Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.Donate to our crowdfunder
We are now making good progress, which will hopefully continue. Once again, we have not tabled anything radical—or even straightforward—in relation to this clause, but I would like to put some points on the record. Unsurprisingly, I also have some questions for the Minister. The clause affects UK residents and non-domiciles who pay tax on the remittance basis and use separate employment contracts for UK and overseas duties with the same or associated employers. In most cases, those separate contracts have been artificially arranged to obtain a tax advantage. I am sure the Minister will say more about that.
At the time of the autumn statement, the Government made it clear that they will
“legislate to prevent a small number of high-earning, non-domiciled individuals from avoiding tax through the artificial division of the duties of employment between the UK and overseas. From April 2014, UK tax will be levied on the full employment income where a comparable level of tax is not payable overseas on the overseas contract.”
As I have said, the clause will ensure that non-domiciles are taxed on the overseas employment income it identifies according to the so-called arising basis. In other words, the income caught by the measure will cease to be eligible for remittance-basis tax treatment.
Dual contract arrangements arise when an individual enters into an employment contract with more than one employer. There have been concerns about such arrangements giving tax advantages to UK-resident non- domiciled employees who have duties abroad. For that reason, such arrangements have been popular with that group. Under these provisions, all references to “non-domiciled” denote a domicile outside England, Scotland—the word “Scotland” is underlined in my notes, and I hope that it continues to be part of the United Kingdom—[Hon. Members: “Hear, hear.”]. It is always good when everyone is in agreement on that point. As I was saying, references to “non-domiciled” denote a domicile outside England, Scotland, Wales and Northern Ireland. Domicile is a matter of private international law and we do not want to go off on a tangent about that now.
This detailed measure is designed to counter a long-standing tax planning opportunity that is used by non-domiciled individuals to avoid UK tax. The aim is to stop the use of dual contracts and contrived arrangements when the duties of the two employments are broadly similar. In essence, it is an anti-avoidance measure, which we welcome in principle. Such arrangements were perhaps more common in the past, but they have been the subject of a great deal of HMRC activity. Inquiries have focused on whether any duties of the offshore employment have been performed in the UK, which is more difficult to avoid in the digital age, and whether any remuneration from the offshore employment has been brought to the UK. We might well ask why the practice is allowed at all. Rather than introducing complex rules to try and deal with the issue, what is the rationale for having a law that allows long-term tax avoidance by non-domiciled individuals at all?
What is the rationale for giving a tax break to wealthy non-domiciled individuals when there is already a statutory relief for non-domiciled employees for broadly the first three years in which they work in the UK? Will the Minister confirm that there will be no further changes to the rules on remittances during the lifetime of this Parliament? Are the Government considering further legislation on the matter? Given the complexity of the rules, how much time does the Minister estimate that HMRC will have to spend on enforcing them? Those rules apply to a relatively small number of people. Rather than devoting a considerable amount of HMRC resources to policing complex arrangements and pursuing a small number of employees, will the Government consider simply abolishing dual contract arrangements? Finally, will the Minister explain how the figures for tax savings as a result of the measure have been arrived at, given the difficulties of predicting salary and bonus levels some years in advance?
We do not intend to vote against the clause, but it would be helpful to have on record the Minister’s response to my questions.
As we have heard, clause 15 introduces schedule 3, which targets arrangements by a small number of high-earning individuals who artificially split a single employment between the UK and overseas to obtain a tax advantage. Let me explain the background to the clause and schedule. Non-domiciles can elect to pay tax on a remittance basis on their overseas income and gains. Under the remittance basis, earnings from employment contracts when duties are performed wholly outside the UK are not liable to UK tax unless they are remitted here. Each year, HMRC encounters a small number of cases that aim to exploit the remittance basis and obtain an artificial tax advantage by artificially splitting a single employment. It is telling that such cases mostly arise with overseas employments in low-tax jurisdictions, such as the British Virgin Islands.
Separate employment contracts for duties performed in the UK and overseas may, of course, be a legitimate commercial arrangement. Naturally the Government wish to continue to encourage non-domiciles to bring their investment and skills to the UK and to contribute significantly to the UK Exchequer through the tax they pay. However, the Government will also act to tackle contrived avoidance and to ensure that relief is given only when it is due.
The changes made by schedule 3 will levy UK income tax on an overseas employment that simultaneously meets a number of tests: whether an individual has both UK and overseas employment, either with the same or associated employers; and, a UK and an overseas employment that are related to each other; and if the foreign tax rate that applies is less than 65% of the UK’s additional rate of tax. Those tests are designed to identify arrangements that are artificial. The Government do not intend to prevent legitimate commercial arrangements, so the Bill takes into account convincing reasons why an individual might be compelled to split a single employment between two countries, such as if there are work permit or professional regulatory requirements that necessitate such employment in the countries concerned.
HMRC is aware of several hundred people—they are concentrated in the investment banking sector—who, depending on their individual arrangements, might be affected by the measure. If income associated with an overseas employment falls outside the parameters of this targeted measure, the existing rules will continue to apply. The Government published this legislation in draft earlier in the year, and a number of improvements have been made in response to representations from stakeholders.
The impact assessment indicates that only about 350 individuals might be affected by the measure. Does the Minister accept that that is the total number of people involved in dual contract arrangements? That does not seem to be a huge number, so how has it been assessed?
That is the estimate produced on the basis of HMRC’s national profile of risk for dual contracts. To arrive at the estimate, HMRC trawled self-assessment returns for non-doms with more than one employment when one or more employment is not taxed in the UK. The information is based on data from the most recent year available, which is 2011-12. I agree that the number of people is relatively small, but none the less significant sums are involved, so it is right that we take action.
The hon. Lady also asked why we did not abolish all dual contracts. As I said, some dual contracts are legitimate and reflect genuine commercial decisions or regulatory requirements. We believe it is right that legislation covers that. On the question of whether HMRC could address the matter by using existing legislation more effectively, of course HMRC does use existing legislation to challenge tax avoidance arrangements, and the matter of dual contracts is no exception. In March 2012, HMRC issued guidance setting out its approach in considerable detail. If income associated with an overseas employment falls outside the parameters of this targeted measure, the existing rules will continue to apply. HMRC will continue strongly to challenge any arrangements it considers to be artificial and if it considers that substantive duties are performed in the UK. However, compliance cases can take a significant time to work through. Information often needs to be obtained from third-party employers who are located overseas—beyond HMRC’s jurisdiction. The clause creates a new test and charge to tax, providing a clear framework for taxpayers and HMRC in removing the complication and delays that can be introduced by third parties.
The remittance basis has been be in place for many years under various Governments. It is not about tax avoidance for the wealthy. It provides internationally mobile individuals who are in the UK, but have ongoing ties to another country, with an alternative treatment for their overseas income and capital gains. The Government remain committed to ensuring that the tax regime for non-domiciles retains the UK’s attractiveness and competitiveness as a place to live, work and invest for those who are internationally mobile.
The measure on dual contracts does not signal a fundamental change to the remittance basis. It is a targeted approach against contrived avoidance by a small number of high-earning individuals who are creating an artificial division of the duties of UK employment between the UK and overseas. I hope that the measure will have the support of the Committee. The Government believe that it strikes the right balance between targeting those contracts that are predominantly motivated by tax planning and those that are not, and that it improves the fairness of the tax system.