Foreign nationals are seeing sharply higher income tax bills following moves by HM Revenue & Customs to directly target the growing number of non-domiciles living and working in the UK.
The latest set of accounts from HMRC showed an 80 per cent rise in the amount of tax received from expatriate employees in the most recent tax year.
The rise reflects a more aggressive approach by HMRC to stamp out complex tax-avoidance schemes that allow foreign employees to reduce income tax.
Neil Tipping, senior consultant at CCH, a tax and accountancy information group, said: “HMRC is targeting its efforts much more now. It has identified significant shortfalls in tax from non-domiciled workers and has allocated more resources to deal with this.”
Four years ago, HMRC created a specialised team to deal specifically with tax due from foreign workers. In the 2005/2006 tax year, this team recouped £57m. Last year this jumped to £102m, well above HMRC’s target of £80m.
HMRC is thought to be paying closer attention to this area as the number of wealthy foreign nationals has spiralled in the past few years – at a time when salaries, bonuses and employment levels have all been high.
Foreign workers have been drawn in by the success of the City and the UK’s favourable tax regime. And accountants believe a large proportion of the employees who split their time between working in the UK and overseas are managing to escape paying their full UK tax liability.
Employees can also sidestep tax rules by taking regular trips home.
In addition, HMRC has been gathering information on offshore bank account holders who have not paid tax on the interest.
HMRC said it had increased the number of staff who investigate tax due from expatriates.
Accountants believe that one particular area of focus has been large bonus payouts, especially to executives who split their time between working in the UK and abroad. Richard Mannion, national tax director at Smith & Williamson, the accountancy group, said: “The Revenue is getting its act together in certain areas. People who are taking liberties can expect the Revenue to have a go at them.”
He thought HMRC could make it harder for people to shed a UK domicile and was likely to police the favourable remittance rules more forcefully.
However, there are fears that a tightening of the tax regime could have repercussions for the City. Wealthy foreign workers have valuable spending power and have been one of the main driving factors behind the health of the UK economy and the property market over the past couple of years.
Mike Harrison at Saffery Champness, the accountants, said: “London is undoubtedly one of the major financial centres in the world. The UK offers a stable tax environment and one that is fairly benign compared with elsewhere in Europe. Increase the tax burden and people could start thinking of going elsewhere.”
According to Mr Tipping: “This could mean that companies have to pay more to attract staff, and it could have a much wider affect on the economy.”
Tax experts say the best way to avoid a punitive tax bill is to keep money offshore where possible.
“The best advice is to segregate capital and income into different accounts,” advises Stephen Herring, senior tax partner at BDO Stoy Hayward.
“The capital can be remitted but you have to make sure you don’t remit the income from overseas, otherwise it is taxable,” he added.
