With the dust from the 2008 Budget settling, we look behind the headlines, including the repercussions for frequent business visitors to the UK and those who are non-UK domiciled.
In his first Budget, Chancellor Alistair Darling raised more than just his own famous eyebrows. While it did not prove to be the revenue-raising or green' budget many expected, the Government introduced a raft of further regulation and anti-avoidance measures, extending the complex UK tax web.
Much of the Budget speech focused at the micro-economic level, with relatively few references to detailed tax proposals. So it was something of a surprise to find HM Treasury issuing a record-breaking 107 Budget Notes, comprising 270 pages of detailed amendments, as the Chancellor sat down, trumping the previous 189-page record set by Gordon Brown in 2007.
Unfinished Business
The 2008 Budget was like the final act in a three-act play. Act One took place in March 2007 when Gordon Brown announced reductions in the basic rate of income tax and the standard rate of corporation tax.
Act Two was the October 2007 Pre-Budget Report (PBR) when Mr Darling announced major changes to the capital gains tax (CGT) regime, the ability to transfer the inheritance tax (IHT) nil-rate band between married couples, and finally, far-reaching changes to the residence and domicile regime.
The 107 Budget Notes represent Act Three. They contained a number of specific anti-avoidance proposals which follow the theme set over the past few years. The Disclosure of Tax Avoidance Schemes (DOTAS) rules introduced in 2004 mean that HM Revenue & Customs (HMRC) becomes aware of tax mitigation schemes very early on and can take action to close them down as swiftly as possible. We can expect similar specific anti-avoidance proposals to feature in future Budgets.
Residence Days In, Days Out
The Government has been eager to close a loophole relating to residence in, and visits to, the UK. The tax legislation states that an individual who is present in the UK for 183 or more days in a tax year should be regarded as resident in the UK for that year.
In addition to this statutory residence test, HMRC also applies a non-statutory test deeming individuals who have been present for more than 90 days a year, on average, over a four-year period, to be resident.
Until now there has been no statutory definition of what constitutes a day' of presence in the UK. For many years days of arrival in, and departure from, the UK were ignored. However, in 2006, in the Gaines-Cooper case, HMRC argued that where the individual concerned came to the UK on one day and left the next day, this should count as one day in the UK. This resulted in considerable confusion.
A Hard Day's Night
In the October 2007 PBR, the Chancellor announced his intention to introduce legislation so that both days of arrival and departure would be counted in the 183-day test. This caused considerable concern to those who make frequent business visits to the UK.
Following sustained lobbying, it has now been announced that a day will only be counted if the individual is in the UK at midnight. There will be exemptions for people who are genuinely in transit and do not engage in business activities while passing through the UK.
The midnight test' will be included in the statutory 183-day test. HMRC will also use the same test for the non-statutory 90-day test.
Counting The Cost
Over the past couple of years a succession of tax cases have reached the courts where HMRC has argued that an individual has remained resident in the UK for tax purposes. The new legislation will give the tax authorities additional tools to fight these cases and it is clear that the question of residence will continue to receive a great deal of attention.
Notwithstanding the new statutory rule for day-counting, much of the decision-making process for determining whether someone is resident is based on case law decided nearly 90 years ago. Other countries have much more straightforward and modern residence tests, but there are no signs that the UK Government intends to bring its rules into the 21st century.
Non-Domicile Changes
Domicile is a common law concept distinct from residence and based broadly on family history, long-term connections and future intentions. UK residents who are not domiciled in the UK (along with residents who are not ordinarily resident') can choose to be taxed either on their worldwide income on an arising' basis, or on their UK income on the arising basis and their foreign income on the remittance' basis.
The PBR included a number of changes to the taxation regime for foreign domiciliaries and draft legislation released on 18 January sets out the details. Following consultation, a number of welcome changes to the draft legislation have been announced.
A Long-Term Commitment
In his Budget speech the Chancellor made a commitment that the present Government will make no further changes to the tax regime for foreign domiciliaries in this parliament or the next.
That said, it is unfortunate that the introduction of the new regime has resulted in needless anxiety for foreign domiciliaries and has damaged the reputation of the UK's tax system.
The changes proposed in the draft legislation were so radical and the time given for foreign domiciliaries to review their affairs so short, that significant distress was caused. Many individuals have spent significant sums on professional advice and wrestled with decisions as to whether to wind up long-standing foreign trusts or even to leave the UK. With better planning and consultation, much of this unnecessary stress and expense could have been avoided.
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