Hot on the tails of their residency proposals, HMRC have also issued a consultation document headed “Reform of the taxation of non-domiciled individuals: a consultation” focussing on the reforms that were highlighted in the March Budget.
HMRC confirm that its objectives are “…to encourage non-domiciled individuals to invest and do business in the UK, while also ensuring that they make a greater tax contribution, especially when they have been resident in the UK for many years…”
They confirm the objectives of the reforms outlined in this consultation are to:
ensure that non-domiciled individuals, especially those who have been resident in the UK for many years, make a fair tax contribution (on the bad news front, this is simply “code” for increasing the current £30,000 charge); and
encourage non-domiciles to invest in the UK, contributing to the Government’s priority of generating economic growth (on the good news front, this is to address the anomaly of having to pay tax to bring money into the UK to invest in a business).
And carry on to confirm that the consultation document attempts to strike a balance between increasing the tax contribution made by non-domiciles and encouraging them to invest in the UK. These reforms include the following measures:
increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who claim the beneficial tax regime available to them (“the remittance basis”) in a tax year and who have been UK resident in 12 or more of the 14 years prior to the year of claim; enabling non-domiciles to remit overseas income and capital gains tax-free to the UK for the purpose of commercial investment in UK businesses; and making technical simplifications to some aspects of the current rules to remove undue administrative burdens.
The £50,000 charge will operate in the same way as the £30,000 charge, which will remain in effect for those individuals who have been UK resident for 7 out of the last 10 years – so effectively a two tiered payment system depending on the length of time the individual has been UK resident.
The more interesting proposals contained with the document relate to the existing remittance rules which are effectively counter intuitive in the sense that they operate to tax monies (i.e. foreign income or gains) brought into the UK to invest into commercial business opportunities.
In order to encourage investment in a broad range of businesses, the document sets out a proposal to allow tax-free remittances for investment in the following types of business. They would be classed as “qualifying businesses” for the purposes of this policy.
This does seem an attractive proposal as in our experience, and in fairness to the Government, this broad definition extends to all sectors of the economy and caters for entrepreneurial businesses as well as more traditional ones. As the document indicates, it does encompass many of the businesses and sectors in which non-domiciles want to invest – such as manufacturing, retail, technology and importing goods for example.
There are a couple of exclusions which are suggested in the document such as investing in residential property (where it is felt the individual may reside in the property) or leasing (which it is felt could be open to abusee for certain rich “toys” such as yachts, art etc to be perhaps financed in a tax free manner).
At this stage we have not digested the document fully, but in essence the two key areas are highlighted above.
Further updates will be issued shortly once the full extent of the document, and some of the early professional press comment have been considered.
The consultation period runs parallel to the statutory residence test consultation, with the intention to again introduce from 6th April 2012.
Businesses undertaking the development or letting of commercial property: “…this is generally carried on as a commercial business but may not technically fall within the definition of trading activity. The Government recognises that non-domiciles often want to invest in commercial property and that including it will broaden the appeal of the incentive. To qualify for tax relief, development or letting of commercial property must constitute a substantial proportion of the overall activities of the business…”.
Businesses carrying out trading activity: “…it is proposed that this will follow the generally understood definition of “trading” as developed in case law, namely that trade generally involves the exchange of goods or services with a customer for reward. Trading on a commercial basis must constitute a substantial proportion of the overall activities of the business in which the individual invests…”