Domicile: Pragmatic question 4: Low income workers

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It's been argued that the changes in the domicile rule will be especially harmful to low income workers who come from mainly European countries to the UK to work seasonally. This is because in addition to the rule that says resident non-domiciles who have been in the UK for longer than seven out of the past ten years will only be able to access the remittance basis of taxation on payment of an annual charge of £30,000, unless their unremitted foreign income or gains are less than £1,000 there is a second rule that says that people who want to use the remittance basis of taxation will in future no longer be entitled to income tax personal allowances. Again, people with £1,000 or less of foreign income will be exempt.

The Low Income Tax Reform Group (a division of the Chartered Institute of Taxation in all but name) have spear-headed the campaign against this change. Their logic is that:

1) Temporary residents should not be penalised in this way;

2) This will impose a significant administrative and tax burden on those here for a variety of reasons, whether they be doctors (who are not on low incomes) or refugees.

First of all, if someone comes to live here then, for whatever reason, I think they should pay the membership fee for doing so. That's paying tax in accordance with our laws. This is called equality before the law. The LITRG ignores this by saying:

Some will say "why shouldn't such people pay the same tax as we do in the UK?" That's a fair point in many ways - but the financial advantage, whether for the rich or poor, is more perception than reality for most 'non-doms' who often have two sets of costs due to being away from home.

Respectfully, that's nonsense. If they are refugees they are unlikely to have costs at home (and I assure you, I have massive sympathy with those who are refugees, I just don't buy this argument and happen to think they do have a duty to pay towards the costs of the country that is providing them with refuge). If those with low income are here as economic migrants that is a choice: we have no reason to subsidise it. Which is the end of the story as far as I am concerned on this issue.

So let's deal with the question of tax burden. For most of those in this low earning situation the UK will be their only or main source of income. We are talking here about low earning people who are resident here, after all. And this group do, if they work for a living, and almost by definition, have low investment earnings. On that case let's look at an example.

Suppose someone comes to the UK to work for several months a year, persistently, and so is resident and ordinarily resident in the UK. Let's assume they are Lithuanian (there are lots around where I live). Let's assume they work in agriculture and get paid about the minimum wage (call it £6 an hour for ease and 50 hours a week for ease). The season lasts, say, 5 months, That will be UK earnings of about £6,300. I estimate that over the five month period they would pay UK tax of about £107 on that this year and NIC of about £462 using 2007/08 rates.

But that is not the end of their story. They will in this example be Lithuanian resident too (which is the scenario the LITRG is concerned about as I understand it). In that case they have a tax liability in Lithuania as well. Using PWC's Lithuanian tax guide for 2007 I can establish that the flat tax rate for income from earnings in Lithuania is 27%. The personal allowance is about £800 a year. As a result this person who has earned £6,300 here and paid £107 of tax has a tax liability in Lithuania on the same source, assuming they have no other income in that country, of £1,485 against which the £107 paid can be offset leaving a tax bill owing of £1,378.

What would happen if the personal allowance was removed in the UK, as the new plan suggests should be the case, if this person does not want to declare their Lithuanian income in the UK (assuming it more than £1,000 and they're not here for more than 7 years)? Their UK tax liability would increase on the sum of £6,300 to about £1,120 in my estimate (this year's rates, again). This would still be less than the tax liability that they owe in Lithuania, and of course that is bound to be the case for a considerable range of income. The Lithuanian personal allowances are lower and their tax rates higher until UK higher rate bands are reached (which is a stark reminder to those who claim the flat tax states offer a good deal: they don't do so for the ordinary employee).

So what in that case is unfair about the proposal to disallow the personal allowance in the UK to a person who does not wish to declare their overseas source income to the UK government? As far as I can see there is nothing wrong with this, at all. It is a fair way of seeking to recover tax in the UK that is fully creditable in the country in which the person is likely to be resident for tax and which would otherwise collect all the tax due on this income although it arose here in the UK. The measure redresses this balance.

But it does something more than that as well. If, as the LITRG seem to think, declaring tax in two jurisdictions is an unreasonable thing to do, even if the law requires it, what is likely to be happening in the example given is that the UK source income is simply not declared in Lithuania. In that case the sum earned in the UK would effectively be treated as almost tax free, and whatever was earned in Lithuania in the rest of the year would then have a full personal allowance offset against it there. The result would be a much lower overall rate of tax than the law of Lithuania allowed because of exploitation of the UK. In effect this would mean that the net pay rate of the Lithuanian worker when in the UK would be higher for each pound of income paid in the UK than would be that of an equivalent UK worker (who would, if working on the same pay rate all year pay, pro rata, £813 of tax on £6,300 of income compared to the £107 of the Lithuanian). The result is obvious: the Lithuanian can undercut the required pay rate of the British resident worker and so price the local person out of a job through abuse of the international tax system. It is this economic abuse of low paid British workers that the new rule is meant to address.

To argue against this new rule is, on the basis of this evidence, hard to justify. It would seem likely that the rule will in fact substantially increase the chance that tax will paid on income arising in the UK somewhere in the world after allowances are taken into account. That is as it should be and all tax professionals should be supporting that position. The existing rules do not promote this and are, therefore deficient. And what is also clear is that the new rules do not create double taxation at any point and do give the vast majority of those who will wish to avail themselves of them a considerable period in which to get their international affairs in order before having to comply with them.

But most of all, the new rules stop overseas temporary workers being subsidised at cost to the local workforce.

For all these reasons these rules are good for tax compliance, good for the UK, fair and of economic benefit to low paid workers in the UK who will not see their wage rate undercut by those evading tax obligations elsewhere. As such I would hope that they will be welcomed as a necessary part of the package on non-domicile taxation.