HMRC: reform of the taxation of non-domiciled individuals

Comments from ACCA
August 2011




The taxation of non-domiciled individuals is one of the most complex areas of UK personal income tax, both in concept and execution. While recent reforms have gone some way to reforming the situation for some individuals, the area as a whole remains complicated, and certain aspects of the compliance procedure have resulted in significant records keeping burdens falling upon tax payers.

Taxation of non-domiciled individuals covers a population of taxpayers with a bias towards the extremes of wealth distribution of those falling within the provisions of the self-assessment return system. Non-domiciled tax payers also account for a significant proportion of those tax payers for whom English is not a native language and to whom the UK tax system will be unfamiliar. As such it is particularly important that any reforms designed to take effect for the wealthiest do not create unintended traps or difficulties for those with more limited resources.

The proposals set out in the consultation document fall into two parts, firstly introducing a new regime for investment into the UK for non-domiciled individuals (which would have the twin benefits of easing the compliance regime for those individuals, and also encouraging economic activity in the UK) and secondly a number of simplification measures aimed at streamlining the current system.

The proposals for tax free remittances of income and gains to invest in the UK are an interesting and welcome initiative from the Treasury. While there is clearly more work to be done on the detail of the proposals, the underlying concept is a useful amendment to the existing regime.

The simplification proposals will all benefit newly arrived non-domiciled tax payers, but to have the full benefit the effects of the changes to the nominated income and foreign bank accounts rules should be backdated to the date of introduction of the remittance charge. The proposed revisions to the art and chattels rules are also welcomed, although again some further relaxation of the rules, bringing them into line with the existing VAT regime for works of art imported into the EU for sale, should be introduced.






Question 1: Are the proposed exclusions from the incentive appropriately drawn? Should other types of business be included or excluded?

The proposed exclusions are consistent with a policy objective of encouraging investment into the UK for commercial benefit. The restrictions are comparatively limited, and reasonable in the context of the proposals.

Question 2: What would be the impact on both investment and complexity of extending the incentive to listed companies?

Restricting the relief to unlisted companies would, as acknowledged in the consultation document, require the drafting of clauses to deal with situations where companies become listed during the currency of the investment. The perceived administrative burden of tracking large numbers of transactions would arise only if the individual chose to indulge in short term trading activities, and would therefore be entirely at the option of the individual.

However, the introduction of a requirement that investment be by way of subscription for initial issue of shares, rather than purchase on the open market of existing shares, would both remove the problem of tracking short term reinvestments and ensure a focus of funds on 'new' investment. There is also a risk that the UK stock market could be used to facilitate money laundering if individuals were able to bring regular sums into the UK without specific checks on the source of those funds, invest them in listed companies, then repatriate the funds as 'clean' money. While the same risk exists for any investment made under the current proposals, parallel checks made by professional advisers involved in company formations/flotations and the like would massively reduce the scope for use of illicit funds; regular payments to a stockbroker or other investment intermediary would not necessarily be subject to ongoing checks once a pattern had been established, and the relative security of a listed investment is likely to appeal more than the risks attendant on an initial start up.

Restriction of investment to exchange regulated markets would strike a fair compromise in terms of promoting investment in those companies which traditionally find it harder to attract investment, without requiring non-domiciled individuals to set up or identify suitable unlisted companies for investment. It would still involve the need for listing provisions in the event that a company were to relist on an exchange outside the regime.

The consultation document refers to investment in companies. It is assumed that this means companies limited by share capital (whether private or public/listed) as opposed to unlimited companies or companies limited by guarantee (or established by Royal Warrant). Given the desirability of ensuring transparency around investments within the scheme, a requirement for the company to be limited by share capital and hence within the 'usual' Companies House regime would appear sensible.

Question 3: Are the proposed anti-avoidance provisions suitable? Would it be appropriate to require remitted income or capital gains to be taken out of the UK or reinvested within two weeks of the disposal of the investment?

The proposed arrangements appear broadly sensible and proportionate. The requirement to remove or reinvest funds on disposal of the investment simplifies the treatment of funds withdrawn from a qualifying company. However, the time frame for removal of funds is too tight. In the majority of cases the investor's exit strategy will have been planned in advance, and if the funds are simply to be sent back outside the UK then this should normally be achievable within the two week deadline. However, if the funds are to be reinvested there may be many reasons why the window of two weeks may be unreasonably short to allow transfer of the funds from one investment to another.

The limit should be set at 30 days, and HMRC should be prepared to consider exceptions, albeit only in extreme circumstances and where the taxpayer is clearly able to demonstrate unexpected circumstances beyond their control.

Question 4: Would a mandatory requirement to claim the relief for business investment on a Self Assessment tax return be an appropriate way of monitoring the policy? If not, what alternative monitoring approach would be appropriate?

Individuals who would qualify for relief under the proposals would in any event be required to complete a UK Self Assessment tax return. There are no compelling arguments in favour of introducing a separate reporting process for any supplementary monitoring or reporting requirements.

Question 5: Would the policy as outlined be an effective means of encouraging investment in the UK?

ACCA believes that the policy would encourage investment in the UK. The current system discourages non-domiciled individuals from investing in UK business opportunities which they might otherwise support through the imposition of a tax charge on the initial investment, before any profits are made. This would apply as much for individuals seeking to support their own or family businesses as it would to larger scale investors. 

The new proposals would not only resolve this issue, but also open up the opportunity for wealthier non-domiciled individuals to invest sufficient funds into the UK to meet their living expenses through the income thereby generated, even after the applicable UK taxes. The benefit from the tax payers point of view would be a reduction in the record keeping and compliance point of view, while the benefit for the UK would be increased economic activity which would otherwise be undertaken overseas or not at all.




Question 6(a): Do you think the proposed solution for each simplification would be effective?

Broadly, yes. While the requirement for nominated income leads to extra complexity for all non-domiciled UK tax payers it is nonetheless essential to maintain the status of the remittance charge for overseas tax purposes, in particular the US, which has confirmed during the consultation period that the remittance charge does qualify as an income tax for which foreign credit is allowable against US tax. As the nominated income concept cannot be abolished, its simplification is welcomed.

The proposed changes to the taxation of foreign bank accounts are welcome and would significantly ease an entirely unnecessary administrative burden on taxpayers. However, to be fully effective they should be applied to back to 6 April 2008 should the taxpayer so elect.

Codification and simplification of the regime under SP1/09 would be welcomed, but should remove the current inflexible administrative requirements which have rendered the current system unnecessarily burdensome on taxpayers and their advisers, such as the inability to reverse inadvertent errors.

Question 6(b): Can you propose other ways in which the remittance basis rules could be simplified, provided they meet the principles described in paragraph 2.63?

Not at this time.

Question 7: Would two weeks be a suitable period of time before which the proceeds of the sale of an exempt asset should be taken out of the UK?

As discussed above, two weeks is too short a time to reasonably require removal of the proceeds from the UK. ACCA would propose a limit of 30 days from receipt of the funds by the individual. The legislation should make clear that where proceeds are received in instalments the requirement would arise in respect of each instalment separately, and be triggered only once the vendor is in a position to secure removal of the funds. So, for example, monies held in escrow would not be treated as 'received' by the vendor until all conditions for release of the funds had been met.