The
Government announced in the last Budget that they would be consulting with
interested parties regarding their proposal to withdraw or restrict the UK
personal allowance for non-resident individuals. The Consultation document was issued for
consideration on 17 July 2014 and the consultation process closes on 9 October
2014.
From the
Consultation document we can glean the Government’s reasons for the proposal
- which is largely driven by:
·
achieving
parity with most other EU jurisdictions that do not offer the equivalent to the
UK personal allowance to non residents
·
establishing
a link between economic activity and taxation so that taxable income arising in
the UK to non-residents (who are taxed on their global income in their home
jurisdiction) does actually result in some tax being payable to the UK Exchequer
to reflect the UK economic activity
·
fairness in UK taxation for all non residents,
regardless of the lack of non-discrimination clauses in the Double Tax
Agreement with certain non residents’ home jurisdictions which currently results in a denial of a UK
personal allowances - for example, to US individuals
One of the major
proposals discussed in the Consultation document is related to the concept of “ties
to the UK”. This concept is already
enshrined in the recent Statutory Residence Test so the introduction of such a
principle for entitlement to a UK personal allowance would seem to sit with the
general principles now contained within UK tax legislation.
One idea is
to measure the extent of non residents’ economic connections to the UK by
referencing their UK income as a percentage of their worldwide income. The value of the percentage used in other
jurisdictions (where a similar concept has been implemented), is either 75% or
90%. So, for non residents who could
demonstrate that either 75% or 90% of their global income is UK sourced, then the
personal allowance would be available. We stress that, at this stage, this is just a point for
consultation but if this idea is adopted, then many non resident retired
persons who have UK sourced pensions (not necessarily taxed in the UK) and UK
investment income will probably still be able to claim the personal
allowance. The main losers are likely to
be those non residents whose main economic activities are outside the UK, via
their employments abroad; if these non residents have UK investment income eg
rental income, they will lose the personal allowance and will pay UK tax on
their UK rental income but, in most cases, they will be able to claim a corresponding credit in their country of residence.
The
Government is aware that pensioners in receipt of Government Service pensions
could be disproportionately affected by any restriction of the personal allowance
so has stressed that the personal allowance will still be available to set
against income that is taxed solely
in the UK in accordance with a Double Tax Agreement.
We will be
reporting periodically on the progress of the Consultation process as and when
HMRC release any commentaries before the final closing date of 9 October 2014.