TaxationWeb by John Kavanagh
John Kavanagh, Chartered Tax Adviser, offers his initial reaction to a capital gains tax anti-avoidance measure announced in Budget 2005.The 2005 Budget contains proposals to prevent the possibility of using a double tax treaty to avoid capital gains tax on disposals during a period of non-residence from the UK lasting less than 5 full tax years.It was possible, however, to avoid that tax charge where, at the time the disposal arose, the individual concerned was resident for tax treaty purposes in another jurisdiction and the treaty provided that tax was only to be charged on the relevant assets in the country of residence. Belgium was frequently (although not exclusively) used because of its helpful tax treaty, its relative proximity and the fact that it did not levy capital gains tax. In this way, the necessary absence from the UK could be substantially reduced.
Law change
The Revenue has previously accepted that the 1998 rules do not apply in these circumstances. However, they now say that:• despite their earlier acceptance of the position, they now take the view that the rules were never precluded from applying;
• to put the matter beyond doubt, they are now going to change the law so that it is not possible to take advantage of treaty non-residence in this way.
The change in the law will also prevent an individual from side-stepping the temporary non-residence rules by contriving to be either resident or ordinarily resident in the UK while being treaty resident in another jurisdiction. Despite the fact that the Revenue says that it now considers that the temporary non-residence rules were not prevented from applying by the fact of treaty non-residence at the time of the relevant disposal, it does not have any plans to apply their change of view to past events.
Is it reasonable?
The Government's intention here, and elsewhere in the Budget, is to discourage taxpayers using double tax treaties to reduce their UK tax liabilities artificially. Is it reasonable in this instance? An individual may well move abroad in order to avoid a UK tax liability (and can still do so of course) but does the fact of doing so involve any artificiality? One can, perhaps, change the residence of a trust or a company in a manner which is arguably artificial but moving abroad, even for a year or so, is a reality which perhaps should be respected, even by our tax authorities.All of the artificiality in this instance is in the new tax rules. The disposal will have taken place when the individual was resident outside the UK but it is solely the statutory fiction provided for in the temporary non-residence rules which treats it as arising on his return to the UK when he is once again resident. Shouldn't the treaty be applied at the time of the disposal, not at some later time which just happens to be convenient to the Revenue?
The interpretation of treaties is a matter of international law, which overrides domestic law, and it is not impossible that the new rules would be found wanting on that basis. But the fact of the matter is that the mere existence of these new rules may well reduce the number of tax tourists to Belgium to zero, with the consequence that there is every possibility that the legality of these amendments will never be challenged...
17 March 2005
John F Kavanagh CTA FRSA MIoD Cert PFS
Director, UK TAX CONSULTING LIMITED
Chartered Tax Advisers
UK Tax Consulting Limited was founded in 1999 by John Kavanagh who has 20 years of experience in nearly all aspects of taxation gained partly within the Inland Revenue but mostly in public practice. The company provides specialist tax consultancy and compliance services to private clients, businesses and to other professional firms, especially accountants and lawyers.
John qualified as a Chartered Tax Adviser in 1990. He worked for a “big 4” firm of accountants for 7 years, spent several years as a specialist tax partner with a top 30 firm and more recently was a board director of a specialist tax consultancy firm in the City.
John has written many articles on various aspects of UK and international tax, mainly for the professional press including the Journal of International Taxation and industry journals. John has also lectured and spoken frequently on taxation matters, mostly to business audiences.
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