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Matthew Hutton MA, CTA (fellow), AIIT, TEP, highlights a potential problem and possible solution for those wishing to use the remittance basis following the changes introduced by Finance Act 2008.

Introduction

A very important point was made at a recent STEP Non-Dom Conference re: nomination for the £30,000 tax. 

First, a nomination has to be made if electing, even if it is only £1 but then, if any income that is nominated is remitted, all future remittances thereafter (not just for that tax year) are treated as coming from a mixed fund pool of all unremitted income and gains on the ‘worst first' paid out rule, i.e., all unremitted income falls within one pool only.  Nor is there any reduction of that pool for money spent offshore or even given away.  That is the dire consequence of remitting any nominated income.

The best solution, where the taxpayer does not need the double tax relief for the £30,000, is to nominate one pound each year only - you do not need to nominate any more - and keep the fund that produces that each year entirely separate with never any remittance out of that fund, so it allows you to nominate £1 each year of unremitted income from that fund.

The authority for this is ITA 2007 s 809I. 

(Contribution from Michael Jepson of MJ Tax Consultants)

Comment

This was a warning raised by Simon Jennings of Rawlinson & Hunter at the STEP Non-Dom Conference on 7 July.  The point made in the first sentence of the second paragraph would apply until all the income and gains arising in that year had been taxed by virtue of the remittances (even if after the year of arising).  The real sting of course is what is noted in the subsequent sentence.

The big danger is surely that if all the income and gains in a given year have to be brought back to the UK and only £1 of income/gains has been nominated, there would in effect be double taxation in the amount of £30,000.

One fundamental issue is whether or not the individual is likely to want, and be able to get, credit relief under a double tax treaty. However, this depends on the answer to the following question.  Where HMRC deem offshore income and gains to have given rise to the balance of the £30,000 tax, it is generally assumed that to the extent that income or gains have not been specified, the tax paid would not be available (even if they were real income or gains) for credit under a double tax treaty.  However, it has been suggested that at this stage treaty relief cannot necessarily be ruled out simply because the foreign income and gains have been nominated by HMRC rather than the taxpayer.  For example, either the other jurisdiction may not require the identification of specific income before credit is available or alternatively, if all the deemed nominated income falls into the same ‘basket' for local tax purposes as the income on which the tax credit is sought, there may not be an issue.  We must simply wait and see.

Is the point intentional or simply an oversight which could be corrected by FA 2009?  It appears, albeit perhaps only anecdotally, that it is intentional, on the footing that the Parliamentary draftsman had told ministers that that was the only way he could see to reflect their instructions. 

Finally, as to the continuing issue as to the terms on which the IRS will give treaty relief for tax paid on nominated income or gains under FA 2008 as enacted, nothing has been confirmed.  Clearly the Skadden Arps Memorandum produced at Budget 2008 has simply been overtaken by events.

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