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company was opaque, remittance rules superceded this argument – a point tax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
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
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.
Does Darwin's theory apply to taxation? Colin ponders...
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