British expats find tax very taxing indeed, so is it time to change the system to something more logical and sensible?
Historically tax law comes in to being for two reasons – to extract more money from taxpayers or to plug holes in the existing laws that are allowing money to drain away from the country’s coffers.
Despite thousands of pages of tax law, no one really knows who should pay what and when because the rules are just too complicated.
A case in point are qualifying non-UK pensions (QNUPS), which are special pensions for the wealthy and expats.
A row is raging between advisors over exactly what type of assets can be held in a QNUPS – with some arguing residential buy to let portfolios and holiday homes are OK, while others suggest these investments break pension tax rules.
Who knows for sure?
Badly drafted and ambiguous laws
The answer is no one because the law is badly drafted and ambiguous and the only way of testing the truth is hiring expensive lawyers and taking on HM Revenue & Customs through endless tax tribunals and court cases.
Most of the information about tax on the HMRC website is guidance – and as such has no force in law.
The same goes for advice from an accountant or tax consultant.
One argument is changing the basis of taxation in the UK to include worldwide earnings and gains like the USA.
For years, taxpayers have squirrelled their wealth away in secret bank accounts. An upcoming talk by Greg Skyte and Christopher Barlow of HMRC on the Isle of Man gives an idea of the depth of the problem that is stored up.
The pair are giving a presentation to financial advisers about the HMRC Offshore Co-ordination Unit (OCU).
Tax differences for US and UK expats
The Birmingham-based OCU is staffed by 100 analysts and technical tax experts who are targeting account holders of HSBC in Geneva, Switzerland.
A whistleblower stole client records and sold them to HMRC. The OCU has uncovered that many of the assets discovered under the Lichtenstein amnesty for UK taxpayers have been concealed there since the Second World War.
This is unlikely to happen in the US, where taxpayers living abroad follow similar rules on declaring income and paying taxes as if they lived in the US.
The only way to sidestep tax in the US is to renounce citizenship – which means becoming tax resident elsewhere and paying taxes there.
Failing to declare foreign income to the IRS is a criminal offence, while taxpayers must declare any foreign bank or investment accounts on their tax returns.
For UK expats, once they have severed ties with the UK, they are no longer liable to make tax returns to HMRC.
Overseas workers who are still UK resident enjoy tax concessions that are the envy of their US colleagues, who must declare the income to the IRS, even if they pay a zero tax rate on their income in a foreign country.