Enter Your E-mail

John Andrews of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk/ ) highlights the problems faced by low-income foreign students and migrant workers coming to the UK, when dealing with the UK tax system

Introduction

LITRG has tried hard to defer the changes the Government propose to the way in which low-income migrant workers and students are taxed in this country. But in June, at the committee scrutinising the Finance Bill, the Government rejected any change.

If you are a foreign student or worker you are now reliant on guidance from the Revenue to work out your tax obligations. A Government Minister has promised that the Revenue will provide “simple, non-technical explanations of the concepts and rules”.

We have spent some time on this website on the tax issues facing temporary visitors to the UK. We have done so because we do not feel that sufficient attention has been paid to the problems faced by those on low incomes as the debate has mainly raged about taxing the wealthy (or at least high earning) foreigner coming to the UK to live or work (the so-called “non-doms”).

We have also had a series of meetings with the Treasury and HMRC, but we have failed to persuade them that the law in the Finance Bill (and the required processes flowing from it) is too complex to explain to the people who need to know.

We wanted to defer the provisions for a year, so that we could get something easily understood in place.

Who needs to know the law?

Two groups who particularly need to know the law are those who come to the UK from overseas to study or to work. Mainly this will be people of foreign domicile.

What do the Government want?

In broad terms the Government do not want those coming from overseas to have any significant tax benefits from being in the UK compared with the long-term British citizen. We do not challenge this policy; that is a matter for Government. What we do challenge is the complex and potentially costly way they are going about it.

Temporary visitors to the UK do not change their whole lives when they come to the UK to work or study for the short term. They keep their overseas home, if they have one, together with overseas bank accounts. They may go back and work there periodically or draw income from a let property. They may leave parts of their closest family back home.

Our tax system was not designed around such people, particularly those on a low income. The new rules make it a labour-intensive exercise, for both the migrant and the tax authority, to ensure that the strict tax law is followed. And these are people who do not have the funds to pass on the burden of understanding these complex rules to a tax adviser.

Why HMRC systems are not up to the job

PAYE is an efficient collection system and produces, most of the time, a good approximation of someone’s tax liability. This can remain undisturbed year on year. What it cannot do, certainly in the way it is currently operated by HMRC, is to cope with things that are out of the ordinary.

The temporary migrant is out of the ordinary, unless they immediately fit into the pattern of HMRC’s view of the model UK citizen with all their income and assets within the UK.

Therefore, to date, anyone who has overseas income, and (like other British citizens) is taxed on it in the UK gets put into Self-Assessment (SA). Many people in SA pay tax agents to help them.

To go into SA as soon as you arrive in the UK is a daunting experience. The way we do it is quite unlike in any other part of the world.

For a start we have the tax year going to 5th April; we have filing dates in October and January, depending on how you file; we have a three instalment collection procedure and, if you have overseas income you have hundreds of pages of quite unintelligible guidance to understand (even if English is your first language).

The ‘remittance basis’

Under the so-called 'remittance basis' the visitor to these shores may be exempt from tax on their income generated overseas, provided it stays overseas and the benefit is not, in some way, enjoyed in the UK. The alternative is that they pay UK tax (subject to relief for tax already paid ‘back home’) on their worldwide income.

If they do opt for the remittance basis, as soon as they arrive in the UK they forfeit their personal allowances and capital gains annual exemption. Only those people with non-UK income of £1,999 or less which they keep overseas are outside this new law.

So even if the new arrival with some overseas income does what HMRC would like them to do, and submits to tax on their worldwide income, there is very little chance of them getting it right without lots of help from somewhere.

This is all very well for the targeted ‘non-doms’ who can afford to pay for advice. But we are concerned about the effects of the new law on migrants who are on “poverty” incomes, therefore not able to pay a tax agent, still less one who is comfortable dealing with issues of foreign domicile and the remittance basis.

The low-income migrant must therefore rely upon HMRC for all of their knowledge.

Why HMRC must now invest heavily and soon

The law to which we refer is, in effect, retrospective in that it will be treated as in force since 6 April 2008, despite its only just having passed into law, and there being some uncertainty as to how it will really operate in practice. It is quite possible that someone covered by this new law will have done something against their own interests since that date, without knowledge, because no-one has advised them otherwise.

The potential numbers of low income people affected by this law are in the millions. The tax which is at stake is much less, because very many of the people under review pay tax in an overseas country already or are below tax thresholds.

But HMRC are obliged to enforce the law; they are also morally obliged to explain that law to those residents in the UK who might be affected by it.

In the House of Commons the Financial Secretary to the Treasury said:

“Questions have been asked about HMRC’s ability to cope. Although the new rules will apply from 6 April this year, it is important to remember that individuals will not need to make a claim to the remittance basis for this tax year until after April 2009 at the earliest, and the first filing date for paper returns will not be until 31 October 2009. There is time, therefore, to put in place new procedures and resource, as needed, to ensure that HMRC administers the new rules effectively.

HMRC is updating all the guidance on residence and domicile, and there will be several layers of guidance including material aimed at providing simple, non-technical explanations of the concepts and rules.”

That is all well and good, but the people affected need to know now what the law is so they can take conscious decisions as to how to organise their lives to avoid complexity and additional liability. They do not want to get involved in SA. A new batch of international students will arrive very shortly and the new wave of agricultural workers is already out in the fields of East Anglia.

This is a real test for HMRC. Following the approach of the Minister above, they will have to communicate with every non-domiciled individual in the UK with income or assets outside the UK to establish whether they should enter the SA system. A migrant failing to do so might break the law and face penalties.

HMRC have been trying to reduce the number of people entering SA, especially those who need support, so will they quickly devise ways in which these people can stay within PAYE but be able to tick a box to indicate that their additional tax liability is too small to worry about?

If HMRC do that for this group of taxpayers, will they extend it to other groups who get thrust into SA whilst being on a low income?

Time for HMRC to put their money where their mouth is

Throughout the debates on the new law (and their application of the existing law) the HMRC/Treasury position has been that there really isn’t a problem. They have the ability to reach out effectively to inform all migrants to the UK of their obligations and to give them guidance in writing, over the telephone and if necessary, face to face.

So now is the time for HMRC to do that. We will, of course, be here to help them review their draft material, because we want those on low incomes to get the best help possible.

But we also put down a marker; we shall fight any cases we see where the compliance parts of HMRC try and levy penalties or retrospective liabilities on migrants who were not individually reached by this new guidance.

We shall also be “mystery shopping” into HMRC helplines to review the standard of advice given and we will publish the results.

Oh and by the way, please HMRC, explain to those same migrants that the tax credit rules for taking into account overseas income are completely different.