Double Taxation Agreements

I’ve got a number of clients that have income and investments both in the UK and overseas. They want to know where do they declare these earnings and how? Other questions I’m often asked are why someone they know doesn’t pay tax or why do they appear to pay less than their fair share?

To determine where you pay your personal tax depends on the answers to a few questions.

For tax purposes where you live is not a simple question. There are three possible answers to that: Ordinary Residence, Residence and Domicile.  Just to make it more interesting there is no tax definition for Ordinary Residence or Residence.

However, it is generally understood that Ordinary Residence is where you live, socialise or do business (though not casual). It is not uncommon to have Ordinary Residence in one or more countries.

Residence is where Joe Public pays their taxes.

Then it becomes interesting, a UK taxpayer pays tax on all their earnings worldwide, including Capital Gains and you pay as it “arises”. If the individual is not an Ordinary Resident or not Domicile (non-Dom) there are special rules on their foreign income and gains. These rules are of course complicated, but generally the tax payer has a liability on income remitted to the UK.

One of the tests HMRC use to decide is the number of days a person stays in the UK. If that person remains here for more than 183 days in a tax year they are resident and have to pay tax. There are even more complicated rules on transiting which mean that basically you can’t leave the airport. Generally this is used by contractors going overseas to work .

The big bucks are the non-Doms. There are various types of domicile status, you may not have a permanent residence or nationality, but you will always have a Domicile. Domicile is not a tax, but a legal term defined by case law.

Persons who do not have Ordinary Residence or are non-Dom usually pay tax on a remittance basis, IE what they bring into the country.  There is provision for these persons to pay on an arising basis but personal circumstances will decide what is best for each individual.

A few years ago there was a bit of a kerfuffle about high profile persons living in tax havens whilst resident in the UK. There are an estimated 200,000 non-Doms in the UK. The government introduced a levied of £50,0000( previously £30,000) RBC (Remittance Basis Charge) against non-Doms deciding to take this election.

A RBC comes into effect if an individual is a non-Dom and has more than £2,000 foreign earnings not remitted to the UK.  The big test is whether you are a long-term resident of the UK.

(This also applies to foreign nationals working here on a secondment, they are deemed to be a resident for UK tax purposes).

There are also other considerations to take into account re overseas earnings that muddy the waters, for example interest on savings in excess of £100 and employed income greater than £10,000.

But if the total of your unremitted foreign earnings is less than £2,000 it doesn’t have to be declared. More complications when completing a self-assessment, and whether the tax payer is paying “arising” tax or “remittance” tax!

If you have been resident in this country, move abroad and then return to the

UK at a later date which is less than five full tax years since your date of departure from the UK, you will have been temporarily non-resident in the UK.

It is possible that any 'relevant foreign income' (RFI) which you brought to the

UK during the time you were not resident in the UK, will be chargeable to UK

tax in the year you become resident again in the UK. Pretty much all these earnings are taxable unless they are employment earnings.

Almost everyone will be entitled to receive a personal tax allowance except for non-Doms or UK residents who have earnings over £2,000 from foreign sources. Personal tax allowances are given for a whole tax year even if you are only in the UK for part of the time.

Double Taxation Agreements (DTA)

Different countries have their own tax rules and laws. When you have income and capital gains from one country and are resident in another, you may have to pay tax in both countries under their different tax laws. To help avoid being taxed twice - 'double taxation', the UK has negotiated double taxation agreements with many countries. Depending on an individual’s status they may be eligible for a person tax allowance and other allowances as well as being able to offset the tax paid overseas.

Just to keep you interested, there are other specific rules pertaining to entertainers and sports personalities both coming to the UK or UK nationals going overseas. These persons also have additional relief not enjoyed by the majority of us. There are also exceptions which apply to seafarers and certain oil and gas workers.

If an ordinary resident intends to leave the UK either permanently or for reasons of work they have to complete a form P85. This form serves several purposes including allowing tax refunds to be completed but more importantly gives HMRC the ability to assess your Domicile and Residency for tax purposes.

Lastly just watch out for National Insurance Contributions (NIC) depending on where your income is coming from, if from abroad that country may have some obligations to which the tax payer may have to adhere.