Non-dom uses taxman’s rules to walk away with court victory

If taxpayers find themselves in a legal fight with the taxman, they can usually expect a pummelling, even if they manage a win on points.

But HM Revenue & Customs got more than it bargained for in taking on a non-dom, who managed to use the UK’s own rulebook to get an exemption from tax on profits held offshore.

In short, the non-dom succ­essfully argued eligibility for the one get-out clause to Section 739 of British tax law, which is the UK’s most pow­erful weapon against offshore tax evasion. This section contains the offshore anti-avoidance rules and the non-dom argued in an anonymised case (for identity protection reasons) that double taxation relief was necessary.

HMRC argued that the US company where the profits were deposited was opaque and therefore liable to UK taxation, but the non-dom countered that even if the company was opaque, remittance rules superceded this argument – a point tax judges agreed with.

Continuing the boxing metaphor, this is the equivalent of HMRC being punched in the face with its own fist in the dispute, heard by the First Tier tax tribunal earlier in the year.

Remittance rules say that as long as non-doms do not bring profits made overseas onshore they’re not liable for tax in the UK.

What must be of concern to the taxman is the way that those who claim non-dom status can effectively trump tax policy – and the clampdown in the Budget on anti-avoidance shows the issue is on the government’s agenda.

One measure is specifically targeted at non-domiciled residents keeping profits offshore. With effect from 6 April 2010 a loophole which allowed non-doms to sidestep the remittance basis rules has been slammed shut. The definition of a “relevant person” is being tweaked, to stop non-doms bringing assets onshore by putting them into non-resident companies.

Non-doms are considered to have brought assets onshore if they are given to a relevant person such as their spouse, civil partner, children or grandchildren. They are also liable to pay UK tax if the assets are put into a close company – a corporate vehicle which has very few directors and would pay out more than half the assets in the event of a collapse.

The Treasury has now said non-resident vehicles are also defined as “close companies”.

The Budget notes explain: “To remove any such uncertainty and to remove the potential for abuse, the legislation will make clear that a ‘relevant person’ include such companies”. It indicates the government knows non-doms have the upper hand, but is taking steps to make sure the maximum number of people adhere to the rules.

The change will only bring in £5m a year, according to the Budget estimates, but HMRC could be making a pre-emptive strike before abuse of the loophole grows. Stephen Timms, the financial secretary to the Treasury, has already indicated there will be a renewed offensive as the UK “robustly” tackles tax avoidance.

Experts at Grant Thornton said the anti-avoidance and evasion measures in general meant the government had “shown a red card” to taxpayers wishing to use artificial arrangements to shelter their income and to anyone concealing assets or monies offshore.

Heather Taylor, tax investigations specialist at the firm, said moves to change the definition of what is a tax avoidance scheme had “widened the posts to leave HMRC with an open goal to aim at”.

However, advisers have been quick to remind the government that avoidance is legal while evasion is not, but are clearly wary of the government’s stance. “The difference between avoidance and evasion is the thickness of a prison wall,” said one.

IN OUR VIEW

Something goes the way HMRC doesn’t like and the department moves to block the loophole. It’s the age-old story of HMRC. This kind of approach doesn’t establish credibility or certainty in the tax system. The taxman needs to pin things down early. But given the current environment we can only expect aggression from HMRC as it attempts to maximise tax revenues.