Domicile » Tax Research UK

The domicile rules on tax are illegal discrimination on the grounds of national origin

Jun 202011

I wrote the blog reproduced below in March 2007, but nothing of substance has changed on this issue since then. Except that the government has now announced a review of the domicile laws as they relate to taxation – promising token gesture changes in exchange for a guarantee that non-doms will then be left alone. Except, as this blog and the related report shows that should not be the case: the domicile laws are illegal discrimination on the grounds of national origin. The time when accidents of childbirth created difference in tax treatment should be history: it’s to the shame of this government that it intends to perpetuate them.

Tax Research LLP has today published a new report in association with the Tax Justice Network in the UK. Entitled ‘National Origin, Equality and the UK’s Domicile Law as it relates to Taxation’ this is a contribution to the protracted debate on the future of the UK’s domicile laws.

Put simply, the report makes clear there is no basis for that debate. These laws discriminate between people living in the UK on the grounds of their national origin because that is the basis on which a person’s domicile is determined. Since 2003 discrimination on this basis has been illegal under the Race Relations Act. It should however be stressed that ‘national origin’ is not the same as race, ethnicity or nationality. It is defined by theCommission for Racial Equality as:

‘National origins’ are not limited to ‘nationality’ in the legal sense of sense of citizenship of a nation state. The Scottish Court of Session has defined ‘national origins’ as ‘… identifiable elements, both historically and geographically, which at least at some point in time reveal the existence of a nation’.

This is the precise point about domicile. This term is not defined in UK law, but broadly speaking a person is domiciled in the country in which they have their permanent home. That is their place of national origin, irrespective of their race, ethnicity or nationality. It is the fact that both terms rely on this differentiation from race, ethnicity and nationality that makes clear they relate to the same concept – a person’s natural home and community of association. Indeed, it is precisely these factors that the revenue looks for in determining domicile.

In so doing HM Revenue & Customs contravenes (even if unwittingly to date) the terms of the Race Relations Act 1976 and the Race Relations Act (Amendment) Regulations 2003. In law this constitutes unlawful indirect race discrimination which takes place in the UK if a public authority provides a service that affords a person of one national origin a social advantage over a person of another national origin unless there is a legitimate and proportionate objective that justifies that different treatment.

The provision of agreeing a person’s tax liability to be lower than that which might otherwise be the case is the service that affords a person of national origin outside the UK with a social advantage over a person whose national origin is in the UK. We doubt very much that people will disagree with the idea that paying less tax is a social advantage and although discrimination against a majority might seem odd, it has a clear precedent. Women are, after all, in that position.

According to reports of the Revenues own estimates the tax saved is at least £1 billion and their own calculations suggest that this is an average reduction of at least 16% on the tax bills of those not domiciled. Many believe the estimate of the tax saved far too low: there is no reason for a non-domiciled person to report this data to the Revenue and as such any data they hold is bound to be an underestimate. The loss to the UK could, therefore, be much higher.

Awareness of this situation presents the government with three options:

1. It can seek to ignore its own law, and continue to discriminate as it is clearly doing at present;
2. Those of UK domicile must be provided with the same basis of taxation as those who are not domiciled in the UK, or
3. Those who are not domiciled must be given the same tax status as those who are domiciled in the UK.

The first option can at best be a short term solution, and hardly a desirable one at that. The second could not be afforded so the third option is the only one available.

The domicile laws must go.

Non doms and tax

Domicile 1 Response »

Feb 152011

The following is a parliamentary answer on tax paid in the UK by non-coms.

Of course what it does not say is what tax was not paid in the UK by non-coms, but the sums involved (£48,000 of tax a head on average in 2008/09) suggest some must be doing very well out of the new arrangement, and that not surprisingly others are simply now paying their taxes in full and giving up the arrangement.

Nothing suggests that I’m wrong to believe that billions might be a lost a year to H M Revenue & Customs as a result of the domicile rule – not least because I have estimated that up to 7 million people qualify to claim each year – and only a tiny proportion put it on a tax return. The rest, I suspect, simply don’t declare their earnings or status on the basis of the fact they’re outside the UK tax system, in their opinion.

Harriett Baldwin: To ask the Chancellor of the Exchequer (1) how many non-domiciled UK taxpayers filed tax returns with HM Revenue and Customs in each of the last five tax years; [39455]

(2) how many non-domiciled taxpayers have paid the flat annual charge to the Exchequer since its introduction; [39456]

(3) how much tax non-domiciled taxpayers paid to the Exchequer in each of the last five tax years. [39457]

Mr Gauke: The number of individuals who filed a self-assessment (SA) tax return and indicated that they were non-domiciled was as follows:

Number

2004-05 110,000

2005-06 111,000

2006-07 117,000

2007-08 140,000

2008-09 123,000

2008-09 is the most recent tax year for which data are available.

The figures above include both individuals who were UK resident and individuals who were not UK resident.

Individuals who complete a SA return are only required to indicate that they are non-domiciled if this affects their tax liability. Therefore the actual number of non-domiciled individuals who complete a return will be greater than the number who indicate their non-domicile status on their SA return.

The annual £30,000 remittance basis charge was introduced with effect from the 2008-09 tax year. The number of non-domiciled individuals who paid the charge in 2008-09 was 5,400. This is a provisional figure rounded to the nearest hundred and may be updated once all returns for the tax year have been received and analysed.

Figures are not available for the total amount of UK tax paid by non domiciled individuals. However, it is possible to calculate the total amount of UK income tax and capital gains tax (CGT) paid by individuals who completed an SA return and indicated that they were non-domiciled. These amounts for the past five tax years were as follows:

£ billion

2004-05 3.3

2005-06 4.0

2006-07 5.0

2007-08 6.9

2008-09 5.9

Several taxes are not accounted for via the SA system and some non-domiciled individuals are not required to complete an SA return at all.

How to deal with the non-Dom problem

Domicile, Tax avoidance, Tax compliance, Tax management 2 Responses »

Feb 082011

I was rung by numerous organisations yesterday wanting to ask my opinion on non-domiciled and taxation. The story reappeared in the press at the weekend with the suggestion being made that George Osborne is considering reducing the seven year period which can elapse before a non-domiciled person has to pay a levy make use of this status to reduce their tax liability in the UK.

I pointed out that the real issue is not the problem of the domicile rule, however significant that is. The real problem is the fact that the UK does not, at present, have an effective residence rule, and many people cannot be quite sure whether they have become resident, or non-resident in the UK as a result of legal ambiguities that now exist as a result of conflicting court decisions. This is a much bigger problem, not least because it has serious impact upon those coming to the UK to work, and leaving to work elsewhere.

There is a solution to this problem. It can be found here, and I recommend it.

Disclosure: I advise the TUC on tax issues.

TUC says it’s time to change the UK’s residence and domicile rules

Domicile, Tax avoidance, Tax justice, TUC 64 Responses »

Oct 182010

As if one new TUC tax report is not enough for a day, over the weekend the TUC issued a second report by me, this one calling for abolition of the domicile rule in the UK and for radical reform of the UK’s tax residence rules. As the report notes:

The UK needs new tax residency laws.

The existing laws of tax residence are now so complex and reliant on conflicting legal decisions that few, if anyone, can claim to fully understand them – including HM Revenue & Customs. As a result tax avoidance is rife – especially amongst an elite who can afford to commute in and out of the UK from places like Monaco but pay little or no tax in the UK.

In addition, the rules on residency include the domicile rule, which has made the UK a tax haven for foreign oligarchs, allowed untold tax abuse and increased division in our society.

Uncertainty and abuse aren’t the basis for tax justice. Tax justice would deliver two things. The first is certainty for honest working people coming to and leaving the UK to earn their living. The second is a tax system that ensures all who enjoy what the UK has to offer contribute to its well-being according to their means.

It is for these reasons that the TUC is proposing radical revision to the UK’s tax residence rules which would, amongst many benefits, sweep away the domicile rule for good.

Our proposals are simple, effective and fair. They will raise money and stop abuse. First we propose that everyone who has a UK passport should be tax resident in the UK, automatically, wherever they live in the world. That means they would always have liability to pay tax in the UK on their worldwide income, gains and wealth, just as all US citizens do in the USA.

However, because we also recognise that tax needs to be simple and pragmatic we also suggest an important exception, which is that those UK passport holders living in a ‚Äòwhite list’ of approved countries would pay no more tax in the UK as a result. The tax they paid in that other country in which they lived and worked would, in these cases, be deemed to settle their UK tax bill. As a result it is those who flee the UK to live in tax havens that this measure would target. We think more than £1 billion of extra tax would be raised as a result, and untold abuse and time wasted by HM Revenue & Customs brought to an end.

We also propose new rules for those coming to the UK from abroad. We welcome the contribution these people bring to the UK. We also recognise many only come for short periods, so for up to four years we suggest anyone taking up residency in the UK should only pay tax on their UK income and that other income they bring to the UK from overseas. But once this period of grace is over we argue that all who come to the UK to live should be subject to exactly the same tax rules as those who have always lived here. So, after four years of temporary residence in the UK we argue that anyone choosing to stay for longer should pay full UK tax on their worldwide income, gains and wealth.

Our rules ensure that is the case, and also ensure that those who stay in the UK for relatively short periods but have extensive connections with it none the less – such as keeping a home and their family here – should also be tax resident in this country.

These changes, matched with the ending of the domicile rule, would , we suggest raise up to £3 billion of tax a year and, as importantly, deliver the fairness and certainty the UK needs if it is to play a full part in a world economy where people are mobile.

The rules proposed are as straightforward as can be suggested in a complex situation. Of course there are winners, and losers. The winners are those going abroad to work in places with acceptable tax systems. Those going to tax havens, on the other hand, will find they are still paying UK tax – and rightly so. They have the right to return to the UK at any moment and claim all the services that we as a state have to offer. That is precisely why they must contribute here if they do not anywhere else.

This is a proposal will deliver significant tax simplicity, fairness between those born and not born in the UK (which is very important), enhanced tax revenue at the time that we needed, and certainty where the law has not provided it to date. If the tax profession objects one has to wonder what their objectives are.

Laws to get rid of: #1 the domicile rule

ConDems, Domicile, Tax avoidance 9 Responses »

Jul 012010

The ConDem government has launched a new web site – called Your Freedom – that is dedicated, it says, to scrapping unnecessary laws.

Well, I have a few that seriously restrict my rights, freedoms and liberties I would definitely like to get rid of.

I’ll be listing a number of suggestions over coming days. If anyone would like to submit them to the new web site, please feel free to do so.

So let’s start with law number 1 to get rid of: the domicile rule. As I showed in 2007, this law then cost the UK up to £4 billion in lost tax revenue a year. It’s been reformed slightly since then, meaning some non-doms now have to pay for the privilege of using the tax exemption it allows. But it still must cost us £3 billion a year.

That’s money we need to preserve our services and our liberties.

This is a law that has to go.

What do you mean we don’t know how many non-doms there are?

Domicile, HMRC 2 Responses »

Mar 052010

The following parliamentary question and answer were reported on 3 March in the House of Lords:

Question

Asked by Lord Oakeshott of Seagrove Bay

To ask Her Majesty’s Government how many taxpayers who are registered with HM Revenue and Customs as non-domiciled are (a) resident, and (b) non-resident, in the United Kingdom. [HL1128]

Answer

The Financial Services Secretary to the Treasury (Lord Myners): Reliable information is not available, as individuals are not required to report their UK domicile status or residence status to HM Revenue and Customs (HMRC) unless either is relevant to their liability to UK tax within that year.

Individuals who are resident but not domiciled within the UK (non-domiciles) do not need to inform HMRC of their non-domicile status unless it is relevant to their tax affairs in that tax year.

In the majority of cases an individual’s domicile status will make no difference to the direct tax they must pay in the UK. This is because an individual’s domicile status is mainly relevant for income and capital gains tax purposes when an individual has foreign income or foreign gains, for example from overseas investment or employment. Where this is the case, UK residents may need to complete supplementary pages to the main self-assessment tax return. Many such residents pay tax on these income and gains on the arising basis so their domicile status is not relevant to their tax affairs. However UK resident individuals who are either not ordinarily resident or are not domiciled within the UK may use the remittance basis in respect of their foreign income or gains instead.

Following the changes introduced in Finance Act 2008, many of these individuals will now have to complete a self-assessment tax return to use the remittance basis (with some minor exceptions for lower-income or migrant workers).

Prior to the Finance Act 2008 it was not always necessary for individuals using the remittance basis to complete a self-assessment tax return. Similarly those individuals who did complete a self-assessment tax return did not always need to say whether they were using the remittance basis because they were non-domiciled in the UK or because they are not ordinarily resident in the UK. In 2006-07, 86,000 individuals filed a self-assessment tax return on the basis that they were non-domiciled in the UK. This is the latest year for which data are available.

UK residents who are non-domiciled may also make lifetime transfers into trusts with inheritance tax due at 20 per cent. To do so, they must inform HMRC of their domicile status. This information is not centrally collated by HMRC’s systems.

With some minor exceptions non-UK residents do not generally pay UK capital gains tax. They pay UK tax on their UK source income, although this may be relieved under a double taxation treaty. There is generally no need for such individuals to inform HMRC about their domicile status; the remittance basis is only relevant to UK residents.

Some non-resident individuals will complete the non-residence pages of a self-assessment tax return and declare their non-resident status. There is usually no need for such individuals to declare their domicile status too, although on occasion some do choose to tick the non-domicile box. In 2006-07 30,000 taxpayers chose to declare themselves as non-resident and non-domiciled in the UK.

These individuals will broadly fall into five groups: those who are not resident in the UK but have investments here on which UK tax must be paid; those who have returned abroad from a UK employment assignment and have to file to pay tax on their final year salary; those with UK-source self-employment income from business trips (particularly if they come from a country with which we do not have a double taxation agreement); those performing in the UK as non-resident artistes or sportspersons; and those who making claims under double taxation treaties.

I find it incomprehensible that we do not have data from tax returns on this issue after 2006-07.

It is incomprehensible that we have no idea how many people have paid the £30,000 flat rate charge to continue using the remittance basis of tax available to non-doms.

And it is an indictment of the appalling state of published data available from HMRC that this question even has to be asked. The information they put into the public domain is abysmally limited in scope, and in many cases they ceased publishing data in 2005, when HM Revenue & Customs was formed.

How can we have an informed debate on tax without data?

HMRC really do need to get their act together.

We can solve the problem of tax exiles

Domicile 5 Responses »

Mar 052010

Johann Hari has an article in the Independent this morning on the above issues. As he notes:

Contrary to the claims of their apologists, there is nothing inevitable about tax exiles. The Tax Justice Network and the brilliant financial expert Richard Murphy have laid out a clear road-map for how to end them.

Well, that’s a new description of me, and one I’m not sure about, but the real issue is what he notes, based on a conversation we had, in part:

Within Britain, there are two types of tax avoider, and they need to be dealt with differently. First, there are the British citizens who claim to be only semi-resident here, and therefore say they should pay little or nothing. There is a simple way to shut this down – and it is already put into practice every day in that socialist utopia, the USA. If you are an American citizen, you pay taxes to the US exchequer, wherever you live in the world. You are allowed to earn up to $50,000 abroad tax-free, and after that, you pay American taxes. You can’t be a tax exile. It’s impossible. You want to be part of the American club, you have to pay the membership dues. If you don’t want to contribute, you have to renounce your citizenship – a wrenching move that only 500 deeply odd and unpatriotic rich people choose every year. Britain could do the same with a click of our legislative fingers. It would abolish overnight the concept of a tax exile.

The second group are non-British citizens who come here and refuse to pay taxes on their global fortunes. Under New Labour, this group has been so cravenly courted that the IMF actually classified the British Isles as a tax haven for foreigners until 2008. Now, they pay a paltry £30,000 a year to count as a non-dom – and then nothing. For people so rich, it’s the equivalent of handing us the small change down the back of their settees. They drive up prices for us all: we have to compete with people for (say) property in London who pay no tax. They can be dealt with just as easily. People who come for short stays – to be a student, or on secondment – shouldn’t have to reorganise their entire tax affairs when they come; that would discourage visitors. But if you stay here for three years or more, you are plainly relying on British public services – so you should have to pay full taxes on your global fortune to us, or go.

And for the tiny number of the super-rich who would still leave and choose eternal boredom in Monaco or the Cayman Islands? They’d be no great loss, but we should still chase them by leading a global crusade to shut down the tiny number of places that allow them to warehouse their fortunes tax-free. It’s not hard when there is the political will: after 9/11, even the most shadowy tax haven shut down al-Qa’ida-linked bank accounts within a week. When Monaco refused to co-operate with France on tax laws, Charles De Gaulle surrounded it with troops and cut off the water supply.

We are constantly being told by a chorus of conservatives that the financial crisis caused by their market fundamentalism can only be solved by slashing back spending. But this is unnecessary if only the overclass start to pay their taxes. Look at the country we are told is the exemplar of over-spending, Greece. In fact, it suffers the worst tax collection rate in the democratic world. According to a study by Professor Friedrich Schneider, some 25 per cent of taxes are not paid, making up $20.5bn a year. If Greece ended this culture, its financial situation would look very different. Why don’t we hear this story, instead of the nonsense that they pay their teachers and nurses too much?

So why aren’t elected governments opting for this sensible, simple solution, supported by 78 per cent in a recent poll? The tiny number of super-rich talk louder than the rest of the population. Their money warps our politics: Labour has non-dom donors too. So the scandal isn’t just that Michael Ashcroft has captured the Conservative Party. It’s that his repulsive tax tango has been legal under Labour as well – and we all have to go on paying for this parasitism.

Quite so: this is an issue where Labour too has been wrong, time and again.

But surely – never again? That’s what I hope.

Time to scrap the non-dom rule

Domicile 4 Responses »

Mar 032010

I have an article on Comment is Free today:

Lord Ashcroft’s disclosures about his non-dom status are a story of the moment, and rightly so. That should not disguise the fact that the abuse facilitated by the domicile rule when applied to taxation in the UK is long-standing and ongoing and will not be resolved even if Lord Ashcroft does become domiciled in the UK after the next election. Nor was it resolved by the very partial reform to the domicile rule introduced in 2008, after which a person could only use the rule cost-free for seven years, whereafter they have to pay £30,000 a year to continue to take advantage of it.

It’s important to stress what a person’s domicile is: it’s their place of natural allegiance; the place they consider to be their real home. It’s not about ethnicity, race or nationality. It can fairly be said to be about national origin. Let’s leave aside for the moment the fact that discrimination on the grounds of national origin has been illegal in the UK since 2003, and that the domicile rule might afford an illegal advantageto those claiming it under that legislation, and instead concentrate on what this means.

The domicile rule does, in effect, mean that through paternal inheritance (this rule is also decidedly sexist), a child acquires their parents’ domicile or place of national origin and keeps it for life, unless they declare otherwise or HM Revenue and Customs choose to challenge their claim, and proves otherwise. As we all know, challenging a state of mind is nigh on impossible, especially when the assumption is granted by law that such a state of mind involves national origin being elsewhere. Unsurprisingly, the number of challenges to domiciled status are few, the rate of success unknown but probably limited, which in turn reduces the number of challenges and so the system self-perpetuates, granting an unfair and unmerited advantage to some in society at expense to others.

There is neither logic, nor natural justice, nor human rights and maybe even law (as previously noted) that can justify perpetuation of this situation, whose survival has been largely necessitated by the chaotic, undocumented and non-statutory basis for determining the unrelated, but equally important, status of tax residence in the UK. It is important to stress we note the difference. It is equally important to stress that the way in which the UK tax system works is that the tax affairs of many temporary residents in the UK are subject to "blind-eye" treatment by HM Revenue and Customs on the grounds that the domicile rules will in most cases allow them to ignore that person’s income arising outside the UK, which they presume (in most cases quite reasonably, no doubt) is not remitted here.

We argue that it is ludicrous that the weaknesses in the UK’s tax residence laws have to be covered by the maintenance of a discriminatory law based on unprovable claims as to a person’s national origin. The consequence is a state of uncertainty that is exploited by many with wealth, but which leaves the vast majority who come to the UK to work uncertain as to their obligations to pay tax and leaves many of those who do so with lower tax liabilities on similar earnings to those who have been resident and domiciled here throughout their lives. Uncertainty in tax systems is widely condemned, not least by all in the tax profession. Unfair competitive advantages distort markets. This is a situation that has top end, whatever the outcome of the Ashcroft affair.

Our solutions are simple. We need a new statutory law for determining who is, and who is not, resident in the UK. This should provide temporary residents who are not citizens of the UK a period of grace during which they should not be subject to full UK tax on their worldwide income: a period of no more than four years should provide the necessary period in which they can either leave again (as many will) or reorganise their affairs to comply with UK requirements. At the same time, UK residents should have a duty to pay UK tax unless they can show they are paying equivalent taxes elsewhere in the world.

If this were to happen, the remaining implicit administrative justification for the domicile rule would disappear: the residence rules could cover the need. In that case, subject to a four-year period of notice being given all those still using the domicile rule to avoid declaration any part of their income or gains in the UK. That rule should disappear from our tax law, sweeping away in the process an anachronism based on prejudice and discrimination from a bygone age that is long overdue for elimination in the 21st century. And, as I have previously argued, the net gain to the UK exchequer might be some £3bn a year, revenue the country is badly in need of.

Surely we can do it now?