Spring Budget 2024 was littered with the usual political posturing and some ineffective tinkering. Unfortunately fiscal drag will continue to be significant. Wednesday 6 March 2024 was also an earth-shattering day for the non-UK doms and all those who advise them.
CHANGES TO NON-DOM STATUS
For tax years from 2025/26 onwards, the Government announced the abolition of the remittance basis (“RB”) for tax purposes and a plan to move away from the concept of domicile and towards a much-simplified test based on residency when considering whether foreign income and realised capital gains will fall to be taxed in the UK.
Overview of the proposals
Provided they make the necessary claim, new arrivers (those who have been non-UK resident for a 10-year period) as well as those who have been in the UK for less than 4 years as at April 2025 (and been non-UK resident for 10 years prior to that) will not be subject to tax on their foreign income and gains (“FIGs”) arising/ accruing in the first 4 years of tax residence- nor will they pay tax on distributions from non-UK resident trusts in this period to boot!
After 4 years we are told that these individuals will pay tax on their worldwide income and gains in the same way as a UK resident would.
The proposed new regime is clearly attractive for the first 4 years but that is a short period of time, so overall not as globally competitive as one might have hoped.
Examples
Transitional rules
Transitional rules have been announced to assist non-UK doms already here:
A relaxation of the mixed fund rules to make it easier for individuals to taken advantage of this TRF has been promised.
Overseas Workday Relief (OWR)
Eligibility for OWR will be reformed in line with the new regime. For the first three years of tax residence OWR will continue to provide income tax relief for earnings relating to overseas duties where there is a mixed UK/overseas employment contract. In contrast to the current regime these earnings can be able to be remitted to the UK without any tax charge.
More on trusts
From 6 April 2025, the protection from tax on future income and gains as it arises within trust structures (whenever established) will be removed for all current non-doms and deemed dom individuals who do not qualify for the new 4-year FIG regime. This means that, unless the 4-year FIG regime applies to an individual, they will be taxed on post 5 April 2025 trust income and gains in the same way as a UK dom.
FIG that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless matched to distributions or benefits (whether UK or foreign) paid to UK residents who are not sheltered by the 4-year rule- in that event by the way the legislation will purportedly not view the payment/benefit as giving rise to a matching event so the trust income and/or gains pools will not be reduced. The onwards gifts rules will need to be modified.
What about IHT?
The government has also announced an intention to move to a residence-based regime for Inheritance Tax, with plans to publish a policy consultation and draft legislation on these changes (including a possible a 10-year exemption period for new arrivals and a 10-year tail for those who leave the UK- eeeesh!) later in the year. Apparently if you set up an offshore trust before April 2025 then it will be safe from IHT!
The abolition of the non-UK dom regime promises a further £2.7bn per year by 2028/29 into UK PLC (in addition to the £8.5 billion which non-UK doms already pay in UK tax each year). The draftsmen/women have until 6 April 2025 to get it right! The temporary non-resident rules will require some attention! And don’t tear up the mixed fund rules just yet!
Aside from the non dom changes, points to note included….
The Government are still dreaming of a day when National Insurance no longer exists…. but for now the Tories announced a plan to reduce the main rate of primary Class 1 National Insurance contributions by 2 percentage points from 10% to 8% from 6 April 2024. Self-employed individuals will also benefit from a further reduction in the rate of Class 4 from 8% to 6%.
Hidden in the tax related documents are some anticipated Anti-Fisher Provisions- measures to amend the transfer of assets abroad provisions by applying a charge to tax where relevant transfers are carried out by a closely-held company which an individual has a qualifying interest in.
The higher rate of CGT charged on residential property gains is reduced from 28% to 24% for disposals made on or after 6 April 2024. Presumably they are still keeping 28% for carry- they seemed to leave carry alone.
We will have a new UK ISA with its own allowance of £5,000 a year for investment into UK equities.
The Furnished Holiday Lettings tax regime will be abolished from 6 April 2025. There is an anti-forestalling rule, effective from 6 March 2024, to “prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rule”.
HICBC whilst amends to this will be welcome in April 2026 unfortunately it has not been scrapped altogether and we are teetering on the brink of household taxation here. For now the threshold has been increased to £60,000pa.
Contact
Helen McGhee: HMcGhee@jha.com
Lynnette Bober: Lynnette.Bober@jha.com
In recent months, the First-tier Tax Tribunal has presided over 3 headline grabbing domicile cases which, whilst offering little precedential value, set out some useful commentary on the multi factorial approach taken by HMRC and ultimately the tribunal in determining an individual’s domicile status. This note reviews the decisions made in Shah v HMRC [2023] UK FTT 539 (TC), Strachan v HMRC [2023] UKFTT 00617 (TC) and Coller v HMRC [2023] UKFTT 212 (TC).
This case concerned an appeal against an IHT assessment raised by HMRC concerning the estate of Mr Shah. Mr Shah was born in Karachi in 1929, travelled back and forth to Tanzania to some extent over the years and then moved to the UK in 1973 where he lived until his death in 2016.
As the party asserting the change in domicile, HMRC had to prove their case (based on the balance of probabilities) that Mr Shah had acquired a domicile of choice in the UK contrary to what his executors claimed that Mr Shah had always been intent to return to India upon retirement.
The tribunal concluded that Mr Shah had settled and had the intention to remain in England permanently – he had acquired a domicile of choice here and any intention of moving back to India was described as “at best vague”.
Many factors contributed to this decision, including (but not limited to):
This case is particularly relevant for long-term UK resident individuals who may hope to take advantage of a UK estate tax treaty (such as with Pakistan or India) to potentially limit their exposure to UK inheritance tax by virtue of non-UK domicile status.
Mr Strachan completed his self-assessment tax returns for the tax years 2011-12 to 2015-16 on the basis that he had abandoned his UK domicile of origin and had acquired a domicile of choice in Massachusetts. HMRC disagreed, and issued discovery assessments for the first four years, and a closure notice and amendment for the fifth year.
The judge held that: “Where a person has two homes (Mr Strachan still maintained his London residence), a domicile of choice can only be established in a jurisdiction if the person has his ‘chief’ or ‘principal’ home in that jurisdiction.”
Mr Strachan’s US home did not constitute his chief residence as it was used almost exclusively for holidays, and he did not move to Massachusetts until he was diagnosed with Alzheimer’s in 2020. HMRC asserted that he had stronger ties to the UK both through work and socially.
Importantly, it was further found that Mr Strachan had been “careless” as he had not taken any professional advice on his domicile status since 1987, and had assumed that he was domiciled in Massachusetts, when a reasonable taxpayer in his position would have taken new advice given the significant changes to his position during that time. It is vital to keep a domicile status under constant review. HMRC were unable to prove that Mr Strachan’s carelessness had caused a loss of tax thus his appeals were successful in part.
The four main issues considered in this case were:
The tribunal underwent a detailed forensic review of many years of Mr Coller’s family history before concluding that his father must have acquired an English domicile of choice prior to his son’s birth thus Jeremy also had an English domicile of origin. Thereafter the mother’s domicile was irrelevant albeit the tribunal commented upon such extensively.
Mr Coller had been educated in the UK and maintained strong social and philanthropic ties here. The tribunal considered that in the context of his wider circumstances his intention to ultimately relocate and settle in Israel upon his divorce in 2012 (despite significant real estate investments there) was not consistent with his life in London where his children were at school.
The cases provide useful commentary and insight into the approach the courts will take and certainly highlight that those seeking to maintain or establish any non-UK domicile status must ensure they have consistent evidence to support this. Vague statements of intent to settle elsewhere are of insufficient evidential value.
The issue of maintaining a non-UK domicile as a matter of law remains of vital importance to many still benefiting from trust protections. Any domicile enquiry can be protracted and emotionally and financially draining (expert advice is pivotal in managing the flow of information) and early and up to date advice is pivotal.
If you wish to discuss domicile or require assistance with HMRC enquiries, please contact Helen McGhee or Daisy Oliver at HMcGhee@jha.com DOliver@jha.com.
Iain MacWhannell, instructing David Bedenham, successfully represented an employment intermediary in an appeal against a denial of input tax and £15 million VAT assessment.
The intermediary had purchased (and on-supplied) labour from thousands of mini-umbrella companies. HMRC subsequently denied the intermediary’s input tax on the Kittel and Fini basis.
The appeal was listed for a 10 day hearing before the Tax Tribunal.
On day 1, HMRC opened their case by setting out their detailed basis for applying the Kittel and Fini principles.
On day 2, David opened the Appellant’s case. This included drawing on the extensive evidence filed on behalf of the Appellant and raising numerous other challenges to highlight the flaws in HMRC’s case.
On day 3, HMRC applied for an adjournment. That application, which was opposed by the Appellant, was refused by the Tribunal.
HMRC then announced in open court that they were withdrawing their Kittel/Fini decision and VAT assessment in full. The Tribunal then ordered HMRC to pay the Appellant’s costs.
The so-called non-dom regime that has played a significant role in the UK’s tax framework for decades may be on its way out. This perhaps somewhat antiquated and arguably no longer fit for purpose regime has for many years allowed wealthy “foreigners” living in the UK to benefit from favourable tax treatment on their foreign income. The approximately 70,000 non-UK domiciled individuals currently claiming such tax status on their UK tax returns (broadly speaking those who reside here for a fixed period and ultimately intend to leave the UK) are only liable for UK taxes on UK source income and gains; their foreign income and gains are subject to the remittance basis of taxation meaning they are taxed only to the extent that they bring this wealth to the UK. A system which encourages wealthy individuals to accumulate wealth outside of the UK and punitively taxes them for bringing funds to the UK seems counterintuitive (leaving aside a discussion around the complex Business Investment Relief rules introduced in April 2012).
Recent public scrutiny around Akshata Murphy (Mrs Sunak) has called the effectiveness of this regime once again to the forefront (there were significant attempts at reform back in 2008 fervently opposed by Greek shipowners and again sweeping changes came in in 2017) with political promises to enhance transparency and equality in the tax system an undeniably challenging objective to achieve whilst also importantly not compromising the attractiveness of the UK (London primarily) as a well positioned and well established global financial hub. Migrants represent a significant percentage of high income, high productivity occupations in financial and professional services in banks/ hospitals alike and there is no desire to haemorrhage worker bees. Reportedly wealthy individuals are already leaving the UK in favour of establishing domicile status in tax havens like Monaco, Switzerland, and Dubai. Migration consultancy Henley & Partners and data firm New World Wealth say more than 12,000 rich individuals have left the UK since 2017. The 2017 reforms significantly limited the tax advantages for long-term non-doms by introducing the concept of deemed domicile for income tax and capital gains tax so once UK resident for more than 15 of the previous 20 tax years, individuals could no longer shelter wealth from these taxes. The changes to the taxation of excluded property trusts (beyond the scope of this article) also further eroded the benefits for some long-term UK resident non-UK domiciled individuals.
It must be that we have moved away from a tax system pinned to an archaic concept of “foreignness” (the idea of “domicile” could easily just be put back into an area of law distinct from tax where Dicey originally did not intend for it to live!) and when we consider the two Chelsea bankers living next door to each other, one originally from Germany and one with strong ancestral roots in the UK, they ought to be taxed on the same basis. But what if one plans only to stay here for 5 years- should he be treated differently to the other? It is also true that we want wealth creation and investment in the UK and there is a balance to be struck.
Will abolishing the non-dom regime prompt a significant mobility response? And what ought we to replace it with some kind of unwieldy (particularly when considering double tax treaty benefits) US style citizenship regime? A Canadian style exit tax on departure? Or a Swiss style arbitrary annual charge to benefit from a more favourable tax regime?
There are many questions to engage with before significant steps are taken and considering the context of the regime and where it sits as part of a wider fiscal policy is vital. When raising questions around the future of the non-dom regime one might consider its long-term usefulness as a potential mechanism to tax and encourage wealth re-distribution in this country? Any reform of the non-dom rules ought to interrelate to the proposed review of IHT- a tax on the transfer of wealth. What will no question cause a non-dom to flee the UK would be a 40% tax on death on his worldwide estate not long after he arrives here!
What about an all-round more effective system of taxation around accumulated wealth rather than income creation. That would prompt serious consideration around trust protections even since 2017 it is still possible for well advised non-UK doms to shelter significant wealth in trust wrappers. The non-dom regime should not be reviewed or reformed in a vacuum there is a wider conversation to be had and the atmosphere is as ripe as it ever has been for whole scale long lasting reform. It must be that to protect the future of our position on the global stage there needs to be serious political and economic certainty.
Striking the right balance between maintaining competitiveness on the global stage (keeping a keen eye on regimes promoted in competing jurisdictions) and amending a somewhat broken non-dom regime to make it fit for purpose in the modern world will require careful consideration and even more careful drafting of any new rules with the correct amount of attention paid to any transitional period. What is needed is a cross party consensus and not faux attempts at lazily drafted legislative reform carrying a distinct whiff of vote winning by simply saying what the often-ill-informed populace want to hear.
Full magazine can be read here.
On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Set out below are the key changes implemented as a result of this publication.
What is COP9?
COP9 is a process whereby a person whom HMRC suspects is guilty of tax fraud is given the opportunity to make a disclosure setting out the background/reasons for any non-compliance and make good any potentially unpaid tax. In exchange, subject to the exceptions listed under “Key Change 2” below, HMRC will formally agree not to open a criminal investigation. This agreement is called the Contractual Disclosure Facility or “CDF”.
Key Change 1 – Broadening the Definition of Tax Fraud
Previously, tax fraud was defined as “dishonest behaviour that led to or was intended to lead to a loss of tax”. Under the new COP9 however, this has been extended to “dishonest behaviour that led to or was intended to lead to a risk of loss of tax”. It further confirms that an individual will still fall within this definition even if the fraud is in respect of tax owed by another, even if the individual does not personally make any gain.
Key Change 2 – New Guidance on Circumstances When HMRC Can Escalate to Criminal Investigation
Pursuant to the new COP9, HMRC may still conduct a criminal investigation under the following circumstances:
Key Change 3 – Personal Attendance at Meetings
The new COP9 guidance emphasises the importance HMRC now places on the individual attending meetings, stating “we view your attendance and your cooperation at meetings if we ask you to attend them as a strong indication of your engagement with the investigation.” Whilst an advisor may accompany the individual, under the updated COP9 procedure, it is clear that personal attendance by the individual is expected.
Key Change 4 – Payment to HMRC
Included within the new terms of the CDF is an expectation that the individual will make a payment on account of any arrears of tax or duty. This obligation arises at the stage of making the Outline Disclosure but there is also an expectation that the individual will make payments on account throughout the investigation as well as upon completion of the Formal Disclosure.
For further advice on COP9, please contact Helen McGhee hmcghee@jha.com
HMRC sends 'one to many' letters to those named in the Pandora Papers haul.
The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
International cooperation: Increased tax compliance has now very much earned its place on the global stage and strengthening international cooperation is critical to addressing the challenges posed by the Pandora Papers. Tax authorities worldwide have established a network of shared intelligence, joint investigations, and combined efforts of gathering evidence, to uncover complex financial arrangements and identify taxpayers involved in tax evasion.
HMRC activity: Off the back of the scandal, HMRC pledged to take swift action to tackle offshore tax evasion and their reactively appointed dedicated taskforce has presumably been very busy for a couple of years poring over the apparent treasure trove of information, investigating those individuals, corporations, and institutions implicated in the leaked data. The sophisticated technology now available to HMRC enables them to identify patterns, cross-reference data, and detect discrepancies that may pinpoint tax irregularities.
HMRC’s powers to deter and hold accountable those taxpayers found to be delinquent in their tax obligations have been steadily increasing in recent times and penalties can be imposed of up to 200% of potential lost revenue as well as HMRC having the option to initiate criminal proceedings and ultimately impose custodial sentences for deliberate non-compliance.
Nudge letters: HMRC is now actively contacting (via a scattergun approach) those it believes have additional tax liabilities to disclose, giving them 30 days to check and take steps to correct their tax position. It may be that Code of Practice 9/ contractual disclosure facility (as recently updated) route to disclosure may be appropriate in certain high profile or high risk cases as a means to afford the taxpayer protection (many structures that have prompted investigation will have been entirely legitimately established) from criminal prosecution when HMRC may assert dishonest behaviour. Making disclosures to HMRC, particularly of tax fraud and deliberate behaviour, is a specialist area.
The Pandora Papers exposé has increased public awareness of the ongoing global battle for fair and transparent worldwide taxation. HMRC is now finally taking positive enforcement action (commensurate of their strained resources) and capitalising on the opportunity to boost the public coffers, but fair and proper taxpayer representation should never be compromised.
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
Register of Overseas Entities
The ECA was fast-tracked through Parliament in March 2022 in response to the Russian invasion of Ukraine. It introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the register came into force on 1 August 2022.
Affected non-UK entities have to register the details of beneficial owners within six months from that date (ie, on or before 31 January 2023) and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since 28 February 2022, or a declaration saying that no disposition has been made.
Unexplained Wealth Orders
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
To supplement the ECA, the Economic Crime and Corporate Transparency Bill is currently passing through Parliament. Part 1 of the bill will purportedly constitute the “biggest upgrade to Companies House” since the UK introduced a register of companies in 1844, by requiring all directors as well as persons with significant control and those delivering documents to have their identities verified. Part 2 seeks more information about partners in limited partnerships and requires limited partnerships to update the Registrar of changes and submit annual statements confirming that certain information held is correct.
Trust Registration Service (TRS)
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The Retained EU Law (Revocation and Reform) Bill, presented to the House of Commons for its first reading on 22 September 2022, should not have an impact on the existence of the TRS. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline was 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. Currently, trusts are generally required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
Person of Significant Control (PSC) Register
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
Mandatory Disclosure Rules (MDR) for Common Reporting Standards (CRS)
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After a lengthy consultation which finished on 8 February 2022, the new MDR regulations were expected to come into force last summer. However, so far nothing has been said about its enactment.
It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD 1 million.
Conclusion
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with current public opinion.
But there will always be a challenge where there is continued opportunity for tax arbitrage, as each sovereign state is entirely at liberty to levy taxes at a rate and in the manner most economically suited to local economic conditions. In addition, these measures are always subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond healthy competition, and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
On a more personal level, the message to clients as regards tax transparency is very firmly to get ahead of it. Get used to increased scrutiny from a larger and more varied group of stakeholders. Proactive rather than reactive mitigation is the future. If the questions is privacy versus the greater good of prevention of financial crime then opt for integrity. As a society we must advocate respect and responsibility towards the financial ecosystem which might mean to sacrifice some form of control over confidentiality.
21 October 2022
Helen McGhee CTA TEP
Nahuel Acevedo-Pena
1 YouGov (2022) “Are taxes on the rich too high or low in Britain?”, accessed 18 October 2022.
2 The Tax Foundation (2022) “International Tax Competitiveness Index 2022”, p 30, accessed 19 October 2022.
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This article focuses on tax measures included as part of that statement.
As previously confirmed, the increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go ahead. For Income Tax, the threshold at which higher earners start to pay the 45% rate will be reduced from £150,000 to £125,140 from 6 April 2023. The government will legislate for the income tax measures in Autumn Finance Bill 2022. The other thresholds for Income Tax, as well as the thresholds for Inheritance Tax (IHT) and National Insurance will be frozen for a further two years until April 2028. This means that by 2028 the IHT nil rate band will have been frozen for 19 years.
The Dividend Allowance will be reduced from £2,000 to £1,000 next year, and £500 from April 2024, whereas the Annual Exempt Amount in Capital Gains Tax will be reduced from £12,300 to £6,000 next year and then to £3,000 from April 2024. The VAT registration and deregistration thresholds will not change for a further period of 2 years from 1 April 2024 (currently at £85,000 of annual total VAT taxable turnover). Finally, from April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%, and banks will be charged an additional 3% rate on their profits above £100 million (i.e. the Bank Corporation Tax Surcharge).
Following consultation, the government will also implement the OECD Pillar 2 rules for a Global Minimum Corporate Tax Rate, for accounting periods beginning on or after 31 December 2023. The government will:
These measures will be included in the Spring Finance Bill 2023.
From April 2023, large MNEs operating in the UK will be required to keep and retain Transfer Pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). This will give businesses certainty on the documents they need to keep in the case of an eventual investigation by HMRC.
Additionally, shares and securities in a non-UK company acquired in exchange for securities in a UK close company will be deemed to be located in the UK for Capital Gains Tax purposes. This will apply for transactions on or after 17 November 2022 and is designed to hit remittance basis users. Both measures will also be included in the Spring Finance Bill 2023.
Note that in general the Non-Dom Regime has been left alone and Jeremy Hunt has thankfully been sensible in this regard. He said that he did not agree with claims that abolishing the Non-Dom Regime will bring in more tax. On the contrary, he would rather wealthy foreigners spend their money in the UK than elsewhere.
Finally, the government is investing £79m over the next 5 years to allow HMRC to allocate further staff to deal with more cases of serious tax fraud and address tax compliance risks among rich taxpayers. The return is projected to be £725m of additional tax revenues over the next 5 years (£350m from tackling tax fraud and £375m from reducing non-compliance by wealthy taxpayers).
The Autumn Statement also says that the government is committed to reforming retained EU law, although it does not include any EU law-related measures about taxation. The Retained EU Law (Revocation and Reform) Bill is currently at committee stage, where detailed examination takes place. The Public Bill Committee is expected to conclude its consideration of the Bill on Tuesday, 22 November at 5pm.
Additionally, together with the Autumn Budget, the government published a consultation response about Solvency II, an EU Directive on insurance regulation. It noted that the Financial Services and Markets Bill, also currently at committee stage, “repeals retained EU law so that it can be replaced with an approach to regulation designed for the UK”. Albeit this is not related to taxation, it shows the government’s willingness to get rid of retained EU law when this is concluded as beneficial for the UK.
If you have any questions, please do not hesitate to contact any member of our tax team.
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
The legislation is contained in Section 87I-M TCGA 1992 in relation to potential capital gains tax (CGT) charges (the stockpiled gains legislation), Section 643I-N ITTOIA 2005 (the settlements code) and Section 733B-E ITA 2007 (the transfer of assets abroad or TOAA code) to capture income tax charges.
Going forward, where a distribution has been made (or a benefit provided) to a non-UK resident (or remittance basis user) from a non-UK trust or structure within the TOAA code which would theoretically be outside the charge to UK tax, then any gift or benefit deriving from that initial gift that is subsequently passed on to a UK resident within three years is treated as made to that UK recipient directly from the non-UK trust or structure. The ultimate UK recipient of the gift is then liable to income tax or CGT where the gift can be matched to offshore income or gains.
Although the legislation requires that there is an intention from the outset by the offshore recipient of the gift to pass it on, the prospect of using lack of intention to defeat any tax charge is scant given that Section 87I(8) TCGA 1992 creates a presumption of intention when an onward gift is made.
The burden of proof is therefore firmly on the donee to evidence that there was no intention at the time of receipt of the funds to pass them on; it is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.
In addition to taxing these “onward gifts” the new FA 2018 rules also operate to treat payments made to the “close family” (spouse/civil partner – or the unmarried equivalent – or minor child or step child) of a settlor as made to a UK-resident settlor in the event that there is income in the trust structure and the family member is either non-UK resident in the year of the payment or is a remittance basis user who keeps the payment outside the UK. The settlor then has an exercisable right to recover the tax paid from the beneficiary – it would be wise to obtain a certificate from HMRC to confirm the amount of tax paid.
Note that the settlor will not be taxed twice on the payment (although it may be that the settlor is taxed by virtue of another provision elsewhere).
The rules for determining the amount or value of the gift upon which tax becomes due varies slightly depending on which part of the legislation is invoked, ie, stockpiled gains, settlements legislation or TOAA code. For CGT purposes, complicated rules set out how a gift is split into “slices” of taxed, potentially taxed and untaxed funds which are attributed in a particular order.
The operation of the technical detail of the legislation can produce some curious results; for example, if the ultimate recipient of an onward gift is a remittance basis user then depending upon which “slice” is attributed to them, they may either not be taxed at all, or be taxed only if funds are remitted in the tax year of receipt but they may not be taxable if the funds are brought to the UK in the following tax year. Similar oddities exist for income tax purposes.
“There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties.”
The interaction with the TOAA code adds an additional layer of complexity to already complex legislation. Some onward gifts are taxable by the TOAA code in priority to and without the need to engage the new onward gifts rules. The consequence of this is that there may be situations where the original recipient (a remittance basis user) receives an income distribution from a trust (potentially taxable – but not actually taxed – on them directly) and makes an onward gift, but the onward gift rules are not actually triggered because they give way to the TOAA code.
Note that as an additional tool in their armoury, in circumstances where these targeted anti-avoidance rules might be invoked, HMRC could also seek to apply the General Anti-Abuse Rule where arrangements “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances”.
There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties. In theory, this means that a UK recipient may have a tax obligation that they know nothing about and about which they have very little power to obtain the necessary information; namely, whether any gifted funds have been provided out of funds received from trusts or offshore structures within the last three years and the residence and tax status of every individual through whom the funds have passed.
HMRC is now looking at the third year of taxpayers’ returns filed since these new rules were introduced (the 2021 returns filed in January 2022) and advisers and taxpayers can expect intense HMRC scrutiny. The rules are complicated, broadly drafted, difficult to understand and apply, and operate on the assumption that the taxpayer has perfect information, which will not match reality for most taxpayers.
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
The ECA introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the launch of the register is scheduled for 1 August 2022.
Going forward, affected non-UK entities will have to register the details of beneficial owners within six months from that date and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since February 2022, or a declaration saying that no disposition has been made.
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
"This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets."
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline is 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. After the 1 September deadline, trusts will generally be required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
“There should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.”
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After lengthy consultation, the new MDR regulations are expected to come into force in the summer of 2022. It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD1 million.
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with public opinion. But there will always be a challenge where there is continued opportunity for tax arbitrage as each independent state is entirely at liberty to levy taxes at a rate and in a manner most economically suited to local economic conditions and subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond just healthy competition and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
