Low hanging fruit

HMRC has revealed that their Personal Tax International Group, the division which scrutinises high earning foreign executives often working in the City of London, collected £154m in the tax year 2013/14. This money was gathered from investigations into UK resident but non domiciled individuals (non-doms). Collections are up by 27 per cent on the previous year due to a number of reasons.

Spending paper trail

These executives are usually high earners; not in the realms of oligarchs and multi-millionaires, but wealthy in comparison to the average taxpayer. Often their personal finance involves multiple sources of income and gains in the UK and abroad. This means that there is a much bigger chance mistakes will be made on tax returns.

Non-doms must follow strict rules in order to benefit from the tax advantages of claiming to be a non-dom. For example they can elect to pay tax under an alternative basis of taxation called the remittance basis. This means that UK sources of income and gains are taxed as they arise, but foreign income and gains (FIGs) are taxable only if they are remitted to the UK. This is achieved by segregating sources of FIGs, but it is very easy to get wrong. HMRC knows that it is a common mistake for non-doms to use the wrong credit card, cheque book, or make a transfer between accounts and remit FIGs to the UK, which will result in a tax bill. Knowing this, HMRC will take a close look at non-doms' spending in the hope of finding the inevitable mistakes.

Multiple employments

HMRC continues the treasure hunt with employees who have multiple employments; one in the UK and the others abroad. This practice, commonly known as 'dual contracts', has had the intended result of splitting an employee's income so that some is taxed on an arising basis, and some (that part which is earned abroad) is taxed on the remittance basis.

HMRC is now beginning to challenge these arrangements in cases where there may only be one employment in reality, or where there may be foreign employment, but some of it is actually conducted in the UK. It is no secret that an executive's mobile phone will rarely leave his or her side, and it is all too easy to perform duties in the UK while being employed by a foreign employer.

Recent changes to legislation may make the use of dual contracts defunct where there are connections between the employments. Any executive with cross border duties should urgently have their financial arrangements reviewed.

Overseas relief

Non-doms with an employment in the UK and duties in several jurisdictions can claim overseas workday relief. HMRC has put significant resources into investigating these claims. In its original form the relief was available only to persons who were "not ordinarily resident" in the UK. The concept of ordinary residence has now been removed from the law but historically, if an employee intended to stay in the UK for less than 3 years, he or she would not be ordinarily resident. A non-ordinarily resident employee could claim relief on a proportion of his or her salary for those days worked abroad.

However, HMRC could check whether a claim of 'not ordinarily resident' was genuine by accessing employment records; a permanent contract could potentially undermine the claim. Living arrangements were also easily checked and UK property ownership, or leases over 3 years suggest a degree of permanence. Furthermore, the number of days claimed to be worked abroad could be verified using flight and Eurostar manifests.

Today overseas workday relief is still available for non-doms in their first three years of residency in the UK.

In short, the rules are complex, which means that mistakes are easily made and taxpayers can be careless or indeed deliberately negligent when preparing their tax returns. HMRC knows this and have shrewdly focussed their resources on areas that should generate the best return on investment.

HMRC have identified and are targeting the low hanging fruit. At first glance this might seem discouraging to foreign nationals moving to the UK, but the rules are generally advantageous to them as long as they are well guided in their tax affairs. Advice from a non-dom specialist is crucial.

Mark Davies is managing director of Mark Davies and Associates

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