Comments from ACCA to HM Revenue and Customs (HMRC), September 2012.
ACCA welcomes the opportunity to comment on the proposals for the reform of the residence regime in the UK tax system. The introduction of a statutory definition of tax residence will, if properly formulated, reduce uncertainty for both taxpayers and HMRC alike. Reform of the ordinary residence regime likewise has scope to reduce the complexity faced by many taxpayers in establishing their status and UK tax liabilities.
Legislation dealing with the matter of tax residence faces a particular challenge as it applies primarily to two distinct groups at what would normally be considered the extremes of the taxpayer spectrum. On the one hand, there are large numbers of migrant workers, frequently from other Member States of the European Union, for whom tax is often a secondary consideration to benefits. English will rarely be their native language, and they are unlikely to have ready access to professional advice. On the other hand, there are a smaller number of families and individuals of far higher net worth who may maintain links with a number of countries, and will often be economically mobile. This group are more likely to be financially sophisticated and will be able to refer issues to their professional advisers.
As a result, any residence legislation, and the accompanying guidance, needs to be sufficiently clear and concise that it can easily be understood by those without professional advice, but at the same time detailed and comprehensive enough to cover all the situations encountered by professional advisers. We understand that there is a particular concern that some high net worth individuals are attempting to exploit the current regime in order to maintain effective residence in the UK without falling within the statutory taxing provisions. However the rules are framed there will always be those who would seek to stretch the application of the law to their own advantage. The statutory definition of residence must therefore address itself particularly to ensuring that scope for engineering situations which might run counter to the overall intentions of the act are kept to an absolute minimum.
ACCA welcomes the opportunity to comment on the proposals for the reform of the residence regime in the UK tax system. The introduction of a statutory definition of tax residence will, if properly formulated, reduce uncertainty for both taxpayers and HMRC alike. Reform of the ordinary residence regime likewise has scope to reduce the complexity faced by many taxpayers in establishing their status and UK tax liabilities.
Legislation dealing with the matter of tax residence faces a particular challenge as it applies primarily to two distinct groups at what would normally be considered the extremes of the taxpayer spectrum. On the one hand, there are large numbers of migrant workers, frequently from other Member States of the European Union, for whom tax is often a secondary consideration to benefits. English will rarely be their native language, and they are unlikely to have ready access to professional advice. On the other hand, there are a smaller number of families and individuals of far higher net worth who may maintain links with a number of countries, and will often be economically mobile. This group are more likely to be financially sophisticated and will be able to refer issues to their professional advisers.
As a result, any residence legislation, and the accompanying guidance, needs to be sufficiently clear and concise that it can easily be understood by those without professional advice, but at the same time detailed and comprehensive enough to cover all the situations encountered by professional advisers. We understand that there is a particular concern that some high net worth individuals are attempting to exploit the current regime in order to maintain effective residence in the UK without falling within the statutory taxing provisions. However the rules are framed there will always be those who would seek to stretch the application of the law to their own advantage. The statutory definition of residence must therefore address itself particularly to ensuring that scope for engineering situations which might run counter to the overall intentions of the act are kept to an absolute minimum.
In connection with this point, ACCA supports the use of clear tables, such as those at draft sections 8 to 10 of the legislation. The inclusion in the primary legislation of the specific rules to be used in rounding up or down for example adds little in terms of overall length but will be invaluable as an aid to clarity for those who are not used to statutory interpretation, and might not otherwise be aware of the appropriate methodology.
ACCA supports the move to a statutory test for tax residence in the UK. The proposed draft legislation incorporates many of the features which ACCA supported in the earlier consultation, and has been revised to operate in what ACCA believes will be a more business and taxpayer friendly manner, without giving ground to those who might seek to achieve non-resident status incorrectly.
The current draft legislation indicates continued positive progress towards a clear test, incorporating definitions which are sufficiently robust and comprehensive as to be capable of independent operation without the need to refer to non-statutory guidance. There are of course areas where it is impractical or undesirable to incorporate the full detail into the primary legislation, either because it will inevitably change on a regular basis or because the level of detail required would not be appropriate.
For example, at draft s12 (5) of the legislation, some limited guidance is given as to the type of force majeure circumstances which might suspend the application of the day counting tests to taxpayers, either individually or in groups. While the application of individual tests triggered by eg illness of a close family member will properly remain in the sphere of case by case analysis at HMRC’s discretion, there are good reasons to suggest a more structured approach in the case of “type a” events (war, civil unrest or natural disasters). This could include a recognised process by which HMRC can notify the groups of taxpayers affected that that a particular event would constitute a valid reason for remaining in the UK, and the desired format for taxpayers to notify HMRC that they seek to avail themselves of this reason when filing their self-assessment for the relevant year.
Since self-assessment processes may change from time to time, and the administrative processes within HMRC by which they are dealt with may also be revised, it seems appropriate for the detailed operation of the general statutory principle to be contained within guidance or if necessary secondary legislation. Nevertheless, it would aid both taxpayers and HMRC to have a clear simple mechanism which both parties can easily recognise and implement to cover situations such as a blanket ban on UK airspace, or Foreign Office advice against travelling to a particular destination.
Given the efforts to which HM Treasury and HMRC have gone to ensure clarity and certainty elsewhere in the draft legislation it would be a disappointment for the potential uncertainty around which particular events will be regarded as exceptional” by HMRC to survive. It seems unlikely that any Court would disagree that war, civil unrest or natural disaster might constitute an exceptional circumstance, so to this extent the current legislation does not significantly reduce the potential uncertainty for a taxpayer around HMRC’s exercise of its discretion in any particular case.
The one aspect of this area of the legislation which does raise some concern is the absolute limit of 60 days on the exceptional circumstances relief. While it would be unusual for travel to be impossible for such a length of time in a “type b” emergency, it is by no means inconceivable that illness might prevent an individual from travelling outside the UK for that period of time. ACCA recognises the desirability of some long stop provision to restrict the possibility of abuse of this discretion, but is concerned that it may act to compound distress in the very hardest of cases.
A further area where ACCA foresees some practical difficulties (although it is likely to be a relatively minor issue) is in relation to training It is quite possible that for individuals earning significant sums the cost of a day or two of training is likely to be considerably less than the adverse tax consequences of becoming UK resident. Particularly in the case of an individual operating a PSC, but potentially also in other cases, there could be an incentive for individuals to settle the invoices for training courses which might more properly be settled within the employer.
It is assumed that any training expense which might properly fall to be reimbursed by the employer would be treated as “paid for” by the employer, but even this may not immediately be clear, given the number of (unsuccessful) cases brought by employees trying to claim reimbursement of their training costs from employers.
ACCA also recognises and acknowledges the progress made in the complex area of connection factors. The analysis of the factors in relation to family is welcome, and in particular the clarity around education at paragraph 3.132 of the consultation. We remain concerned that where there is an element of circularity to the tests, that is, each spouse’s residence status would be dependent upon the others, there is no tie breaker The introduction of some such mechanism would aid certainty for taxpayers and their advisers.
Question 1: How far would increasing the number of working days allowed in the UK under the Full Time Work Abroad condition from 20 to 25 days mitigate concerns about the impact on employers and their employees?
Allowing workers up to two working days per month in the UK on a regular basis would significantly ease the position where an individual is expected to report back to a UK head office on progress of an overseas project or business. Allowing a maximum of 20 days would limit their UK presence to just one day in several months of the year, which could create significantly reduce their ability to manage meetings and diary commitments with other senior employees in the UK.
25 days on the other allows for a sensible regular monthly timetable of two working days in the UK which could coordinate far more sensibly with existing board reporting schedules and the like.
Question 2: How far would increasing the number of hours that constitute a working day from 3 to 5 hours mitigate concerns about the impact on employers and their employees? How far would it reduce record keeping requirements?
While increasing the limit to 5 hours per day would potentially reduce record keeping requirements, it would nevertheless allow for a situation where (if prepared to work 7 days without a full rest day) and individual could actually complete what is generally regarded to be a full working week without being regarded as having ‘worked’ in the UK at all in the period.
Question 4: Would there be significant benefits in increasing the qualifying period for FTWUK from 9 months to 12 months? What would the benefits be?
ACCA understands that for many businesses secondment processes are typically designed around a 12 month basic period. Aligning the tax treatment in the UK to this commercial reality would not significantly affect the liabilities of any of the individuals concerned, but would reduce the administrative burden on employers.
Question 5: Do you think there is a risk of manipulation of the midnight rule? If so, how do you think it could be addressed in a targeted way?
ACCA understands there to be genuine concern that individuals might seek to manipulate the midnight rule by arranging to leave the UK for a short time around midnight on a regular basis. While we have discussed with HM Treasury and HMRC officials a number of potential strategies which might facilitate such manipulation of the rule, none of them would appear attractive or practicable for long term or widespread use. However, we do recognise that even a comparatively short term exploitation of such strategies could result in a tax loss to the Exchequer running to many millions of pounds.
Attempting to draft an anti-avoidance rule which might deal with such strategies in a targeted fashion would be extremely difficult. There is more over the point that in order to establish an individual’s presence in the UK on sufficient occasions to trigger the provisions would impose a significant evidential burden on the parties.
Given the practical difficulties of drafting a specific rule to catch ‘UK presence counting’ which would not run the risk of increasing doubt and complexity for all taxpayers, we would question whether a targeted anti-avoidance rule in this area is practicable. There is of course the possibility that the matter could be covered by a general provision introduced to combat unintended losses to the Exchequer.