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The trap in non-domicile status Much has been written about the benefits of being non-UK-domiciled for tax purposes. However, contractors who are married or in a civil partnership where one party is UK-domiciled and the other is non-UK-domiciled should beware a potential pitfall. On death, a spousal exemption exists which allows assets to pass from one spouse to another without an inheritance tax charge - regardless of the value of the estate. However, this is not the case where assets pass from a UK-domiciled individual to a non-UK-domiciled individual. So, where you have, say, a UK-domiciled husband and a non-UK-domiciled wife the spousal exemption is limited to £55,000 above the personal nil-rate band of £312,000. There is also a nasty little twist to the rules that apply to transfers between deemed UK and non-UK-domiciled spouses. An Australian couple who have been UK tax resident for different lengths of time may see one spouse deemed UK domiciled before the other. During this time, if one spouse was to pass away, any assets transferred to the other could give rise to a potential exposure to inheritance tax. To be deemed UK-domiciled for inheritance tax purposes, you will need to have been UK tax resident for 17 of the last 20 tax years. An onshore pinch to the offshore raid A new campaign by HM Revenue & Customs (HMRC) to flush out unpaid tax on offshore bank accounts may extend to money sheltered in the UK as well. Aimed at taxpayers with overseas accounts at hundreds of small banks, the campaign will limit penalties to just 10% of their unpaid tax, to encourage people to confess. However, the penalty will also apply to any untaxed income the taxpayer has in the UK as well. When HMRC targeted the big high street banks, we had a lot of calls from individuals who were worried that they had done something wrong. At the time, the non-UK-domiciled rules were different and a vast number of people who were legitimately holding monies offshore and not reporting the income on their UK tax return were targeted. This time around the non-UK-domiciled rules have changed significantly. Therefore, contractors should ensure that they have completed their self-assessment forms correctly and, where they are not claiming the remittance basis of taxation, that they have reported worldwide income correctly. It is also worth contractors checking their tax residency status. Expenses and benefits remain on the radar HMRC is considering possible changes to the reporting, tax and NICs procedures that apply to employer-provided expenses and benefits. In particular, it is looking at the possibility of collecting tax and NICs through the payroll rather than through existing P11D/P9D processes. To test the mood, the Revenue is inviting employers to help them review the current rules for payrolling expenses and benefits by filling in a questionnaire. Give that the tax authority failed in its attempt last year to make payrolling of benefits compulsory, it would seem that HMRC is now trying the ‘optional’ approach - perhaps with a view to making it compulsory in the future. From the Revenue’s viewpoint, payrolling benefits can have cashflow and compliance-checking advantages. The downside is, of course, that provision of benefits is not a simple area and it was on this point that HMRC failed last year. Hefty cash penalties loom for one in three The Public Accounts Committee has looked into HMRC and found that almost a third of all the tax payments it receives are late. And the amount of money owed to HMRC is enormous – more than £17 billion at the last count. The PAC enquiry also found that the number of tax debts has increased over 2007-08 by 22 per cent. Problematically for a cash-strapped government, HMRC has concluded it cannot afford a new IT system to link all the tax records of an individual taxpayer, much to the disappointment of the department’s collection agents. HMRC having to retrain a number of its staff to concentrate on investigative work helps explain the poor collection effort of late. This retraining, coupled with the reduction in overall staff numbers, and the mounting pile of paperwork that businesses and individuals need to produce for HMRC means that its straightforward activities, like collecting tax, have become lower priorities. There are concerns that HMRC’s level of customer service ‘on the ground’ is deteriorating. Nevertheless for the third of taxpayers who miss their filing deadline it is worth remembering that, absent of any special arrangement, there are strict rules on interest, surcharges and penalties. For instance, surcharges on late paid self-assessment balances run at 5 per cent of the tax not paid within 28 days of the due date, with an additional 5 per cent after six months. Guidance by Paul Spindler, a partner in the technology group at Kingston Smith , a chartered accountant. Jun 12, 2009 Email this article Printer friendly page Previous Page
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