They say that a little knowledge can be dangerous. Likewise, being self taught off the internet can cause unexpected tax problems. A lot of taxpayers around the work want to be able to say “it’s tax free”.
It is widely reported that if somebody works in say the Middle East, then their salary is tax free. Whilst this can be the case, it is not always the case. And even then it doesn’t mean all your income and gains are tax free from UK taxes. It depends upon all the relevant facts including your domicile and residency for tax purposes.
Why is domicile and residence important?
Both domicile and residence can change over time. Some facts can become significant and others can wane. Taxpayers may not appreciate the differences between a domicile of origin, a domicile of choice and a deemed domicile. Likewise, taxpayers may not appreciate the difference in being resident and ordinarily resident.
With modern families being more internationally mobile with their work and visiting family, some taxpayers do not appreciate that whilst you can only ever have once domicile at a times, you can have multiple residencies at the same time.
Confused?
Who decides?
The facts will decide. The key is establishing all the relevant facts. In the UK, HMRC can challenge a taxpayer on either concept in any tax year.
Don’t forget the Common Reporting Standard (CRS)
Each year HMRC autoatically receives information from other tax jurisdictions around the world which is processed through CONNECT.
What are the consequences?
If you are non-resident UK and non-domiciled UK you may still have a need to make a Return to HMRC. Moreover, you may have tax deducted at source which you may be able to reclaim.
As the pandemic has shown, events and facts can suddenly change and at the last minute such that the tax advice and ultimate conclusion that was sought and valid at the time becomes irrelevant with unexpected tax consequences.
A case in point
Perhaps you have a contract to work in a “tax free country” say the Middle East. Then there is an opportunity to invest in the local vibrant property market. Imagine further that there is a wider opportunity to invest in more than one property as there is an insatiable demand for family and friends to come over and rent such properties for a few weeks or even a month at at time.
None of the rents are declared to HMRC – why would they be?
A question of facts
Supposing all the above is correct but a few facts have been overlooked. For example, being cautious, you decided not to sell your UK home before you left for a sunnier climate. You’ve let the UK property out on short term lets and even go back to the UK for a few weeks just to check on the property and meet up with old friends and acquaintances.
Knock, knock. It’s HMRC.
But it’s tax free I hear the taxpayer say!
It still might be tax free in the Middle East but based on the above facts, there is a potential UK tax liability. HMRC might be able to successfully argue that no-one actually ever left the UK (for UK tax purposes).
All the income and gains are taxable in the UK, plus interest and penalties. Otherwise HMRC may consider it to be tax evasion.