Friday, March 04, 2011

BLOG 100


I have just finished reading an HMRC Press Notice entitled, “New penalties for offshore tax dodgers”. It quotes Exchequer Secretary to the Treasury, David Gauke, having said, “The game is up for those going offshore to evade tax”.

Leaving aside the fact that, assuming that he has been accurately quoted, his State comprehensive school education seems to have left him with a poor grasp of English – those “going offshore” will actually have no liability to UK tax to evade as they will cease to be UK resident, whereas I suspect that he actually has in mind those staying here and investing money offshore – the references to tax dodgers and tax evaders hides the fact that Mr Gauke intends to heavily penalise those with a limited grasp of the UK tax system who have the misfortune to be born in one country rather than another. Not by accident, I should add, but deliberately! Read on. He is personally aware of the issue of such people as he himself raised it when in opposition.

What HMRC’s colourful language is presaging is that Mr Gauke has decided to introduce from 6 April this year the enhanced penalties in relation to offshore income that Mr Darling rushed through parliament without debate in the dying days of the last government. Although these penalties were not debated by parliament, they were alluded to last April on the Second Reading of the Finance Bill both by Mr Gauke himself and by Mark Hoban, who were the lead speakers for the then opposition. Mark Hoban, now the Financial Secretary to the Treasury, said

“Clause 36 … has been criticised by the Low Incomes Tax Reform group about the impact that it could have on unrepresented low-income taxpayers. Let me quote from its representations. “Many unrepresented taxpayers who will be caught by these provisions actually come from overseas territories, which are likely to be placed in categories 2 or 3. Will a Ghurkha be affected because we do not have a double taxation agreement with Nepal? Will a nurse coming from a West Indian island without the “correct” HMRC designation be affected disproportionately? Is every mistake in relation to a source of income or gains in their home country to be penalised at one-and-a-half or double the normal rate, simply because of where they come from?” The Financial Secretary will no doubt be aware of the experiences of the Minister for Borders and Immigration and the Under-Secretary of State for Defence … They have both come off worse after locking horns with the Ghurkhas. Does he want to be the Ghurkhas’ third scalp? We need to think carefully about how those on low incomes are going to be able to comply with them”.

Sadly the then Minister, Sarah McCarthy-Fry did not have time to respond to any of these questions. However in winding up for the Conservatives, David Gauke himself said, “My hon. Friend also talked about clause 36, which relates to penalties in respect of offshore income, and might affect the nationals of countries with which we do not have tax information exchange agreements. He also highlighted the position of the Ghurkhas who have settled here, and raised the prospect of Joanna Lumley turning her attentions to Treasury Ministers; they may or may not find them an appealing thought … We will let those clauses through. Tackling avoidance is a perfectly reasonable intention – we have no difficulty with it – but we make a commitment that we will listen to representations made by professional bodies on the technical and practical implications of the Bill, and if appropriate return to those matters”.

Since taking over responsibility for tax matters, Mr Gauke has not actually sought representations on the Finance Act 2010, so there may have been nothing for him to listen to – I, along with others, I suspect, had assumed that he would give further thought to the representations that had already been made. In any event his “listening” period is clearly now over. He has not thought it appropriate to return to this matter but has gone ahead with introducing Mr Darling’s legislation.

The reason for the references above to categories 2 and 3 is that, where a country is in category 2 any penalty for failure to disclose income from that country will be at 1.5 times the normal rate, and where the country is in category 3 it will be at 2 times the normal rate.

I have no sympathy for those who evade tax. However I have a great deal of sympathy for those who do not understand tax and are, in effect, penalised for their ignorance. Assuming that the undisclosed income is picked up by HMRC, not by the taxpayer, there will be a minimum penalty where a category 2 country is involved of 22.5% of the tax and for a category 3 country, 30%. Mr Gauke has now revealed that he has in fact put Nepal into Category 2. In the West Indies, Anguilla is in Category 1, the neighbouring islands of Barbuda and Antigua are in Category 3, the next island, Guadeloupe, is in Category 2 with, the one next to that, Dominica is in Category 3. Next to that is Martinique (Category 2) and then Barbados (Category 3). The category into which a country falls depends on the scope of the exchange of information provision that HMRC has negotiated with the tax authority of the country concerned. The poor taxpayer of course has no control over what treaties his government enters into. Nor does he have control over the order in which HMRC choose to negotiate treaties – I suspect that Category 3 Caribbean countries are there not because of a reluctance to exchange information but because HMRC has not yet got round to asking them to negotiate a new treaty, as they do not have the resources to deal with many at a time.

You may be thinking the worries are a bit far-fetched. Is a low paid worker in the UK really likely to keep their savings in Dominica? Yes. The nurse or bus conductor who came to England from Dominica some years ago probably sends his or her surplus money back home to help the family and to save for retirement. When the nurse came to England the interest on such savings was not taxable. Now it is because the nurse or bus conductor is likely to be one of those nasty non-doms. The law was changed in 2008 to tax non-doms on worldwide income, whether or not it was remitted to the UK, unless the non-dom pays a fee of £30,000 p.a. to defer paying the tax on overseas income until it is brought into the UK. It is most unlikely that the average nurse or bus conductor is aware that they were affected by this change or will have the resources to pay a £30,000 fee.

But, sadly, coming here to work hard in David Cameron’s Britain apparently labels you as a tax dodger if you dare to send money home.



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