Taxing concepts for living and working abroad
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Dear All, It's nice to be back in the WBJ again after a one-year absence. I've been looking for an excuse to impart a bit of relevant U.K. tax advice to the Warsaw expat population and in his budget statement on April 17, Chancellor of the Exchequer Gordon Brown gave me a reason. So if, like me, moving to the U.K. beckons and unlike me you're not 100% a Brit, then a bit of good tax planning opportunity still exists, but is under review and needs taking into account - particularly if you base your decision to move around it and they take it away.
The technical bit revolves around what the U.K. calls domicile status. This is different from the more standard test of residency and helps to complicate the position if someone is not irrevocably settled in the U.K. An individual who is domiciled and resident in the U.K. is subject to U.K. tax on his worldwide income irrespective of where the income arises. By contrast, an individual who is resident but not domiciled in the U.K. is fully subject to U.K. tax on his U.K. source income and gains but his foreign (that is, non-U.K.) investment income and capital gains are only subject to U.K. tax if such income and gains are remitted to the U.K. In addition to this, earnings from certain separate employment outside the U.K. may also be taxed on a remittance basis. So a foreign national based in the U.K. is taxable in the same way as a U.K. resident on any income earned there but if he or she has income or gains arising abroad, then the U.K. only seeks to tax this if the money actually makes it to the U.K. And if the money is kept abroad, then it escapes U.K. tax altogether.
Legally speaking Domicile is a legal concept rather than a tax concept and is usually more important for inheritance and estate taxes than income taxes. However, the U.K. is more generous than most jurisdictions in allowing those that aren't U.K.-domiciled to avoid taxation on those baskets of income. This is a particular benefit in attracting those high-rolling international business types who can choose to locate themselves and their operations anywhere, as it avoids the excessive cost of having absolutely everything taxed. So if you're running your Polish business from the U.K., any income you generate and can keep outside the U.K. (on the more difficult assumption that you can actually get it out of Polish tax of course) will not be taxable there. Of course the above is of limited benefit to U.S. citizens, who will always remain ultimately subject to tax in the U.S. on their worldwide income, although as the U.S. rates are lower, keeping the income outside the U.K. will still give an overall net benefit.
Try, try again This is one of those issues that Inland Revenue tries to reform pretty regularly, namely in 1956, 1974 and 1988. Each time the attempts have been dropped, as in the end it was felt that rather than bringing someone's total income into the U.K. tax net, changing the rules will mean that those who could work anywhere move somewhere more tax friendly, potentially reducing the tax take instead of increasing it. Following what now seems to have become a budget tradition, much of the media has given extensive coverage to the perceived abuse of the U.K. regime for the non-domiciled. The argument put forward was that wealthy foreign citizens are able to reside in the U.K. for significant periods of time and not pay any U.K. tax simply by bringing into the country funds that are identified as accumulated capital wealth, rather than income. While this may in theory be true, this does overlook that any work being performed in the U.K. is still subject to tax in the U.K. and so it remains very difficult to be based in the U.K. and not pay tax when you are working and earning.
Too early It is too early to say what the proposed changes will be, and how they will affect anyone and it is true that the previous attempts to change the law have always failed when the wider economic interests of, for example, the financial institutions of the City of London are taken into account. So for now when the prospects of years more in Warsaw, where it still snows in April if my Easter visit to the out-laws is anything to go by, starts to make you dream of moving, the U.K. is still an attractive proposition for a year or two more at least. And that way you can have me do your taxes again! And if you were hoping for a year's worth of accumulated tax jokes, I'd underestimated how difficult it is to get back into column-writing mode after such a long time. Maybe I should practice a bit more often ... Bye for now from sunny Birmingham (and that's Birmingham England, not Alabama), Peter
Peter Ferrigno is a tax partner in the Birmingham office of Andersen and WBJ tax columnist from 1995-2001.
Anna Szymańska is a tax senior manager in the Warsaw office of Andersen
