Upcoming changes to the UK’s tax regime for non-domiciled individuals (non-doms) may inadvertently deepen the fiscal deficit. The Government’s newly introduced transitional rules, to take effect in April 2025, could accelerate the departure of non-doms, thus reducing potential tax revenue.
A Lucrative One-Way Ticket?
The new rules, effective from 6 April 2025, will end the current reliance on domicile as a tax-defining factor. For a long time, the UK has been the only country to consider an individual’s domicile status. Instead, a person’s tax residence will determine whether their worldwide income and assets fall under the UK’s IHT regime. Non-doms who have been UK residents for at least 10 of the past 20 tax years will be subject to IHT on their global assets, even after they leave for a period of ten years (known as the Ten Year Tail).
However, the proposed transitional rule allows non-doms planning to leave the UK next year to avoid this new 10-year IHT tail, creating a short-term lucrative opportunity for those already considering relocation.
Impact on Offshore Trusts
The reforms will also have significant implications for trusts. Currently, trusts holding non-UK assets are typically exempt from IHT as long as the settlor is not UK-domiciled. From April 2025, however, the trust’s IHT status will depend on the settlor’s residency status.
Previously, a trust could shift in and out of the inheritance tax system depending on whether the settlor was deemed a long-term UK tax resident. This introduces added complexity for trustees, who may not always maintain regular contact with settlors over time.
Trustees could also face an “exit charge” on non-UK assets if the settlor ceases to be a long-term resident.
Urgent Decisions for Non-Doms
With only a few months until the rules take effect, non-doms need to consider whether to relocate to countries with more favourable tax regimes, some of which offer zero IHT.
Next Steps
As the deadline for the new rules approaches, please do get in touch if you require any UK tax support.
Regarding Self-Assessment tax returns, it’s crucial to be timely. Failing to submit your tax return by 31st January following the end of the relevant tax year or not paying your due taxes on time can lead to automatic penalties from HMRC. Additionally, failing to notify HMRC about chargeability will also attract similar penalties. However, the only way to avoid these penalties is by proving you have a reasonable excuse. But what exactly qualifies as a ‘reasonable excuse’?
What is a Reasonable Excuse for HMRC Penalties?
There is no strict statutory definition of a reasonable excuse. One of HMRC’s internal manuals defines a reasonable excuse as:
“Something that stops a person from meeting a tax obligation despite them having taken reasonable care to meet the obligation.”
Essentially, this means that despite taking the necessary steps and precautions, an individual was unable to fulfil their tax obligations due to unforeseen or uncontrollable circumstances. However, every case is unique, and what may be deemed a reasonable excuse in one situation might not hold up in another. HMRC review this on a case-by-case basis.
Excuses Rejected by HMRC
Each year, HMRC publishes some of the most bizarre excuses they receive from taxpayers. Here are some of the more amusing, yet rejected, submissions:
• “I was just too busy – my first maid left, my second maid stole from me, and my third maid was slow to learn.”
• “My hamster ate my post.”
• “After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else.”
• “I’m too short to reach the post box.”
• “My boiler had broken and my fingers were too cold to type.”
• “My ex-wife left the tax return upstairs, and I can’t go and get it because I suffer from vertigo.”
While entertaining, these excuses failed to meet HMRC’s criteria for what constitutes a reasonable excuse.
Examples of Valid Reasonable Excuses for HMRC Penalties
To provide clarity, HMRC includes a range of scenarios in their manuals, including issues related to physical or mental illness, reliance on a third party, bereavement, postal delays, technical issues & loss of records due to fire or flood (not keeping adequate records is not a reasonable excuse).
In addition, HMRC provides specific examples in their manuals and online guidance:
• An unexpected hospital stay that prevented the person from dealing with their tax affairs.
• The person’s computer or software failing just before or during the submission of the online return.
• A fire, flood, or theft prevented the completion of a tax return.
• Delay caused by HMRC themselves.
• Active service overseas for members of the Armed Forces.
These examples show that, in essence, the taxpayer must demonstrate that they were prevented from fulfilling their obligations due to circumstances beyond their control and that they acted as a reasonable person would have in the same situation.
Case: Farmer v R & C Commissioners
One case that highlights the nuances of what can be considered a reasonable excuse is Farmer v R & C Commissioners. The taxpayer in this case submitted her paper tax return for 2021–22 on time but sent it to an outdated HMRC address. She received an initial £100 penalty along with daily and six-month penalties. Although she was unaware that the address was incorrect (which served as a reasonable excuse for the initial penalty), the First-tier Tribunal ruled that she should have taken corrective action after receiving notice of the first penalty. Consequently, while the initial £100 penalty was overturned, the daily and six-month penalties were upheld because she did not act quickly enough to mitigate her situation.
This case demonstrates that even when a reasonable excuse exists, taxpayers must remedy the situation promptly to avoid accumulating further penalties.
Special Circumstances for HMRC Penalties
HMRC may also consider ‘special circumstances’ that don’t qualify as reasonable excuses but warrant some leniency. This includes factors that, while not directly causing the failure, may justify a reduction or cancellation of penalties. Taxpayers are encouraged to communicate with HMRC as soon as issues arise and maintain a record of any difficulties faced.
In Summary
For HMRC to accept a reasonable excuse, the taxpayer must show that they took all possible steps to meet their tax obligations but were prevented from doing so by events outside their control. While some excuses are immediately dismissed, legitimate reasons related to health, bereavement, technical failures, or misinformation may be considered valid. However, it is vital for taxpayers to act promptly and keep thorough documentation to support their claims when penalties arise.
Next steps
If you need any help in filing your tax return, tax return advice, or in relation to any other tax matters, then please get in touch.
Starting next year, non-domiciled individuals (non-doms) in the UK will face a tougher tax regime as Labour aims to eliminate what they see as an outdated tax benefit and reform inheritance tax (IHT) liabilities.
Labour’s Plans…
Labour plans to enhance the Conservative proposals from the March Budget by implementing stricter transition rules and introducing a new residence-based system for IHT, effective from 6 April 2025. The full details of the rebasing dates will be disclosed in the autumn Budget.
The New System
The new system will shift from a domicile-based IHT approach to one based on residence, targeting those who have been UK residents for the past 10 years. This change will affect the scope of property subject to UK IHT for both individuals and trusts, and will only apply to deaths occurring after the new rules take effect, avoiding retrospective application.
Four-year foreign income and gains (FIG) regime
The Labour government will not continue the transitional measures announced by former Conservative Chancellor Jeremy Hunt, such as the 50% tax reduction on foreign income for individuals losing access to the remittance basis in the first year. Instead, they will implement a four-year foreign income and gains (FIG) regime, offering 100% relief on FIG for new UK arrivals in their first four years of tax residence, provided they have not been UK tax residents in any of the previous ten years.
UK residents ineligible for the four-year FIG regime will be subject to capital gains tax (CGT) on foreign gains as usual. Remittance basis users can rebase foreign capital assets to their value on a specified date for CGT purposes when they dispose of them. This rebasing date will be confirmed in the upcoming Budget.
April 2025
As of April next year, income and gains within settlor-interested trust structures will lose tax protection. A new temporary repatriation facility (TRF) will be introduced, allowing individuals who have previously used the remittance basis to remit FIG accrued before 6 April 2025 at a reduced tax rate for a limited time. The specifics of this will be detailed in the Autumn Budget.
Furthermore, there will be a review of offshore anti-avoidance legislation, including the transfer of assets abroad and settlement rules, to clarify and simplify the current laws. Any changes resulting from this review are not expected before April 2026.
If you have any questions on how your tax liabilities will be affected by the new labour government then please get in touch. Our team of experience tax advisers will be able to guide through proposed changes.
The Shifting Tax Landscape in the UK: High Earners and the Move Abroad
Introduction
In recent years, the UK has seen a significant shift in its tax landscape. There are now 2.8 million more higher rate taxpayers compared to 2010. This change has concentrated the tax burden on a smaller population segment, with over 60% of the income tax being paid by the top 10% of earners. As a result, many high earners are exploring options to mitigate their tax liabilities, including the possibility of relocating abroad.
The Appeal of Moving Abroad: Popular destinations of choice
Faced with increasing tax pressures and high tax rates, numerous UK residents are considering moving to countries with more favourable tax regimes. Thailand and Portugal have emerged as popular destinations for those seeking a better quality of life and potential tax advantages.
Thailand offers a low cost of living, beautiful landscapes, and a relatively lenient tax system. The country’s non-resident status and foreign income exemption rules make it an attractive option for retirees and remote workers.
Portugal, through its Non-Habitual Resident (NHR) regime, provides significant tax incentives for new residents. Its favourable climate, safety, and high standard of living further enhance its appeal.
However, moving abroad comes with complex tax implications that need careful consideration. One crucial aspect is assessing residence status, as individuals may face split-year treatment. This would mean that the tax year is split into a period of residence and non-resident, hugely impacting how an individual’s income is taxed.
ETC Tax can assist clients in navigating these challenges by:
Determining UK Tax Residence Status:
We can assist with reviewing HMRC’s Statutory Residence Test to establish whether you are considered a UK resident or non-resident for tax purposes. This can help you be confident that you are paying the correct amount of tax for the year where there are complex residence considerations.
Split-Year Treatment:
Advising on the rules and implications of split-year treatment, ensuring that your income is correctly taxed during the tax year in question.
Tax Planning:
Providing tailored advice on how to structure your affairs to take full advantage of tax benefits in your new country of residence.
Compliance and Reporting:
Ensuring that all tax obligations are met in the UK and assisting with these. We’re happy to help with all or just part of the process. We are flexible in terms of our level of support.
Next Steps
Relocating abroad can offer significant tax benefits, but it requires expert guidance to navigate the complexities of international tax law. ETC Tax is here to help you every step of the way, ensuring a smooth transition and optimal tax outcomes. Please do get in touch with us at enquiries@etctax.co.uk should you want to find out more.
Our client had been approached by HMRC who sent a ‘nudge letter’ advising they believe that the client may have received foreign gains that should be taxable in the UK.
Issue
Our client was not in receipt of any foreign income or gains for the year in question and HMRC seemed to suggest otherwise.
How we solved it
We assisted our client with responding to HMRC by acting on their behalf during the entire process. We worked with the client to obtain all the relevant details and identify where HMRC had received the incorrect information from. Documentation in relation to an offshore life insurance policy our client held contained an error and we assisted our client with obtaining the correct details from the provider to prove to HMRC that there was in fact no gain chargeable.
The Outcome
Our expertise and assistance meant our client was confident that they were obtaining the necessary support and HMRC responses were handled correctly and professionally. Once we were able to obtain the correct documents, HMRC were in agreement that there was in fact no chargeable gain and revoked their enquiry.
Next steps
Does this case sound familiar to you or your client? Please get in touch with out team at ETC Tax.
VAT’s relationship with food is complex and it seems there is a never ending conveyor belt of court cases around the VAT treatment of certain foods. It is a lot more complex than it seems when it comes to VAT code on food categories.
The latest to go through this legal ordeal which resulted in the delving into the complexities of VAT categorisation is Duelfuel Nutrition Ltd ‘Duelfuel’.
Duelfuel vs HMRC
Duelfuel became involved in a conflict with HMRC regarding the tax status of its sports nutrition goods. The initial matter, which was overseen by the First-tier Tribunal (FTT), revolved around the crucial question of whether the products (which are marketed as cakes), should be classified as such or whether they are more of a confectionery item which would influence the VAT rate.
Duelfuel’s aims were to provide both pre-workout energy and post-workout protein intake through a range of flapjacks and cakes. Despite being marketed and designed with the intention of being cakes, HMRC argued that the products belonged in the confectionery classification, resulting in their standard rate VAT treatment.
Cake or fake
During the tribunal, the FTT looked closely at many different aspects of the products.
To decide what category they belonged to they looked at…
1 What they were made of
2 How they were packaged and advertised
3 How people typically ate them
Even though the products looked like cakes, they were quite different in terms of what they were made of, how they tasted, and who they were meant for compared to regular cakes.
The fact that they contained protein powders and were marketed for their health benefits rather than just being tasty treats played a big role in the tribunal’s decision.
Tax law definition is final!
Duelfuel argued that their products should be taxed at zero rate like cakes, however HMRC’s position won out. This was backed up by the tax law’s broad definition of ‘confectionery’, which includes sweet foods eaten with fingers. The FTT’s decision highlights the careful balance between legal definitions and the product’s real-world application, which ultimately determined how the products were to be taxed.
In a similar dispute, Innovative Bites, who are an importer of American “Mega Marshmallows,” challenged HMRC’s decision to apply VAT to the marshmallows. They argued that since the marshmallows were intended to be roasted over a flame, they should be considered ingredients rather than sweets and not be subject to VAT.
Complexities of VAT classification
The tribunal’s decision reflected the complexities of VAT classification, in a similar vein to the Duelfuel case, considered both the legal interpretations and practical factors.
In this case it was the, the physical change that marshmallows undergo when roasted which played a key role in determining how they would be treated for VAT. The FTT agreed that marshmallows were cooking ingredients rather than finished sweets.
Conclusion
Both of these cases highlight the intricate details involved in VAT classification, where legal definitions intersect with practical considerations to determine the correct tax position. From examining the product compositions closely to analysing how they are consumed, VAT disputes often involve navigating through layers of legal complexities, impacting both businesses and consumers.
Next Steps
Here at ETC Tax, we have a vast amount of experience in dealing with these types of VAT intricacies. From our experience we know that when the question of VAT comes along, the tax at stake is usually quite high.
If you or your clients require any support specifically with regards to VAT, please do get in touch.
