Who wants to be a non-dom?
23 September 2010
There has been a lot of publicity recently on the tax-breaks enjoyed by non-domiciled persons. But, if you think you're a non-dom, how can you get the Revenue to agree to this?
Until Self-Assessment in 1994, it was usually possible simply to write to the Inland Revenue and ask for a ruling as to your domicile status.
In 1994 that practice was phased out, although if you were lucky you might find a tax inspector who would still give you a ruling. However, since about 2000, the Revenue would not rule on your domicile status unless some tax was at stake. Consequently, if you wanted to get a ruling it was necessary to trigger a small tax liability. There were typically two ways to do this:
(a) Earn interest on an offshore bank account. Disclose this on your tax return, but claim that it is not taxable because you are a non-dom; or
(b) Set up a trust with just over the inheritance tax-free band. Claim non-dom status on the inheritance tax return.
Both of these routes triggered a small tax liability and forced HMRC to take a view. Alternative (b) was more expensive but would usually produce a much quicker answer, particularly early in the tax year.
At some point around the end of 2006, however, there was an apparent change of policy within HMRC and it became increasingly difficult to get a ruling from them. Eventually that apparent change of policy was formally announced when the Revenue published detailed guidance in spring 2009.
This guidance allowed you to decide for yourself whether or not you were domiciled in the UK. If you decided that you were a non-dom, then you didn't have to submit a tax return to the Revenue. However, if you did, then the Revenue would only open an enquiry into that return if they thought enough tax was at stake (your inheritance tax bill would have to be over £10k).
So what's changed?
The Revenue published new guidance this summer which limits the circumstances when they will be able open an enquiry into your tax return, to only where there is a good chance that there will be a loss of UK tax.
In order to decide this, the Revenue say that they will look at a wide range of factors, including personal information about you, such as your lifestyle and background. The Revenue haven't quoted an amount of tax that has to be at stake, as they say that this is only one factor they will consider when choosing to open an enquiry.
The Revenue have also pointed out that they will keep the factors in mind when carrying out the enquiry, and may decide to stop it at anytime when it would not make financial sense to continue.
This new guidance could make life very difficult for non-doms. First it will be more difficult to get a ruling out of HMRC. And second, even if you can force HMRC to look at the position, this is now likely to involve a much more searching investigation of your personal affairs. Also, it does seem odd that HMRC may turn down tax that is legally due to them by limiting the circumstances in which they can carry out an enquiry. But what with the Revenue's staffing cuts, this was inevitable.
Phone a friend?
If you are unsure how to go about deciding whether or not you are a non-dom, you could:
1. Get an opinion from a tax advisor. Burges Salmon would, of course, be delighted to help with this;
2. As was common practice under the old rules, trigger a tax liability of a bigger amount - our current best-guess of what this might be is £50k. But it's hard to tell whether this will be enough to force HMRC to look at your case; or
3. Trigger a tax liability in £10k steps (eg. by adding property into a trust in £25k steps) until HMRC take a view!
For further information contact John Barnett, Michael Evans or Beatrice Puoti.