Historically the UK tax regime has been designed to attract investment into the UK. In recent years though, whilst the Government has been making the corporate tax regime more attractive for potential investors in the UK, the personal tax regime has become far less so. The Government’s latest consultation paper is a continuation of that trend.
Latest proposed change
The latest consultation paper suggests taking away the UK Personal Allowance currently available to many non UK residents against their UK income (rental income for example). Why does the UK Government want to change this? Money is the simple answer, though the consultation paper wraps it up in more elaborate language.
What changes is the UK Government considering?
The Government is suggesting an economic connections test. The test would be the percentage of that individual’s income that is derived from the UK. The threshold could be set at, for example 75% or 90% of income being derived from the UK to be able to qualify for the Personal Allowance. This takes no account of other factors such as economic value added in earlier years, assets in the UK etc.
HMRC’s view of who will be affected and how is roughly as follows:-
- Employees
- Those on high incomes couldn’t claim because their income would be too high. So it will be the medium and low earners who are affected, though HMRC argues that many will be able to claim credit in their home country so won’t lose out unless they live in a country with a lower tax rate than the UK. However low income earners may not earn enough to be a taxpayer at home and these people would lose out badly. The Government might consider a de minimis measure but it is hard to see how this would easy to deal with from an administration viewpoint. It would also reduce the economic argument for the measure.
- Non residents with UK property income
- Pensioners
- In HMRC’s view many will not be affected either because they continue to be UK resident or as tax treaty provisions mean pensions are only taxable in the state of residence and not the UK.
- UK employers operating PAYE
- There would be an increased burden placed on employers in having to clarify the tax residence position of employees.
Conclusion and next steps
This will increase the complexity of the UK tax system for many individuals for relatively little gain to the Exchequer, especially if there are exclusions for some of the groups referred to above. There is also a fairness argument in that the only economic test suggested by the Government relates to the income level in a given tax year. That doesn’t reflect past economic contribution (in the case of pensioners or individuals who may work outside the UK for only a year or two and rent their UK home out while they are gone), or economic contribution in the form of a investment in assets.
The consultation runs until 3 October so if you have any views on this either way then it is important to feed those views back. A more detailed note is in this link, Losing Personal Allowance.