Flat tax sends scores to quiz accountants

The overhaul of the tax treatment of foreigners, announced with much fanfare by chancellor Alistair Darling in the Pre-Budget Report this week, has prompted scores of worried expatriates to contact their accountants.

For many, the changes are likely to be expensive. Come the start of the next tax year, Roman Abramovich, the Chelsea football club owner, Mohamed Fayed, Harrods’ owner, and scores of less well-known ex-pats, who are not “domiciled” in the UK, but have been living here
for at least seven years, will be required either to pay a flat fee of £30,000 each year, or face standard UK income tax on all income, including that generated outside the UK.

Only unremitted foreign income of less than £1,000 will be ignored by HM Revenue and Customs.

If expatriates pay the £30,000 flat tax, they will also forfeit the privilege of
claiming personal allowances against their remitted income, which is currently worth £5,225 per individual,

“The clock is already ticking and anyone who became resident in the UK before April 5 2001 will pay the fee from April 5 2008,” says Mike Warburton, senior tax partner, at Grant Thornton. “Clients are disappointed, but the richer ones are saying we expected it.”

Accountants agree that it will make sense for foreigners to forgo standard income tax and pay the £30,000 flat tax, only if they have more than £1.5m in accounts offshore and are generating income from it of about £75,000 per year.

“Otherwise, you are in effect paying extra tax than you need to pay,” says Warburton.

The chancellor indicated that there were around 15,000 “non-doms” living in the UK who would fall into this category and pay the flat levy, which will yield about £500m in additional tax revenue in the 2010-2011 tax year.

But while many tax advisers applauded the Treasury’s move – arguing that £30,000 was low enough to keep wealthy non-domiciles in the country, and the seven-year exemption would protect temporary workers – others had more concerns.

“These changes are quite radical in that the benefits of non-domicile status have been talked about for many years, but no previous chancellor has taken the next step of introducing the measures,” said Stephen Herring, tax partner at BDO Stoy Hayward.

“The chancellor will no doubt be holding his breath to see whether the changes will trigger an exodus of affluent but not über-wealthy non-doms.”

George Bull, head of tax at Baker Tilly, agreed. “The idea of ‘fat cat’ non-doms is wide of the mark. Many non-doms who work in the UK and contribute £4bn in taxes annually to the Exchequer are far from wealthy. The proposed levy of £30,000 paid out of taxed income equates to £50,000 of pre-tax income,” he said.

The changes announced by Darling concerning non-dom status are the most severe affecting foreigners in the UK.

Other proposed measures, which are likely to be clarified by the end of the year, could also have a significant impact on hundreds of thousands of people.

From April, those who claim to be “non-resident” here will have to count their days of arrival and days of departure, on top of other days spent in the UK, to decide their residency status for tax purposes. This will hit tax exiles living in places such as the Channel Islands and Monaco, who fly into the UK every week to work.

For example, if an executive were to fly in from Monaco every Tuesday and return home the next day, he might be forced to change his residency status. According to the new rules, he would have spent two days each week in the country, or 104 days. You are treated as a UK tax resident if you spend more than 90 days in the UK each tax year on average over a four-year period.

Also, the widely accepted practice of “source-ceasing” which allows expatriates to bring interest earned on foreign bank accounts to the UK without incurring a tax charge, will no longer be permissible.

Darling has vowed to introduce provisions to ensure that offshore trusts and companies will not be able to “alienate income and gains” or “convert taxable income and gains into non-taxable payments”.

“The devil is in the details,” says Patricia Mock, a director in Deloitte’s private client services group. “In the speech, Darling mentioned there are various anomalies that need to be tightened up. The really wealthy non-doms have all set up offshore companies and trusts to minimise their taxes and it’s not at all clear how they are going to be hit.”

Further details of the proposals are likely to be made clearer at the end of the year when proposed legislation becomes available in draft form. But accountants are already advising expatriate clients to embark on a review of their affairs before April.

“It is not simply a question of whether or not to pay the £30,000 charge. Many non-domiciled individuals may have established company holding structures and family trusts outside the UK, and these may now contain hidden tax charges,” concludes Warburton.