When did or will Zac Goldsmith cease to be a non-dom?

It's been revealed that Zac Goldsmith has been claiming that he is not domiciled in the UK for tax purposes. Zac is the green adviser to David Cameron and a prospective Tory MP for Richmond Park.

Non UK domiciled taxpayers are not required to pay UK income tax on income that arises overseas as long as it is not remitted to or enjoyed in the UK. If they are resident here non-doms are fully taxable on their UK source income. As of last year any UK residents who claim the tax benefits of being non-doms are liable to pay an annual £30,000 charge in lieu of the tax on their overseas income.

The article in the Sunday Times contains extensive reference to trust assets made available to Zac as a result of late father's largess. What the article doesn't do however is to explain the justification for Zac's (admission that he) claims to be domiciled outside of the UK.

His status would seem to be derived from his father's non-dom status at the time that Zac was born. This is commonly the case and would mean that Zac has a domicile of origin in a specific overseas country. However this is not the end of the story. Zac has spent most of his life in the UK. So he might be thought to have established a domicile of choice here - and thus have forsaken his non-dom status. Indeed a spokesman is reported to have stated that Zac:

"has already taken the decision to relinquish his non-domicile status.”

I'm sorry? Either he has established a domicile of choice here or he hasn't. As HMRC's own guidance says in HMRC 6:

Broadly, to acquire a domicile of choice you must leave your current country of domicile and settle in another country.

The booklet goes onto confirm that it's a lot more complex than this and there are a series of useful flowcharts (on pages 25-28) that are intended to help people understand their domicile status. I fear that Zac has already established a domicile of choice in England.

I hope he has already filed his 2008/09 tax return. Otherwise he will be hard pushed to claim non-dom status on it if he has already decided to accept that he is domiciled here in future. Indeed HMRC could question the legitimacy of the claim on previous tax returns as there has to be a date from which someone's circumstances change and from which they are to be treated as domiciled here. Would that have been the date on which he was elected as the local Conservative Parliamentary candidate in March 2007?

Lesson? Tax rules are complex - never allow your spokesman to make statements that could impact your tax position unless they understand the implications of what they are saying and this accords with the facts.

Tax Tease of the week - resident or non-resident?

There's a story in the Sunday Times today headed: Taxman targets exiles who keep UK toehold.

This qualifies for inclusion on the TaxBuzz blog as a 'Tax Tease' as there's nothing really newsworthy in the story. Tax advisers have been aware of a shift in the way HMRC treat claims to non-UK resident status for some time. It has become particularly difficult to be confident of a securing non-UK resident status if you continue to spend time in the UK since Robert Gains-Cooper first lost his claim to non-resident status in 2006. He has since lost his appeals to the High Court and to the Court of Appeal as I reported in a posting last year: Gaines-Cooper loses in Court of Appeal - Residence rules revisited.

HMRC meanwhile withdrew their guidance booklet IR20 which had previously been considered the 'bible' for advising clients as to what they needed to do to secure non-residence status. Revised guidance was published on 31 March 2009 in the shape of: HMRC6 - Residence, Domicile and the Remittance Basis.

HMRC's FAQs for Non-Residents continue to suggest that you can achieve non-UK resident status if you 'leave' the UK and spend a sufficient amount of time abroad. Indeed the day counts listed in FAQ 3 are the same as they have ever been. As indicated in HMRC 6 (section 8) the real emphasis is now on whether or not you can evidence that you have really 'left' the UK. And it's likely that plenty of amateur tax advisers are unaware of HMRC's views on the subject.

And it is examples of traps in this regard that the current Tax Tease addresses. Tax advisers with expertise in this area have long been cautious about allowing would be tax exile clients to think they have achieved non-UK residence until and unless their status has been examined by HMRC. As the top rate of income tax in the UK rises to 50% next year so it will be even more important to be sure of whether or not someone has retained their UK resident tax status.

Bottom line. Nothing has changed here for months. The so-called new 'high net worth unit' in HMRC is simply the 'Complex Personal Returns' teams after many less complex taxpayers have been removed. These teams were originally established in 2002.

If you previously understood that you could become non-UK resident simply by ensuring that you limit your visits here to less than 90 days a year - think again. Would be tax exiles will need to decide how far they are prepared to go to justify a claim to non-UK resident status, to chance a long-winded expensive HMRC challenge or whether they are prepared to remain resident here.

Having said all that, if you are preparing a tax return for the year ended 5 April 2009 and want to check whether you can legitimately claim non-UK resident status, do get in touch with one of our expert tax advisers.

Tax avoidance scheme of the week 27 Nov

I wasn't intending to make this a weekly feature but circumstances have intervened!

This week though we're back in the UK - well almost. The scheme in question was one intended to avoid Stamp Duty. The amount of Duty at stake? £54 million.

This was the amount of Stamp Duty that would otherwise have been payable in 2003 when HBOS undertook a transaction with AIG. HBOS set up of a holding company in the Cayman Islands and, surprise, surprise, HMRC argued that this set up was nothing more than a “ruse to avoid tax”.

In April, Britain's first-tier tax tribunal allowed the bank to keep the proceeds of its "highly artificial" transactions. HBOS is of course now owned by Lloyds Banking Group, which is 43% state-owned.

The judge presiding over the case last month did not accept HBOS argument that setting up the overseas company was for commercial purposes. Instead he said that all the evidence shown to him confirms that the project arose from a marketed tax avoidance scheme.

I don't know but I suspect that this evidence includes correspondence and emails that refer to the tax advantages of using a Cayman Islands holding company.

Of course the promoters and probably the tax advisers and maybe even the auditors would all have been complicit in attempting to focus attention on supposedly business rather than tax reasons for basing a holding company in the Cayman Islands. It would be interesting to know how seriously anyone takes that assertion. And, even if it makes sense in the banking world it's hard to imagine any arguments that would sustain such a position in the the normal commercial world.

Some will say that this doesn't matter as tax motives are not (yet) enough to deny a taxpayer from the hoped for benefit of a tax avoidance scheme. We don't have purposive tax rules here. The Duke of Westminster rules (this being the classic case which established that a taxpayer may organise his affairs in any legal way he wishes so as to minimise tax. And that tax avoidance is perfectly legal.

The corollary is the more recently well established principle that, in any case where a predetermined series of transactions contains steps which are only there for the purpose of avoiding tax, the tax is to be calculated on the effect of the composite transaction as a whole.

The key question has become therefore, how does HMRC and the Courts know whether any steps have been inserted only for the purpose of avoiding tax? Well, clearly they will want to see all related correspondence including emails, paperwork and agreements related to the transactions in question. Many a tax avoidance plan can be quickly and easily struck down by examining such paperwork.

And I've long believed that the day was coming when we would see greater publicity given to the impact that such paperwork has on the outcome of tax cases. No doubt some promoters of tax schemes are explaining away the absence of marketing materials as a necessity to avoid(!) their scheme being struck down due to it's overt tax avoidance motives. As long as the promoters are slick salesmen or otherwise convincing professionals such an approach may work.

Of course it means there will be even less cause for complaint or recourse in the event that the scheme is blocked or the hoped for tax savings are reversed.

My final comment on this case is to flag, once again, the time scale involved. The transactions in question took place over 6 years ago. I wonder for how long all the parties thought the scheme had been successful......?

Tax avoidance scheme of the week

This week we highlight reports of the latest turn of events of a non-UK tax scheme as the amounts involved are just so huge. The scheme involves Switzerland's No. 1 private bank, UBS, which, in February agreed to pay $780m (£547m) to the US authorities to avoid a criminal prosecution for helping thousands of wealthy Americans avoid tax by hiding their money in secret bank accounts.

SwissInfo today contains a report titled: Spotlight falls on shadier tax evasion scams.

"The murky and sophisticated world of tax avoidance has been glimpsed in the details of a treaty to turn over UBS bank clients to the United States authorities."

In the summer, UBS agreed to reveal the names of thousands of UBS's rich U.S. clients to Washington to settle the tax-avoidance dispute. The request for such information was first reported around a year earlier in the New York Times: U.S. seeks client names in UBS tax evasion case.

Under US law, Americans are supposed to declare all foreign bank accounts containing more than $10,000. According to prosecutors, some 20,000 Americans had private accounts at UBS containing $20bn between 2002 and 2007. Some 17,000 of these accounts were concealed from the tax authorities.

So the scheme here was clearly more in the way of fraud in that taxable income was not being disclosed.

SwissInfo reports that:

UBS clients who used sham shell companies, disposable mobile telephones and credit cards to funnel cash into Switzerland will also come under the scrutiny of the Internal Revenue Service (IRS).

The Swiss government agreed a deal with the US authorities in August to hand over the names of 4,450 UBS clients following a confession from the bank that some staff had actively helped US citizens evade taxes.

Details of which names would be disclosed were kept under wraps until the end of a recent US tax amnesty.

A prime example, covered by the treaty, would be indirect ownership of accounts. In other words, clients who hid their identity behind overseas trusts, corporations or foundations – sometimes fronted by third parties – that sifted assets into Swiss bank accounts.

A US lawyer is reported to have warned that:

"even the most sophisticated methods of disguising identities and salting away undeclared cash could prove paper thin given the level of cooperation between the Swiss and US authorities."

"All codes are breakable and recent events [such as the UBS investigation and the Swiss-US disclosure deal] have shown that these holding agencies are extremely vulnerable," he said.

In the UK there is no exemption for any foreign bank accounts. Indeed HMRC's current New Disclosure Opportunity is intended to provide a final opportunity for any UK residents to tell the taxman about previously hidden foreign bank accounts. The deadline for notifying HMRC of your intention to make a disclosure is 30 November.

Equitable liability to become a statutory right

One of the challenges of writing this blog is that I'm unable to cover all areas of tax policy. One development that I chose not to address earlier this year concerns the concept of equitable liability.

What is it? It's a concession that can be applied by HMRC such that a taxpayer need only pay what is fair and reasonable despite legally owing much more than this. Thus, in certain tightly defined circumstances HMRC will, by concession, accept that only an ‘equitable liability’ be settled rather than the full amount of income tax or corporation tax that is legally due from a taxpayer. In agreeing an 'equitable liability' HMRC normally accept the evidence of time-barred returns, accounts, claims etc where there is a tax debt but no longer any legal right to adjust the liability. The amount of the legal liability is not actually amended, but HMRC will not pursue the difference between the original liability and the revised amount.

In May 2009 HMRC announced that they intended to withdraw this concession. Numerous representations were made in an effort to persuade HMRC and the Government that this was a bad decision. Taxation magazine published hard hitting arguments to this effect by Barrister Keith Gordon and by editor Mike Truman. The ICAEW Tax Faculty and the CIOT also made the point strongly.

I'm delighted to confirm that the protestations have been heard and that legislation is to be introduced such that the concept of equitable liability will become a statutory right. Earlier today I received a press release stating that the Government have told the CIOT that they will be legislating “at the earliest opportunity” to retain the practice.

Why am I now making reference to the issue? Partly it's a public admission that I should have addressed this earlier in the year. My mistake. It's also an opportunity to note that some campaigns are worthwhile and can effect revisions to decisions that appear to be fixed in stone. That's what has occurred on this occasion. I would expect however that the turnaround has occurred because of patient diplomacy by the professional bodies and the heavyweight articles in professional publications.