015, designed to aid UK Financial Institutions in understanding their obligations under the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, similar to the American regulations for FATCA.

1.6 Suspension of penalties where personal business incorporated

The First-tier Tribunal (FTT) has found that HMRC's decision not to suspend a taxpayer's penalty because he would soon be exiting the self-assessment regime was flawed. The taxpayer's appeal against the penalty levied was therefore allowed in part.

This case concerned Mr Patel (P), a self-employed locum pharmacist who, in his personal tax return, had claimed a deduction for the cost of acquiring bonds for his 'self- investment personal plan' (SIPP) (not a registered pension plan) and for the interest on the loan taken out to fund this acquisition.

HMRC found this tax treatment to be patently incorrect; the loan was not taken out for the purposes of P's trade, the bonds were not purchased for the purposes of P's trade and because the SIPP was not a registered pension no statutory deduction was available for any contributions made. The Tribunal agreed with this and that P had been careless in his behaviour.

HMRC had decided not to suspend the penalty levied in respect of P's carelessness because P, it was established, was intending to transfer his locum pharmacist trade to a company. This, it contended, meant 'it would not be possible to impose conditions that would address [P's] continuing personal tax compliance.'

The Tribunal disagreed on this point, stating that P would presumably be required to submit a personal tax return in respect of the salary (or deemed IR35 salary) or dividends he receives from his company in future. It therefore found that HMRC was 'flawed' in its decision that it could not reasonably suspend the penalty and allowed P's appeal in part.

The legislation in FA 2007 Sch 24 does not state that suspension must set conditions in respect of the same type of errors, although HMRC often tries to refuse suspension where an error relates to an isolated type of obligation or a transaction that may not recur. This case demonstrates how challenging that stance can be successful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Tina Riches
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