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 â€šÃ„Ã²white 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.