In this month's Tax Clinic, Malcolm Finney considers the Remittance Basis for non-Domiciled or non-Resident Individuals, Using non-UK-Resident Companies, Can the IHT Annual Gifts Exemption be Carried Back, Is Business Entertaining Ever Allowable, and Mileage Allowance Paid by the Employer or Claimed from HM Revenue & Customs

Non Domicile Remitting Savings Before 7 Year Deadline

In his query non Domicile Remitting Savings Before 7 Year Deadline raised by “Roger7777” and the similar query raised in non-Domicile Unremitted Funds raised by “jtinlondon”, the difficulaties arise out of the significant amendments made in FA 2008 in relation to non-UK domiciled but UK resident individuals. The first tax return for the tax year 2008/09 in relation to the new rules is due by 31st October 2009 or 31st January 2010 depending upon whether the return is “paper” or “on-line” respectively. Not only is the non-UK domiciliary faced with getting to grips with the new statutory rules but he or she also faces completion of a significantly amended return.

Roger7777’s query concerned the UK taxation position if and when certain offshore monies are remitted to the UK, and how this works with the newly introduced “7 year rule”. As pointed out by contributor “TN” the “7 year rule” refers to the imposition of a so-called remittance basis charge (RBC) of £30,000 per tax year, as and when a non-UK domiciled individual has been UK resident for 7 out of the previous 9 tax years and opts for the remittance (as opposed to the arising) basis to apply to offshore generated income/gains. Thus, for Roger7777, the 7 years were breached effective 6th April 2009 and not from October 2009 as thought.  As a consequence, a remittance of offshore monies cannot now be effected before the 7 year deadline applies (as it already applies).

However, as contributor “Maths” suggests all is not lost. He points out that a distinction needs to be made between offshore monies generated pre 6th April 2008 and those generated thereafter.

Pre April 2008 monies generated whilst non-UK resident constitute “pure capital”, and can be remitted to the UK “tax free” whether the £30,000 remittance basis charge is paid for 2009/10 or not. Even income/gains generated pre April 2008 whilst UK resident may also be remitted without a UK tax charge arising with careful planning (e.g., gifting).

For ‘post April 2008 generated offshore monies’, the UK tax position is radically different (due to the FA 2008 amendments) but some flexibility still remains for tax effective planning to be carried out.

Jtinlondon’s query raises an interesting point also involving the application of the new FA 2008 remittance provisions.

The “below £2,000” rule (referred to by jtinlondon) effectively permits the remittance basis to automatically apply, (i.e., no formal claim necessary), to a non-UK domiciled’s offshore monies without the need to pay the £30,000 RBC (referred to above) even after the 7 out of 9 tax year test is satisfied. All that is necessary is that for the particular tax year, (e.g., 2008/09), the quantum of “unremitted offshore income/gains” for that tax year falls below £2,000. In jtinlondon’s situation, however, it seems that the 2008/09 income/gains unremitted fall below £2,000 only after the deduction of offshore capital losses. Whilst capital losses may in principle be offset against capital gains in calculating capital gains tax liabilities, this is not permitted in ascertaining if the “below £2,000” test is satisfied. Thus, unfortunately for jtinlondon, the “below £2,000” test is not satisfied and a formal claim for remittance basis treatment will be necessary (and, in addition, the £30,000 RBC may need to be paid and a capital loss election may also be necessary).

Contributor “Barry Hallam” also points out that under the FA 2008 rules any offshore monies for the tax year which are spent outside the UK are thus not remitted to the UK. In such cases this may make satisfaction of the “below £2,000” test impossible.

UK Dom & Residence & BVI Company

The use of tax haven companies (e.g., the British Virgin Islands) must be a tempting option to those UK residents wishing to avoid UK income/corporation/capital gains tax. Prima facie, “thodge78”has attempted to use such a company, in UK Dom & Residence & BVI Company.

It is true that if, for example, a UK resident individual owns 100% of a tax haven company, that the individual and company are two separate taxpayers for UK tax purposes. If the company is not UK resident and does not carry on a trade within the UK then in principle no UK tax is payable on the company’s profits.

In practice, however, ensuring the company is truly not UK resident can be extremely difficult in these circumstances. To achieve non-UK residency the company’s “central management and control” (broadly, management and control at board of director level) must be exercised outside the UK. The use of local so-called “nominee directors” who supposedly are carrying on the company’s business but who, typically, simply carry out the instructions emanating from the majority shareholder in the UK, will be regarded by HMRC as UK resident and thus exposed to UK corporation tax on worldwide income; hence, no UK tax saving is achieved.

Even if non-UK residence of the company is achieved UK tax may still be levied on the company’s profits if the company trades within the UK; any form of UK activity connected with the company is thus likely to precipitate a UK corporation (or UK income) tax charge on profits.

The above may well apply in the current situation as indicated by contributor “maths”.

Even if the above hurdles can be surmounted a very powerful set of anti-avoidance provisions (contained in ITA 2007 Part 13 Chapter 2 “Transfer of Assets Abroad”) is likely to apply, pursuant to which the company’s profits are simply imputed to the UK resident shareholder and taxed on him/her just as if the profits belonged to the shareholder in the first instance.

The use of offshore companies by UK domiciled and UK resident individuals is fraught with dangers and professional advice is a must.

Annual Exemption (Carry Back??)

In his query Annual Exemption (Carry Back??), "DavidHC" asks whether, for Inheritance Tax purposes, the unused element of the annual exemption (i.e., £3,000 per tax year) in respect of a tax year can be carried back to an earlier tax year and offset against a gift made in that earlier preceding tax year.

In the instant case, £9,000 cash is gifted in, say, tax year 2008/09 and the issue is whether this £9,000 can be covered by the annual exemption of 2007/08, 2008/09 and 2009/10 assuming no other gifts were made in the tax years 2007/08, 2008/09 and 2009/10.

In short, as contributor Lee Young points out, the answer is “no”.

If the annual exemption is not utilised in a tax year (e.g., 2007/08 in the above case) it can be carried forward for one tax year only (i.e., in this case to 2008/09). Thus, in 2008/09, effectively the aggregate annual exemption available is the £3,000 from 2007/08 plus the £3,000 re 2008/09 (i.e., £6,000 in total). However, the unused £3,000 in respect of 2009/10 is not available for utilisation in 2008/09 and thus, of the £9,000 gift made in 2008/09, £6,000 is exempt with the balancing £3,000 treated as a Potentially Exempt Transfer (i.e., a PET).

As the above shows, the annual exemption of £3,000 may be deducted from a larger gift (i.e., the exemption does not mean only £3,000 or less may be gifted). Where more than one gift is made in a tax year, the exemption is in principle offset against earlier gifts first.

Business Entertaining

“Whatdoiknow” raises the hoary old chestnut regarding the tax deductibility of "Business Entertaining"

In short (as confirmed by contributor “RAL”) business entertaining is not deductible in computing trading profits, for either income or corporation tax purposes. The term “business entertaining” is defined as including hospitality of any kind which extends to the making of gifts, albeit some gifts which are inexpensive (i.e., £50 per annum) and carry an advertisement in respect of the donor’s business are in fact tax deductible (e.g., calendars).

Expenses incurred in relation to the entertainment of employees are also tax deductible although this is not so where their entertainment is incidental to the entertainment of others (e.g., customers). Thus, in relation to the query posted, the cost to an employer of, say, two or three employees and ten or so customers drinking will not rank as tax deductible for the employer.

As for the employees, in general no tax liability arises on their part when they entertain for business purposes, although if the costs involved are excessive such a charge is likely to arise. The entertaining of staff themselves is generally a 'benefit in kind' but there is a £150-a-head per year de minimis which applies to annual events.

Business Mileage Allowance

“High.pressure”s query and contributor “robbob”s response concerning Business Mileage Allowance from employers illustrates an interesting point.

The issue raised involved a comparison between payments received by high.pressure’s existing employer versus that offered by a new employer.

Where an employee uses their own vehicle on business it is usual for their employer to reimburse the employee for the costs involved. However, whilst the employer may dictate the quantum of any reimbursement, HMRC lay down what are referred to as “approved mileage allowance payments” (i.e., so-called AMAP) in the form of a rate per mile. For 2008/09 and 2009/10 these rates are 40p per mile for the first 10,000 miles in the tax year and 25p per mile for each mile in excess of 10,000 miles.

Should the employer pay an amount in excess of the AMAPs (which in fact would be very unusual) the employee will be subject to income tax on the excess element. Where the employer (typically) pays less than the AMAPs the employee may lodge an expense claim for the shortfall. Prima facie, this may appear to result in the employee’s tax position being identical irrespective of the amount of the employer’s actual payments.

As contributor robbob’s comments show, this is not the case and indeed an employee will be “worse off” where the employer pays below the AMAPs.

Example

Assume two employees each travel 50,000 business miles in a tax year.

Employee A’s employer pays at the AMAP rates whereas Employee B’s employer pays 15p for the first 10,000 miles and 10p for each mile in excess thereof.

Employee A
Receives cash of 10,000 @ 40p plus 40,000 @ 25p i.e., £14,000.

Employee B
Receives cash of 10,000 @ 15p plus 40,000 @ 10p ie £5,500

But B can also claim as a tax deductible expense the shortfall of:
25p on 10,000 plus 15p on 40,000 ie £8,500 which at 20% is worth £1,700 and at 40% is worth £3,400 providing a total of £7,200 (if a 20% taxpayer) or £8,900 (if a 40% taxpayer).

So in total, B will get either £7,200 as a 'Basic Rate' taxpayer, or £8,900 if a 'Higher Rate' taxpayer.

Thus, either way, Employee B is significantly “worse off” than Employee A.

Article Added Sunday, 02 August 2009 | 5038 Hits

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