Finance Bill Tracking Service 2009 | Budget 2009

BN55 THE REMITTANCE BASIS: MINOR AMENDMENTS

Who is likely to be affected?

1. Individuals who are resident but not domiciled, or not ordinarily resident, in the UK for tax purposes.

General description of the measure

2. Individuals who are resident but not domiciled or not ordinarily resident in the UK have the option of using the remittance basis of taxation. This allows them to pay UK tax on their foreign income only when it is brought into the UK, rather than on the arising basis of taxation which taxes their worldwide income as it arises.

3. Finance Act 2008 introduced significant changes to the remittance basis regime which became effective from 6 April 2008. Following detailed consultation with external stakeholders, Finance Bill 2009 will introduce further minor changes to these rules. These are designed to make the rules simpler to operate in practice and to ensure the legislation effectively delivers its policy objectives.

Operative date

4. The changes which apply to individuals with small amounts of overseas employment income, individuals with less than £2,000 of unremitted foreign income and gains for a tax year, individuals with no UK tax liability and no remittances in a tax year, exempt property and Gift Aid donations will have effect on and after 6 April 2008. The remaining changes will have effect on and after 22 April 2009.

Current law and proposed revisions

Individuals with small amounts of foreign employment income

5. Individuals employed in the UK are currently required to file a Self Assessment tax return if they have also received income from overseas employment in the same tax year. This is the case even where there is little or no tax to pay in the UK because the overseas employment income has already been subject to tax in the other country.

6. This obligation to file a return will be removed with effect from 6 April 2008 where such individuals have overseas employment income of less than £10,000 and overseas bank interest of less than £100 in any tax year, all of which is subject to a foreign tax.

Exempt Assets

7. There are currently a number of exemptions which allow an individual using the remittance basis to bring property into the UK which has been purchased from relevant foreign income (broadly speaking income from overseas investments and savings) without triggering a liability to UK tax.

8. The scope of these exemptions will be extended with effect from 6 April 2008 to include property purchased out of foreign employment income and foreign chargeable gains as well as relevant foreign income.

Application of the Remittance Basis Without a Formal Claim

9. In most cases, individuals who wish to use the remittance basis of taxation are required to make a formal claim to do so through the Self Assessment process. However, no such claim is required where an individual has unremitted foreign income and gains of less than £2,000 in any tax year. In such cases it is assumed that the individual has chosen to use the remittance basis.

10. Following representations that the current rules are not clear on this point, the legislation will be amended to put beyond doubt that a claim will not be required in these circumstances. The effect will be that the individual will be treated as having used the remittance basis unless they notify HM Revenue & Customs (HMRC) that they wish to be taxed under the arising basis. This will apply from 6 April 2008.

11. The situations where a claim will not be required will also be extended to cover cases where an individual has total UK income or gains of no more than £100 which has been taxed in the UK, provided they make no remittances to the UK in that tax year. This extension will also come into effect from 6 April 2008.

The Remittance Basis and the Settlements Legislation

12. The new remittance regime includes transitional provisions which prevent certain income which arises before 6 April 2008 from being taxed as a remittance if it is brought to the UK on or after that date. These provisions will be extended to ensure that they operate as intended in their application to individuals who are taxed under the settlements legislation in Chapter 5 of Part 5 of the Income Tax (Trading and Other Income) Act 2005.

13. Legislation will also be introduced to clarify the interaction between the remittance basis regime and the tax rules which apply to settlements which are settlor-interested.

14. The first of these changes will have effect from 6 April 2008 and the second will come into force on 22 April 2009.

Gift Aid donations

15. The Gift Aid provisions in Chapter 2 of Part 8 of the Income Tax Act 2007 (ITA) allow charities to claim tax relief on any gifts of money from individuals, provided the donor has paid sufficient UK income and capital gains tax in the tax year in which the donation was made. In situations where the donor pays tax on the remittance basis, and is required to pay the £30,000 Remittance Basis Charge under section 809H of ITA, it was always the intention to treat the £30,000 in the same way as other types of income tax or capital gains for the purposes of Gift Aid. Finance Bill 2009 will amend the remittance basis rules to ensure that tax relief under Gift Aid is available in such circumstances.

16. This change will have effect from 6 April 2008 .

Anti-avoidance provisions

17. Section 809M of ITA defines 'relevant person' for the purposes of the remittance basis and includes participators in a close company as defined by reference to sections 414 and 415 of the Income and Corporation Taxes Act 1988.

18. However, the term 'participator' is not itself defined and it is not made explicit that references to a close company includes subsidiaries of companies. The legislation will be amended, with effect from 22 April 2009, to clarify the scope of the terms 'participator' and 'close company' and remove the potential for abuse.

19. Section 809Z5 of ITA applies in circumstances where property is purchased out of overseas income and gains and forms part of a larger set, such as a series of linked artworks or a stamp collection, and only individual items are brought into the UK. This statutory rule is intended to apply more widely when determining the value of such items for the remittance basis.

20. To remove any uncertainty, and to remove the potential for abuse the legislation will be amended to make clear that the rule currently in section 809Z5 applies in all cases where individual items from a larger set are purchased out of overseas income and gains and brought into the UK. This change will have effect from 22 April 2009.

21. Draft legislation and explanatory notes covering these anti-avoidance provisions have been published today on the HM Revenue & Customs website. Not ordinarily resident employees and HMRC Statement of Practice 1/09

22. On 18 March 2009, HMRC issued a Statement of Practice 1/09 which sets out how they will treat transfers made from an offshore account which contains only the income relating to a single employment contract, and how earnings should be apportioned between UK and non-UK employment where an employee is taxed on the remittance basis. This replaced the earlier Statement of Practice 5/84 which was withdrawn with effect from 6 April 2009.

23. The Government will legislate Statement of Practice 1/09 in Finance Bill 2010, to allow for a period of consultation with external stakeholders on the most effective way of doing so.

Further advice

24. If you have any questions about these changes, please email offshorepersonal.taxteam@hmrc.gsi.gov.uk or telephone 020 7147 2762. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk