Wednesday, 30 March 2011

Statutory Definition of Residence Theoretically Good News for Expats

The Government has announced that it will consult on the introduction of a statutory definition of residence to provide greater certainty for taxpayers.

This statutory definition of residence is theoretically good news for expats as we will now discuss – however, let’s not get too excited just yet, because we have yet to see how the definition will actually be defined!  Also, what impact might it subsequently have?  Everyone is hoping that a clarification of the rules will be a good thing – but what if the rules change for the worse? 

As most British expats are aware, when you leave the UK for good you should advise HMRC that you’re no longer resident so that they can assess you for taxation purposes accordingly.  You can fill in form P85 if it’s relevant to your situation – and in theory, as long as you meet the following HMRC defined guidelines, you should achieve non-residency status, and therefore theoretically not be liable for UK taxation on your income: (note, plenty of exceptions to this exist, so do not ever assume you’re not liable for UK tax – speak to an accountant!!): -

“Normally if you leave the UK to work abroad full-time, you will become not resident and not ordinarily resident in the UK if:

- your absence and employment from the UK covers a complete tax year (that is 6 April to 5 April)

- you spend less than 183 days in the UK during the tax year

- your visits to the UK do not average 91 days or more a tax year over a maximum of four years

From 6 April 2008, days when you are in the UK at the end of the day, that is midnight, are normally counted as days spent in the UK.”

However, as mentioned, there are exceptions to these guidelines – and they are guidelines only, not constitutional and legally enforceable rules – and therein lies the current problem for all British citizens!

There is no legally defined set of rules that have been tried and tested and proven in a court of law to say what constitutes residency in the UK.  All we have are documents such as IR20 – which was replaced by HMRC6 – and the results of a few fairly high profile court cases where IR20 and HMRC6 have been called into question.

Theoretically, if you fulfil the above detailed criteria you are unlikely to be investigated for non-payment of British taxation as you are indeed non-resident.  However, if HMRC decides it would actually like to investigate you and claim tax off you, it currently can. Google the case of Robert Gaines-Cooper if you want to read more about this.

So, in the budget last week it was announced that the government is finally going to consult on introducing a statutory definition of residence that will remove all confusion, and ensure that it is very easy to see whether you’re resident or non-resident – and therefore liable or not liable for taxation in the UK, (that is putting it quite simply, because there are times when even a non-resident is liable for taxation – such as on gains made on a UK asset if it is sold within a certain amount of time after you have become non-resident for example!).

The idea put forward is that the statutory definition of residence will be consulted on over the next year, and if an agreement can be reached, it will be implemented in April 2012.

On paper this is great news for British expats everywhere as they should then very easily be able to meet the residency/non-residency rules and simplify their position for tax purposes accordingly.  At Shelter Offshore we very much welcome any simplification when it comes to taxation for expats!  It’s been too wishy washy and confusing for too long.

However, before anyone gets too excited, the rules that could potentially be defined may be strict, harsh, difficult and overwhelmingly negative for expats.  We have already seen that this government will do anything to claw cash back from every member of society, and so surely, if it can include more people within its tax net it will do so.  Therefore we think expats should be wary of what may come next.

Of course, we hope that the government will simplify everything and ‘just’ make the current HMRC guidelines law…but we’re not going to hold our breath.  Watch this space for updates on this story as they become available…and please remember, you really should seek the support of a qualified international taxation expert or accountant if you have complex financial/taxation affairs and you’re not sure about residency rules and how and where you may be liable for taxation.  Never assume you’re not liable, because when it comes to tax, ignorance of your position is not an excuse if you fail to make payment.

Tuesday, 22 March 2011

Tax Question....If a director pays himself £7,068 on 6 April 11, and then nothing for the rest of the year, does he have to pay tax/NIC in May?


If a director with tax code 747L pays himself £7,068 on 06/04/11, and then nothing for the rest of the year, does he have to pay tax/NIC's in May?


Techically yes....

There should be an up-front PAYE bill for the tax (no NIC's as it is calculated on a cumulative basis for directors) followed by monthly/quarterly refunds by the company to the director on his net pay. At the end of the tax year he would have to offset it against any other tax he owes when he does his self assessment return or claim a rebate. Alternatively the company could ask for a PAYE rebate as they would have overpaid for the year but this is likely to take a while and may well be queried, attracting unwanted attention.

HMRC used to do annual PAYE schemes in such cases where they wouldn't hassle you with pink reminders every month but I'm not sure if they still do them. Even if they do, could you avoid a surcharge for a late PAYE payment under the new regime? Probably if you appealed, but I wouldn't count on it, as I believe the annual schemes were meant for year end salaries, not up-front payments or monthly/quarterly ones.

Hard to see how HMRC would ever find out about it anyway as there is no need (yet) to disclose when someone is paid. Obviously that would change if RTI comes in next year as planned. Even if the client had a PAYE visit, it would probably not get picked up as they tend to focus on payroll, bank statements, credit card bills and expense claims. If it just goes through loan account to clear a debit balance they would probably never know.


Saturday, 19 March 2011

Income Tax & NIC merger plus Small Business Tax changes

 Pensioners may be penalised

Next week’s budget will make various changes to the current tax system. If the proposed simplification proposals for merging income tax and National Insurance (NI) are implemented, retired people and those living off savings stand to lose out as they do not currently pay NI. Unless specific allowances are made for pensioners they are likely to lose out.

Flat-rate tax for small businesses

The recommendation for a flat-rate tax scheme to help small businesses would be difficult to implement fairly and could ultimately create a more complicated tax structure.

Any flat-rate scheme will require HMRC establishing an “average” tax rate that will be applied to small businesses. Some businesses will benefit and others will lose out, so to be fair there would have to be many flat rates, and this could ultimately be quite complex.

If the government introduces a voluntary scheme, small businesses will have to decide for themselves whether or not it is financially worthwhile joining. Small businesses would be wise to seek advice before making any decisions.

Flat-rate tax is a good idea in theory, but as we have already seen with the flat-rate VAT scheme, which was introduced in 2002 but has not been universally adopted, simplicity does not always result in cost savings.

Savers risk paying too much tax with new tax software

Savers face being pulled into a higher tax bracket as a result of new computer software being implemented by HMRC. The software is designed to reduce data processing errors by automatically updating individual’s tax codes when their self-assessment tax return is sent to HMRC.

Payroll changes from April 2011

Payroll changes are afoot. The government is proposing changes effective from 5 April 2011. Small businesses should take care to ensure that they understand these changes and what it will mean for their business and employees.

P45 changes
Currently, post-P45 payments are subject to PAYE at basic rate (tax code “BR”) and any additional income due is accounted for through self-assessment. According to HMRC, this can result in employees paying less tax than is due, so from 6 April 2011, employers will need to use a new tax code for post-P45 payments. The new tax code, “0T”, means that employers must withhold income tax at the appropriate rate as if the departing employee is entitled to no allowances. Guidance on how employers are required to operate the new code is not yet available, although it is expected to be published shortly.

NICs increases
From 6 April, the rate of employees’ national insurance contributions (NICs) will be increased from 11% to 12% on earnings between the lower earnings limit (currently £110 a week but increasing to £139 a week) and the upper earnings limit (currently £844 a week but decreasing to £817 a week). NICs on earnings above the upper earnings limit will increase from 1% to 2%.

Friday, 18 March 2011

Spot checks from HMRC

HMRC intend to check the accounting records of small businesses more frequently. They are to target 50,000 small businesses to ensure that minum standards are being met.

Estmates are that HMRC could be looking to tax over £600 million in direct and indirect tax from UK small businesses.

Fines will be levied of upto £3,000 if tax and accounting records are found not to be up to date and accurate.

The visits will begin in late 2011. This will include checking basic documents, bank and credit card statements, as well as tax returns and accounts to ensure that the owners are keeping a basic level of records.

There are major concerns from small businesses as HMRC have not provided detail of how business accounting and tax records will be check.

Fines could have serious implications on small businesses to the point of putting some out of business completely.  Surely HMRC needs to help small businesses understand their tax obligations first.

For many small businesses bookkeeping is low down the priority list, maintaining an income strean in these difficult economic environment is more of a priority.

Outsourcing bookkeeping and accountancy procceses is becoming more popular with small businesses as this takes away the worry, is generally cost effective and should keep the taxman away.