Expat Tax Changes

Living Abroad, working in/for the UK? There are threats to your pay packet!

Child Tax Credit calculator During the 2014 Budget, the government advised that it would consider restricting the UK Personal Allowance for non-residents. On 17th July, HM Treasury published an article, advising that the government is entering a consultation period, which closes on 9 October 2014 at 23:45 (11:45pm). HM Revenue and Customs estimate that around 400,000 individuals claiming Personal Allowances in the UK are non-resident. Removing the allowance will bring the government a huge amount of revenue.

The current UK domestic law (Section 56 Income Tax Act 2007) provides an Income Tax Personal Allowance where the individual:

  • is UK Resident
  • is a national of a European Economic Area state
  • is resident in the Isle of Man or Channel Islands
  • has previously resided in the UK but lives abroad for the sake of their own health or that of a member of their family who is resident with them
  • is a person who is or has been employed in the service of the Crown
  • is employed in the service of any territory under Her Majesty's protection
  • is employed in the service of a missionary society
  • is a person whose late spouse/civil partner was employed in the service of the Crown

According to HM Treasury, these are High Level principles that are adhering to:

  • fairness: the effect of the UK Personal Allowance must be fair for all UK taxpayers and the Exchequer
  • simplicity: any change must be as simple as possible for those people and businesses who would be affected to understand and implement
  • competitiveness: any restriction to the UK Personal Allowance must not undermine the competitiveness of the UK as an international destination for work and investment

I would urge you to make your voice heard if you want to keep your entitlement to the Personal Allowance. The Personal Allowance is currently £10k, meaning that the first ten thousand pounds you earn is tax-free. (Rising to £10.5K in April 2015). Having read the document and other related articles, I believe that the government has a biased approach to the 'consultation', using emotive words and terms such as 'Most countries have a Personal Allowance or equivalent in their income tax system. However, few are as generous as the UK...'

Rationale for Change?

Here are a few snippets from the document, stating their 'rationale for change' with my thoughts:

  1. Most countries have a Personal Allowance or equivalent in their income tax system. However, few are as generous as the UK which has the highest personal allowance in the G20 and one of the largest in the OECD and the EU. The Personal Allowance is available to their working population, as it is in the UK, so is a moot point. The fact that the UK allowance is higher is an economic debate, not a moral one i.e. they have set their limit, as has the UK. (UK Personal Allowance has increased by 60% over this parliament). Removing something that has been previously available is a moral issue, 'why should they lose out?'
  2. The UK grants a Personal Allowance to more non-residents than many other tax jurisdictions. Many other countries, including the US, Australia, Canada and most of the EU, restrict non-residents' entitlement to their equivalents to the UK Personal Allowance. Just because they do it, doesn't mean it is right! In addition, this statement does not indicate whether this has always been the case, or if the country has removed it from them. The old adage, 'if you saw him put his hand in the fire would you copy?' springs to mind.
  3. The difference between the UK tax system and our comparator countries means that where the UK entitles a non-resident to the UK Personal Allowance they may have a more generous tax outcome than a comparable individual would receive in those other countries. So basically, HM treasury is saying that because a person who chooses to work in/for the UK has a better outcome than someone else, or that they would have if working in their own country, we should stop the allowance? Sounds a bit 'green-eyed' monster to me!
  4. Based on the data available to the government, it understands that most non-residents receive only a small portion of their income in the UK and most non-residents will typically only be liable to UK tax on that portion of their income arising in the UK. Whilst non-residents are generally subject to taxation on their global income (including their UK income) in their country of residence, their UK tax liability often does not reflect the extent of their economic link to the UK. Hang on, what data? Fight fair! You have just said that they are liable to UK tax and 'global tax' in their own country. I would think their economic link is obvious, you earn in the UK, you pay tax in the UK (or not, if under £10k). HM treasury is actually talking about relief on tax.
  5. In most of the UK's comparator countries there is no entitlement to an equivalent to the UK Personal Allowance based on nationality. Entitlement is generally based on tax residence or another measure of economic connection to the country. Removing the connection between nationality and entitlement to the UK Personal Allowance would remove the obligation of the UK under the non-discrimination provisions of many of its tax treaties to grant Personal Allowances to resident-nationals of its treaty partners. Who are the comparators and how did the government identify them? Hit the nail on the head with 'remove the connection' statement. It goes directly against their 'high level principle' of fairness!
  6. One of the government's aims is for the UK tax system to deliver similar outcomes for individuals in similar positions. The current entitlement to the Personal Allowance on the basis of EEA nationality does not apply equally to all the UK's non-resident taxpayers and takes no regard of their connection to the UK. I'm absolutely certain that if you remove the entitlement to the allowance for non-residents it is unfair treatment and does more to dis-align individuals than to bring a 'similarity'.
  7. Many countries, particularly Member States of the EU, incorporate a test into their tax legislation to distinguish which non-residents should retain entitlement to equivalents to the UK Personal Allowance. OK, disregarding the high level principle of simplicity, this could actually work. In adherence to both moral and legal obligations, it may be fairer to 'assess' whether someone should have the personal allowance or not. It will be a lot of work for the tax man though, so HM Treasury needs to consider the impact costs for administration.

Assuming that the government go ahead and remove the allowance, how would it be implemented and what would this mean to those living abroad? I cannot answer, but serious consideration needs to be given to;

  1. The disparity between tax laws, rates, exemptions, credits and brackets in various countries. Would someone end up worse off? If so, how would this be tackled? Would UK allow a stepped system, allowing the natural economy to align through inflation?
  2. UK Pensions. The Directorate for Work and Pensions (DWP) estimate that about 1,200,000 ex-pats are receiving a pension. How would a removal of the personal allowance affect pensions? There are various types of pensions that would be affected differently e.g. government service pensions are generally only taxed in the UK, regardless of residence status. Without a doubt, some pensioners would be worse off.
  3. The cost of implementing change: Both in terms of initial cost, from consultation to changing laws, implementation, tracking and assessing, right through to the everyday administrative costs to HMRC (Pay As You Earn (PAYE) and Self-Assessment (SA) systems)
  4. Business risk: How will the government assess the risk to the individual, local businesses and the UK economy? Consideration needs to be given to the impact of removing/restricting the personal allowance in terms of losing expertise and financial backing from abroad. In addition, how long will he assessment period be.three months? One year? Five years? Or will they just soldier on, ignoring any debris.

Please see the List of consultation questions below, taken directly from the HM Treasury consultation document.

HM Treasury - 'This consultation is at stage 1 of the government's Tax Policy Consultation Framework (setting out objectives and identifying options). Officials will work with interested parties and stakeholder groups over the course of this consultation to discuss the issues and inform the government's view on the options available.'

To respond to the consultation questions, please send comments to [email protected] or write to:

Specialist Personal Tax consultation
HM Treasury
1 Horse Guards Road

Please send comments in response to the consultation questions by 3 October, accompanied by evidence to support your answers.

QUESTION 5.1: Do you agree that, if the government decides to introduce any restriction on non-residents' entitlement to the Personal Allowance, this should not apply in circumstances where individuals have strong economic connections to the UK? If you do not agree please explain your reasoning.

QUESTION 5.2: Is a percentage test for the location of income the simplest and least burdensome basis upon which to identify circumstances where individuals have strong economic connections to the UK? Do you have any views on what level such a percentage should be set at? Please explain your reasoning.

QUESTION 6.1: Are there unfair outcomes for those with globally low incomes from a broader policy of restricting non-residents' entitlement to the UK Personal Allowance? Could a de minimis limit of global income below which non-residents would automatically be entitled to the UK Personal Allowance help mitigate these unfair outcomes? If so, is there a way to design this so that the administrative burdens are not disproportionate?

QUESTION 6.2: Do you agree that retaining the UK Personal Allowance in respect of the income of non-residents which is by treaty subject exclusively to UK taxation would help mitigate unfair outcomes from a broader policy of restricting non-residents' entitlement to the UK Personal Allowance?

QUESTION 6.3: Are there any other hard cases or unfair outcomes you believe that the government may not have considered if the Personal Allowance for non-residents were to be withdrawn?

QUESTION 6.4: In practice are non-resident individuals claiming the UK Personal Allowance on the basis of criteria other than UK residence or EEA nationality?

QUESTION 6.5: If the government were to remove the entitlement to the UK Personal Allowance by virtue of EEA nationality to what extent would non-residents you are familiar with claim the UK Personal Allowance on the basis of other criteria currently in Section 56 Income Tax Act 2007? Please provide what evidence you can in support of your answer.

QUESTION 6.6: Which, if any, of the criteria other than UK residence or EEA nationality in Section 56 Income Tax Act 2007 do you think are relevant to the in the 21st century? Should these criteria be repealed? Are there any other criteria in Section 56 on which individuals should be entitled to the UK Personal Allowance? Please provide evidence in support of your answer.

QUESTION 6.7: How widespread is knowledge of residence status amongst PAYE scheme operators, particularly employers? How easy would asking employees to declare their tax residence be for employers?

QUESTION 6.8: How could the PAYE starter process be best used to ensure that most people get the correct tax code at the start of the employment if the government decides to restrict the availability of PAs to non-residents? What questions could be used to indicate residence status? Is the new starter process a sensible way to identify non-residents? What other processes could be adapted, with minimal additional burden, to identify non-residents?

QUESTION 6.9: Although the government will consult on detail if it decides to restrict non-residents' entitlement to the UK Personal Allowance do you have any preliminary views as to whether any system should lean toward restriction or entitlement?