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Mark McLaughlin CTA (Fellow) ATT TEP highlights recent guidance on claims for the remittance basis, and warns of anti-avoidance rules regarding 'constructive remittances' to the UK.

Mark McLaughlin

Introduction 

Practitioners may be aware that the ‘remittance basis’ (i.e. sums received in the UK for a tax year) for foreign income of individuals not domiciled or ordinarily resident in the UK must be claimed on an annual basis (ITTOIA 2005, s 878(2)), if it is appropriate in the circumstances. However, what is probably less well known is that there are anti-avoidance rules to deem foreign income to have been remitted to the UK in certain cases (all references are to ITTOIA 2005, unless otherwise stated).

Remittance basis claims

The normal basis for assessing relevant foreign income is the arising basis. The term ‘relevant foreign income’ was introduced in ITTOIA 2005 to replace those categories previously taxed under the ‘old’ Schedule D Case IV and V, which were largely indistinguishable in practice. It includes foreign source income such as trading and property business profits, overseas property income, interest and dividends from overseas companies (s 830(2)). Unremittable income (e.g. due to the laws of the foreign territory) is excluded from the definition of relevant foreign income, as it is subject to separate rules.

However, as mentioned a person who is not domiciled and/or not ordinarily resident in the UK may claim to be taxed on the remittance basis, unless that income arises in the Republic of Ireland (s 831). Claims can be made for 2005/06 and later tax years, even if that income arose before the 2005/06 tax year. No deductions may be claimed for expenses unless the income is from a trade, profession or vocation carried on abroad, in which case the same deductions can be claimed as if the activity had been carried on in the UK (s 832).

The Chartered Institute of Taxation recently issued a statement on making claims for the remittance basis, following discussions with HM Revenue & Customs (HMRC). There is no formal claim form for the remittance basis to apply. However, HMRC have confirmed that a claim will be treated as made if the Non-Residence and Foreign Income (i.e. page F2) supplementary pages of the self-assessment return have been completed, together with confirmation in the ‘Additional Information’ box on the return that the relevant income was not remitted in the tax year.

There is no specific deadline for submitting a claim, and HMRC therefore appear to accept that a claim can be made at any time up to five years from 31 January following the end of the tax year (TMA 1970, s 43(1)), as opposed to within the normal statutory deadline for filing returns. This longer period may be helpful in respect of earlier years if, for example, an individual’s domicile or ordinary resident status has only recently been established. However, it should be noted that the Non-Residence pages for 2006-07 have significantly changed. The questions asked of the taxpayer in those pages for the purposes of establishing residence and domicile status arguably provide HMRC with a greater opportunity to challenge claims for foreign domicile or non-UK residence status than in previous years.

Constructive remittances

Without specific anti-avoidance provisions, it may be possible (say) for an ordinarily resident but non-UK domiciled individual to take out a loan, spend the proceeds in the UK and make loan repayments out of foreign income not remitted to the UK. The rules on ‘UK-linked debt’ therefore apply broadly to tax relevant foreign income as constructive remittances when used to repay the following, in whole or part:

• interest or capital on a UK loan; or
• a non-UK loan received in the UK; or
• replacement loans.

For loans made outside the UK falling within the last two categories above, it is irrelevant whether the funds are brought into or received in the UK before or after the foreign income is used to repay them, as the anti-avoidance provisions still apply. However, for timing purposes, if the funds are not received in the UK until after foreign income is used to satisfy the debt, the date of receipt into the UK becomes the effective date for deemed remittance purposes, as opposed to when it was used to repay the debt. The rules apply t o individuals ordinarily resident in the UK, and therefore do not catch a non-UK domiciliary who is also not ordinarily resident in the UK.

Further provisions prevent the above rules being circumvented by indirect means. For the purposes of these rules, the borrower is treated as using relevant foreign income to satisfy a UK-linked debt if two conditions are satisfied. Firstly, the income is caught if the lender holds funds or property for the borrower, which is available to repay the debt (e.g. by offset). The second condition is that there is an arrangement between the borrower and lender whereby the amount of debt outstanding or the time of repayment depends in any way upon the amount or value held by the lender for the borrowing taxpayer (s 834). 

In addition to the above rules specifically relating to relevant foreign income, a remittance basis can also apply for employment income and capital gains tax purposes, in certain circumstances.