HMRC withdrawal of non domiciled 'concession' is unacceptable, says expert

Out-Law News | 07 Aug 2014 | 10:28 am | 2 min. read

The UK's HM Revenue and Customs (HMRC) has announced that it has withdrawn its 'concessionary' treatment for loans on commercial terms taken out by remittance basis taxpayers and secured and serviced using foreign income or gains.

Ray McCann, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said "It is unacceptable that HMRC has now withdrawn what it describes as 'concession' in this way and with little or no prior notice".

"This is a very serious change in HMRC's approach and the lack of proper consultation shows further disregard by HMRC to the need to treat taxpayers fairly," he said. "In addition, being announced as having immediate effect at a time when many taxpayers and their advisers are likely to be on holiday is likely to further damage the relationship between HMRC and the professions and demonstrates again that in trying to crack down on what it sees as abuse by a minority the majority of compliant taxpayers suffer the consequences". 

Non-UK domiciled individuals (non-doms) who are taxed on the remittance basis are subject to UK tax on foreign income and gains only to the extent that it is remitted to the UK.

Until now, where such an individual secured loan finance on offshore assets, the loan was not treated as remitted to the UK in the event that the loan was used to acquire UK assets. Any foreign income or gains that were actually used for example to meet interest costs or to repay the debt were taxable remittances in the normal way. Equally in the event that the security was called in then a taxable remittance would occur so far as the security comprised foreign income or gains.

HMRC's 'concessionary' treatment was published in 2010 in its Residence Domicile and Remittance Basis guidance Manual.

HMRC has announced that from 4 August 2014 it will treat any such loans as equivalent to the remittance of any foreign income or capital gains that is part of the security upon which the loan is made.

From 4 August, if a loan is secured using overseas income or gains and is serviced or repaid from foreign income or gains the repayments of capital and interest will, as before constitute remittances. Additionally, from that date the actual amount of any loan that is remitted to the UK will also be treated as a remittance to the extent that it is secured on different foreign income or gains.  This will potentially give rise to a double charge in respect of the amount of the loan used in the UK if the loan is serviced from different foreign income or gains to that used as collateral.

HMRC has said that non-domiciled individuals who have relied on the previous concession and have not declared remittances as a result of the fact that the loans were secured on overseas assets, will not be assessed to tax in respect of the remittances, provided they give a written undertaking either that the foreign security has been or will be replaced by non-foreign security before 5 April 2016 or that the loan or the part that was remitted to the UK will be repaid before 5 April 2016. The undertaking must be given by 31 December 2015 and must be complied with, if the tax charge is to be avoided.

HMRC said that the change was being made because it is seeing "large numbers of arrangements" which are "not considered to be commercial and not within the intended scope of the concession".

Ray McCann said "It is likely that many experts will consider HMRC's view of the law to be incorrect especially in those circumstances where there is no suggestion that the loan and security arrangements are other than genuine commercial lending arrangements. A large number of non-domiciled individuals will have arranged their financial affairs in this way and the change is likely to force many to revise those arrangements at considerable cost".