The government’s rejection of attempts to limit the impact of. abolishing foreign earnings deduction will hit thousands of ‘ordinary workers,’ as well as big earners like rock stars.
Measures in the finance bill to scrap FEDs, which exempt UK citizens from tax if they work outside the country for 365 days but not for a whole tax year, are designed to limit tax avoidance.
The likely consequences were highlighted this week when the Rolling Stones scrapped the UK leg of their world tour because of fears that the abolition of FEDs would leave the band with a possible #12m tax bill plus a major tax hit for members of their tour crew.
Michael Kaltz, Ernst & Young’s head of expatriate tax, warned the end of FEDs would harm UK competitiveness abroad and many lower paid workers could be billed for tax on bonuses paid before the change took effect.
He said: ‘It’s particularly regrettable the government decided to tar ordinary UK workers with a tax avoidance brush. This relief was overwhelmingly used by professional and technical staff, nurses and aid workers.
‘The allowance was valuable to them and their employers. Losing it will put pressure on UK competitiveness abroad.’
E&Y warned that consultancies and construction firms may be faced with having to gross up employees’ salaries – hitting profit margins on already-negotiated contracts – or see staff suddenly face tax they had not expected when they took on the work.
They could also face a competitive disadvantage against US, French and Dutch companies operating under more liberal tax regimes.
During debates in the Commons finance bill committee last week, Treasury financial secretary Dawn Primarolo refused opposition amendments to exclude earnings at levels below #100,000.
She admitted there was nothing the government could do to stop rich tax avoiders from absenting themselves from the UK for an entire April to April tax year and claiming foreign residency.
She said: ‘From the point of view of fairness, people who are resident in the UK or who are UK citizens should be liable to UK tax, although there are exemptions which depend on residency or non-resident status and on the interplay of double taxation agreements.’
Overseas aid charities had been told most of their workers need not be hit because they could be treated as non-resident, while teachers on overseas secondments benefited from services paid for by taxpayers.
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