A tax update from Mark Davies & Associates Ltd
Autumn Statement – 3 December 2014
George Osborne has delivered his final Autumn Statement before the General Election next year. As usual here are our comments directed at our non-dom clients and their advisers.
Changes to the Remittance Basis Charge (“RBC”)
Some foreign domiciled individuals, “nondoms”, are going to see an increase in the RBC for the years in which they wish to access the remittance basis.
While the RBC for those resident in 7 of the last 9 years will remain at £30,000, those resident for 12 of the last 14 will have to pay £60,000, up from £50,000. Moreover, those who are UK resident in 17 of the last 20 years will have to pay a new RBC of £90,000 to claim the remittance basis each year. This brings the income and capital gains tax treatment in line with the inheritance tax concept of having a ‘deemed UK domicile’ at the same threshold, making planning in the tax year before the 17 year anniversary of one’s arrival even more important. Approximately 5,000 people claim the RBC annually.
Next year the Government has promised a consultation on the remittance basis. They have proposed that the election to claim the remittance basis is for a minimum of 3 years. If this goes ahead, the flexibility of the remittance basis being used year on year would be lost and the cost of claiming the remittance basis would be significantly higher.
Our view – We welcome that the Government has not scrapped the tax treatment of foreign domiciliaries as these highly mobile people make a substantial contribution of over £8 billion in direct taxes to the UK Exchequer annually. However, it may make foreign domiciliaries plan from the outset to stay in the UK less than 12 years. The higher charges after 12 years of residency make the UK less competitive in the international market place.
A radical reform of stamp duty land tax (SDLT) was announced together with news that the rate of ATED will be increasing by 50% above inflation for those properties worth more than £2million. This follows the publishing of the summary of responses on the consultation on CGT for non-residents last week. Property is certainly a key focus for the government in the run up to the Election and the proposed changes will have significant implications for all. A separate tax bulletin will follow shortly summarising the key points.
Consultation to address “hybrid mismatch arrangements”
Hybrid mismatch arrangements are common tax planning techniques employed by multi-national groups and they sport colourful names in the tax community, such as the “double Dutch sandwich” or the “double Irish” to name but two. For example a UK company might take a deduction for a payment of interest to another group member offshore, while the offshore group member is not taxed on that receipt. Or there is more than one deduction for the same expense, commonly known in tax adviser parlance as the “double dip”.
The Government intends to introduce UK domestic legislation with effect from 1 January 2017 to prevent multinational enterprises avoiding tax through the use of certain cross-border business structures or finance transactions.
A consultation on these rules will run for 10 weeks until 11 February 2015.
Our view – If implemented, a change in these rules will have an impact on offshore service providers, but the UK is going to find it difficult to legislate in practice. The Chancellor is only empowered to amend domestic legislation within the framework of the EU. It will be difficult for the UK to avoid EU infringement proceedings where, for example, an interest deduction is denied in the UK if it happens to be payable to an EU finance company where the receipt of interest is not taxed. In short, to be successful any change in legislation has to be part of an EU wide strategy.
Diverted Profits Tax (“DPT”)
The Government will introduce a new DPT to counter the use of aggressive tax planning techniques. The aim is to prevent multinational enterprises from evading corporation tax by artificially diverting profits from the UK. The DPT will be applied at the rate of 25% from 1 April 2015.
Draft legislation on the rules shall be released in the Finance Bill 2015 on 10 December 2015.
Our view – The Chancellor announced this measure to the accompaniment of cat calls of Labour MPs shouting “Starbucks!”. Clearly this is going to be a popular political measure (“double measure?”) but our comments about working within the EU framework, see above, also apply here.
Tackling Aggressive Tax Avoidance
The Government continues to be relentless in tackling evasion, avoidance and aggressive tax planning where it arises within the UK.
Following consultation the DOTAS regime is to be ‘strengthened’ by updating existing scheme hallmarks, adding new hallmarks and removing ‘grandfathering’ provisions for the future use of schemes that were previously excluded by those provisions. A DOTAS taskforce will also be established to ensure that avoiders cannot circumvent the DOTAS rules and HMRC will be allowed to publish summary information about DOTAS-notified tax avoidance schemes and their promoters.
Moreover HMRC will consult in early 2015 on introducing further deterrents for serial tax avoiders and on penalties for tax avoidance cases where the General Anti-Abuse Rule applies.
Specific arrangements have been named and shamed and will no longer work from 6 April 2015, including:
Disguised fee income – arrangements involving partnerships or other transparent vehicles whereby fee income is disguised as gains. However typical ‘carried interest’ arrangements will be not be affected.
Special purpose share schemes – all returns made to shareholders through different classes of share schemes will be taxed in the same way as dividends.
Miscellaneous loss relief – loss relief will be denied where miscellaneous losses, or miscellaneous income, arise on or after 3 December 2014 as a result of relevant tax avoidance schemes.
Our view- we do not agree that tax evasion, avoidance and aggressive tax planning should all be lumped together due to the subjective nature of certain planning. It is a shame that the Government does not appreciate that simplified rules usually means less tax planning opportunities.
Devolution to Scotland, Wales and Northern Ireland
The Chancellor also announced that the Government agreed to the devolution of more powers of taxation to Scotland, Wales and Northern Ireland. Draft clauses will be published in the New Year, however the types of changes are known:
Scotland will have the control of Income Tax rates and thresholds for income other than dividends to all Scottish taxpayers. The Personal Allowance for UK residents, however, will not be affected.
Wales will gain the full devolution of non-domestic (“business”) tax rates with a fully operational regime by April 2015.
Northern Ireland might gain the control of setting its own Corporation Tax rates if its Executive can demonstrate that it is able to manage the financial implications. This will allow Northern Ireland to compete with the neighbouring Republic of Ireland’s 12.5% Corporation Tax rate.
Our view – These changes will introduce regional tax planning opportunities where investors might be able to use Scotland, Wales or Northern Ireland for a preferable rate of tax whilst still utilising the benefits of being a non-domiciled individual residing in the UK.
Personal Tax Rates and Allowances
The personal allowance will increase to £10,600 from April 2015. However, most non-doms taxable on the remittance basis will not benefit from this increase, the ‘price’ of the remittance basis being the loss of such allowances.
The basic rate limit for 2015/16 will be reduced to £31,785 so the higher rate threshold above which individuals pay Income Tax at 40% will be increased to £42,385. The additional rate (45%) threshold remains at £150,000.
Savings and Pensions
The ISA annual subscription limit will be increased from £15,000 to £15,240 from 6 April 2015. The Chancellor also announced that from 3 December 2014, if an ISA saver in a marriage or civil partnership dies, their spouse or civil partner will inherit their ISA tax advantages. Broadly, from 6 April 2015, surviving spouses will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.
From April 2015, individuals will be able to access their defined contribution pension at the point of retirement subject to their marginal rate of Income Tax. In addition individuals will be allowed to pass on their unused defined contribution pension savings to any nominated beneficiary when they die, instead of paying the 55% charge which currently applies. If the individual dies before age 75, the beneficiary will pay no tax on the funds. If they die after age 75, the beneficiary will pay their marginal rate of Income Tax, or 45% if the funds are taken as a lump sum payment. From April 2016, lump sum payments will also be taxed at the recipient’s marginal rate.
If you would like to discuss any tax matter raised within the Autumn Statement please let us know.
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