Time to Revisit Residence?

Richard Murphy FCA calls for simplicity when drafting proposals for possible revisions to  the rules governing residence and domicile

{mosimage}It might seem odd that during the middle of the credit crunch substantial effort is being given to the future definition of taxation residence in the UK, but I have good reason to believe that many of our professional institutes are doing just that at the moment.

I understand they are constructing a draft statutory basis for determining the residence of a person in the UK. I can see considerable merit in this work, but I hope they are doing so in what I would consider a responsible fashion. That is because in my opinion, the approach you adopt to the question of residence and domicile is a bit like the proverbial Marmite question. It creates clear and unambiguous divides between those involved in the debate.

First of all, do you go for simplicity or not? All the professional institutes have pleaded continually for simplicity and clarity in tax legislation. This would be possible with regards to both residence and domicile. But do the institutes dare embrace it? The obvious simplification with regard to domicile is simply to abolish the rule. We know it does not work; we know that the new rules in operation since April 2008 are flawed. Anyone who really believes in simplicity will scrap the domicile rule altogether. But that would be contrary to the best interest of some of the wealthiest people in our society, and of the accountants who serve them. Will the tax professionals have the courage of their convictions or will they seek to appease their clients?

Second, the same can be said with regard to simplicity when it comes to residence. Do we need the two existing tests? Is it possible simply to determine residence for single years in isolation? Is any aggregation over time necessary? Others do without it. Is a transitional arrangement for those arriving in the UK needed? If so, how simple can it be made?

Third, there is doubt at present as to just what the law is with regard to days of arrival and departure. What approach should the institutes take? The old one that we thought we enjoyed, that ignored both days? Or should we embrace in legislation a test that seems more appropriate, which counts only one of these two options as a day of residence, leaving the other out of charge? Wouldn't that be more equitable? And at a time when the UK needs every penny of taxation revenue it can get, shouldn't the institutes be supporting a sensible extension to the tax base of this sort? If they do not, what does it say about the location of their loyalty? How will the public perceive professions that argue that there should be tax laws which make it possible for the wealthiest to avoid liabilities when there will, without doubt, be increased taxation pressure upon many who live in this country on a permanent basis?

Fourth, and as importantly, how simple can record keeping be made to ensure that those on low incomes but who are seriously affected by any change in these laws, can comply with them without having to secure professional advice, or to inundate tax offices with enquiries as to their status? This appears to me to be a vital question when data from the Office for National Statistics suggest there might be some 7 million temporary residents in the UK and yet the number of high net worth non-domiciled people, on whom much of the debate has focused to date may now number, for tax purposes, in the tens of thousands?

My own position is clear. I believe that the institutes must have the courage of their conviction: they must go to simplicity. They must seek abolition of the domicile rule as part of that process. They must be seen at this moment to be supporting the UK tax base. There must be a bias as a result towards including people within the UK residence net, rather than excluding them. There must be measures which make it hard for a person to fall out of UK taxation if it cannot be proven that they have adopted taxation residence in another place. This must be part of a new process of supporting International regulation of finance in which the institutes must play a part. 

But most of all, this is a moment when the institutes must show that they can take the lead, not for the few who pay and reward the upper echelons of our profession but on behalf of society as a whole. Throughout the profession there will be disbelief and disquiet if what is proposed is complex, lengthy, a burden on the ordinary taxpayer, and indicates a failure to support the ordinary UK middle-income person who has suffered an excess burden from the tax system for too long.

Are the institutes up to the challenge? I hope so.

Article Added Friday, 24 October 2008

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