I have mooted the idea of what I call a passport basis of tax residence for the UK on a number of occasions — most recently in the last few days on this blog. It always gives rise to howls of protest, which seems to me the clearest evidence that it has real merit given the source from which many of the howls emanate.
The passport basis of tax residence is not a universal panacea for tax residence. As many US citizens find, being taxed on worldwide income when living outside the US can give rise to double taxation. I am not a fan of double taxation, any more than I am a fan of double non-taxation. But as I note below, this objection is easy to overcome.
The problem with our existing tax residence system (apart from the fact that no one is sure precisely what it is right now — which is perhaps the best reason there is for codifying it) is that it is far too easy to cease to be UK resident, especially if one has full time work abroad, or is wealthy enough to, in effect, globe trot at will for a while - as some people with considerable wealth can undoubtedly do.
Now I happen to have little problem with those who have no long term association with the UK being able to break their taxation ties with the UK when and if they really leave the country. It seems just and equitable that they should be able to do so. After all, we have no a priori claim on their income.
But I do think those who have long term ties with the UK — perhaps best (but maybe not solely) indicated by their having a UK passport should have considerable difficulty with breaking their taxation ties with this country. The reason is a straightforward one. It does not matter whether a UK citizen lives here or not when it comes to their access to services. They can always return here and can always access services such as the NHS without question. The result is that these services are theirs to use whether they are here or not, and so they have primary obligation to pay for them.
That said it is very obvious that as far as possible complication in the tax system is best avoided. So whilst a basic principle that UK passport holders should be taxable on their world wide income makes complete sense as a matter of fact credit should be given for all tax paid in another place and in some cases that should always be sufficient to fulfil the UK obligation to pay tax. In practical terms that means there should be a “white list” of states where it is deemed that if a UK passport holder is resident then they are deemed to have settled their UK tax liability by fulfilling their obligation to settle the tax due in that other country. All EU states would fall into this category “white list” category. So too would the USA, Japan and all other such major states. Many developing countries — India and South Africa, plus major Latin American states would also qualify. It might also be wise to include states where it was very unlikely a tax exile would reside. Many of the poorest countries of the world could be added to the list on that basis so avoiding taxation problems for those working there for development agencies.
That clearly leaves a group of countries — let’s call them tax havens for sake of a better term — where the passport basis of taxation would be of considerable benefit to the UK Exchequer. There are UK passport holders who use such places to avoid UK tax. An obvious case in point this week is the family of Sir Philip Green, who are, I suspect, UK passport holders but who live, according to Sir Philip, in Monaco. Of course they may do that; it is their legal right to live where they want. But my argument is that the right to do so does not absolve them or anyone else in a similar position, from the obligation to pay tax. If as a result of living in such places they pay no or little tax, probably as a result of the deliberate action of the state in which they choose to reside, then I suggest that the UK should retain the right to tax them as if they were in the UK.
This proposal is, of course, in very many ways an extension to income tax of the logic of the controlled foreign company rules to be found in corporation tax. But note that I would not provide an exception for those working in the places not on the ‘white list’ of approved states. So all those with UK passports who chose to service the offshore finance sector from tax havens would remain wholly taxable in the UK as a result (and yes — special arrangements for those who genuinely come from the Crown Dependencies and other locations issuing UK [passports would have to be made).
Of course some issues would remain — such as whether or not states in the UAE and Saudi Arabia would be on the white list or not. But I suspect that what I propose would pass the reasonableness test that is critical to the acceptability of all taxes to the mass of a population to which it would apply — in this case, the ordinary people of the UK.
Which is why I think it something that those Coalition members who want to take tax avoidance seriously should be giving considerable attention to at this moment.
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I wonder which list you would put Switzerland and Hong Kong on…. 😈
I don’t know if even this proposal would snare Philip Green.
My understanding is that he gave up sometime ago trying to be non-resident as it wasn’t practical to run his companies and continue to fit the test (particularly as it has become stricter).
The reality is that all the loot is in his wife’s name, and she is by all accounts a South African residing in Monaco. Now I do wonder how she resides and travels so freely around Europe on a South African passport. She surely must have EU nationality somewhere. Maybe she has a British passport…
@Mr Snuffleupagus
I think there are other stickiness tests too – as I hint
Like having a family home in the Uk
I am not easily deterred
And I agree Sir Philip probably is resident
And if this does not catch him – so what? Let’s not make this personal because it isn’t bar making a headline – the issue is much bigger than that
Now Guy Hands it certainly would catch….
[…] actually I don’t think it would have had much impact on Sir Philip. Which is why I have suggested something else […]
Your suggestion is a fine response to my earlier complaint that citizenship-based taxation gave rise to unfair double taxation.
The problem is that I think you have been too generous. If the suggestion was enacted then the effect would be that tax exiles would skip tax havens and move to other jurisdictions which have lower taxes than the UK. It would be unlikely to raise additional UK tax.
I am not sure how one squares the circle here.
What’s wrong with a “non-resident” passport holder being required to complete a tax return with all direct taxes paid abroad being deductable expenses? There is then no need for a “white list” or any other coloured list for that matter.
How would you treat people moving to countries such as Belgium which has no capital gains tax and would still be on your white list?
[…] Did I say that? Apparently so. […]
@Forlornehope
Fine in principle, but gets too complicated once you build in indirect taxes, capital gains and timing issues (e.g. something being taxed in one fiscal year in the UK, and another fiscal year in another jurisdiction).
Also open to abuse – check out the ugly history of the UK tax credit rules, which operate on a very limited range of taxes, and imagine what would happen with your much more generous approach.
What are the costs and the return of such a policy? My understanding is that the proceeds to the US treasury from US citizens living overseas are immaterial, but that the expenses to the IRS of processing the returns can be significant.
It seems to me that the only benfitors of this proposal would be the army of tax advisors required to prepare the tax returns of non-resident overseas UK citizens. Is this really what one is trying to achieve?
@Marc Daniels
Oh, we could add an accommodation test too…
And maybe a few other stickies
@Marc Daniels
Agreed
@peter verstage
Pragmatically there’s little we can do within the EU
@Jason
97% fall outside my scheme so cost is low and yield high
That’s deliberate
Richard,
To make the proposal credible, I’d suggest you put some numbers on it. This should be contrasted against the US experience where, as per my understanding, the amounts collected from overseas citizens are immaterial.
@Jason
Since I’m not comparing like with like it would be pointless
And your comment is so typical of those who want to protract abuse
Did you ask the same of the so called attack on benefit fraud?
I bet not
Richard, I am not quite sure what triggered the tone of your response. Why does benefit fraud became an issue?
I was only pointing out that worldwide taxation in the case of the United States produces very low proceeds. This is something you will hear a lot with respect to your own proposal, and you ought to be prepared to address this.
@Jason
And I’m pointing out that the comparison makes no sense
I am sorry, but on the face of it, there is a logical fault in your position.
The US program applies to all citizens reiding overseas, regardless of where they live. There is a system of tax credits to prevent double-taxation, but there is no “white list”.
By your own admission, your proposal would exclude 97% of overseas residents.
So the question is: if the tax collected from 100% of overseas residents is minimal, how can can a tax collected from only 3% of the same population amount to something substantial?
I also have another question: who would actually collect this tax from UK nationals resident in, for instance, Monaco?
@Jason
If 97% of the tax can be collected from 3% of the people – as I suspect – then I’m suggesting an efficient tax, unlike the US
So there is no comparison
Who collects? We do. People have a habit of returning to the UK.
How much do you think it will raise?
How many individuals would it target?
@Jason
a) Billions
b) 10s of thousands. Maybe 100,000
Estimates will be refined