UNITED KINGDOM: SPECIAL EXPATRIATE FISCAL REGIME

The UK is no tax haven, but it does have relatively low tax rates compared with some other European countries, and it has traditionally offered exemption from tax for income from foreign investments for people who are resident but not domiciled in the UK (although see below for changes to the tax treatment of such individuals. For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities.

The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few 'visiting' residents will therefore have a UK domicile.

Foreign investment income has traditionally been exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they have been able to safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation. Note however that capital gains crystallised abroad during a period of residence are deemed to be remitted to the UK, and are then taxed. Some types of mutual or hedge fund impose capital gains unilaterally on members.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of this UK possibility, but for all other nationals, it has usually been available. This rule led to many foreign celebrities making the UK their home for tax purposes.

For several years before changes were actually made, the Treasury had been making threatening noises about the tax privileges of the 'non-doms'. In the 2003 budget a more formal period of consultation was launched over proposed changes.

Perhaps surprisingly, there was some support for then Chancellor Gordon Brown's plans from some in the accounting and tax consulting professions. Many organisations supported the prospect of reform in this area of tax law, in the hope that new legislation would make the domicile rules simpler. Also, by taking a proactive approach to the reforms, they were hoping to stave off more radical proposals that Brown may have been considering.

In September 2003 the Paymaster-General at the time, Dawn Primarolo, a known tax 'hawk', said she was increasingly hard pressed to justify the current state of affairs to her constituents.

Primarolo told the FT: "There seems to be quite a lot of agreement it is not fair...People pay tax...and they want to ensure they are paying a fair amount compared to anybody else. What I am hoping this time is we will actually get to the bottom of it," said Primarolo.

In January, 2004, the government dropped a further strong hint that the non-dom rules would be amended, with the news that the Inland Revenue (now HMRC) was building a new database of expatriate workers living in the country. The Revenue was said to have set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It also began to send out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled”.

Then in May of that year, perhaps the most famous, now ex-non dom was in the news when permission for a full-scale investigation into the tax affairs of Harrods owner, Mohamed al Fayed was granted at the Court of Session. Lord Reed rejected claims that a tax investigation initiated following the ending of the 'forward contracts' tax break for super-wealthy foreign-domiciled UK residents, constituted an abuse of power on the part of the Inland Revenue.

Explaining the reasoning behind his decision, the judge observed that: "Mr al Fayed works as a director of major companies, but does not appear to be paid a salary. He lives in expensive accommodation, but he does not appear to own or rent it."

"The natural inference from the evidence is that a great deal of effort and ingenuity has gone into creating networks of offshore companies, trusts and other entities in order to minimise liability to tax." He concluded: "In the face of such opaque and sophisticated arrangements, it is important the Revenue should be able to ensure UK tax liabilities are accurately assessed."

When the Budget arrived in March 2005, the Chancellor put off for a further year any change to the highly favourable tax regime enjoyed by non-doms.

The Treasury said: "The Government is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.

Delivering his 2006 budget speech, Mr Brown repeated his 'holding statement' of the previous year with regard to the taxation of non-doms.

Later that month HM Revenue and Customs felt the need to clarify its position on the issue of tax residence in light of the most recent court case on the matter, and issued the following statement:

"The recently published decision of the Special Commissioners in Robert Gaines-Cooper v HMRC (SpC 568) has attracted some attention from tax practitioners and their clients. In particular, some commentators have suggested that the decision in Gaines-Cooper means that HMRC has changed the basis on which it calculates the ‘91-day test’. This is incorrect."

"The ‘91-day test’ is set out in Chapters 2 & 3 (‘Leaving the UK’ and ‘Coming to the UK – Short term visitors’) of the booklet IR20: Residents and non-residents. This guidance is clear that the ‘91-day test’ applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis. Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first."

"Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years. HMRC’s normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the ’91-day test’."

It continued:

"In considering the issues of residence, ordinary residence and domicile in the Gaines-Cooper case, the Commissioners needed to build up a full picture of Mr Gaines-Cooper’s life. A very important element of the picture was the pattern of his presence in the UK compared to the pattern of his presence overseas. The Commissioners decided that, in looking at these patterns, it would be misleading to wholly disregard days of arrival and departure."

"They used Mr Gaines-Cooper’s patterns of presence in the UK as part of the evidence of his lifestyle and habits during the years in question. Based on this, and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK. From HMRC’s perspective, therefore, the ’91-day test’ was not relevant to the Gaines-Cooper case since Mr Gaines-Cooper did not leave the UK."

• "HMRC can confirm that there has been no change to its practice in relation to residence and the ‘91-day test’. HMRC will continue to:
• Follow its published guidance on residence issues, and apply this guidance fairly and consistently;
• Treat an individual who has not left the UK as remaining resident here;
• Consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, in deciding whether or not an individual has left the UK;
• Apply the ‘91-day test’ (where HMRC is satisfied that an individual has actually left the UK) as outlined in booklet IR20, normally disregarding days of arrival and departure in calculating days under this ‘test’. "

The HMRC Brief concluded:

"The guidance provided by booklet IR20 is general in nature. If, on the facts of the matter, a dispute arises over the application of this general guidance and the parties cannot resolve their dispute by agreement, the Commissioners will determine any appeals. The Commissioners are bound to decide the legal issues by reference to statute and case law principles rather than HMRC guidance. Where a dispute relates to particular facts the Commissioners will consider the evidence and make findings of fact to which they will apply the law."

Gaines-Cooper was again in the news in October 2008, when it emerged that he had failed to convince Court of Appeal judges in London that he was non-domiciled for tax purposes.

The ruling left the globe-trotting businessman with a huge tax demand for the years 1993-2004.

The judge dismissed the appeal as “nothing more than an illegitimate attempt to reargue the facts”.

Returning to non-dom rules in a more general sense, the government finally took action in 2007, unveiling planned reforms in the pre-budget report.

Under the new rules, non-domiciled UK residents would be obliged to pay --in addition to the tax collected on UK-sourced income -- an annual charge of GBP30,000 to ensure that they contribute in respect of the foreign income and gains which they keep abroad, and on which they do not pay UK tax. The charge will apply for non-doms resident in the UK for more than 7 years. Users of the remittance basis were also to lose their tax free personal allowances, it emerged.

The Government explained that the measure was targeted to protect competitiveness by ensuring that secondees to the City are not affected (the majority have left the UK by 7 years). The Government added that it would also amend the rules to remove flaws and anomalies that allow remittance basis users to sidestep UK tax where it is due on foreign income and gains, and would tighten up the day counting rules to bring the UK into line with international practice.

Then in March 2008, the new Chancellor of the Exchequer, Alistair Darling has announced that the government intended to forge ahead with its controversial plans to introduce a new tax scheme for non-domiciles, albeit with some concessions, in a budget speech that otherwise contained few surprises concerning the tax regime for businesses in the UK.

In his first budget speech since taking over the job from Gordon Brown last year, Darling informed the House of Commons that the government would be implementing the package of tax reforms "subject to some changes made in the light of consultation".

Key changes to the original proposals announced in the PBR have meant that income and gains in offshore trusts will only be taxed when they are remitted to the UK, even if these come from UK assets. The Chancellor also clarified the government's position regarding children, who will not be liable to the GBP30,000 charge.

Further changes to the non-dom tax proposals mean that: the GBP30,000 charge should be creditable against foreign tax; art works brought into the UK for public display or for repair and restoration will face no new tax charges; where art works owned by offshore trusts are sold in the UK, tax will only be paid when the trust remits the gain to the UK; and people with unremitted offshore income and gains of under GBP2,000 will be exempt from the GBP30,000 charge and the changes to personal allowances.

According to Darling, the rules in this area will not be "substantially revisited" for the rest of this or the next Parliament.

"We welcome the contribution made by people born outside the UK who choose to come and work here. They are an important and central contributor to our economy’s growth and prosperity," Darling told the House.

However, he went on to add that: "I believe that it is right and fair that they should, after 7 years, pay a reasonable charge to maintain the right to be taxed differently from other UK residents."

"Beyond that, as I have said before, we will not seek to charge UK tax on offshore income or capital gains that is not brought into the UK," Darling told MPs.