On 4 August 2014 HMRC unexpectedly changed the way it treats loan arrangements for non-doms who use the remittance basis. As part of the 2014 announcement HMRC requested anyone who had relied on the previous concession to restructure by 5 April 2016 to avoid a remittance.However, on 15 October 2015, HMRC announced that its change in guidance will not apply to remittances made prior to 4 August 2014.
This change is helpful insofar as it essentially "grandfathers" any arrangements where the loan was remitted to the UK before 4 August 2014. However, there are still technical difficulties surrounding the new approach from HMRC and questions over whether its interpretation of the law is correct.
If borrowing is undertaken in or brought to the UK then there can be a remittance if foreign income or gains are "used in relation to" that borrowing outside the UK. This obviously catches paying interest or repaying such borrowing, but the rules arguably go wider. There has always been a question over whether using foreign income or gains as collateral for such borrowing is caught.
Previously, HMRC ignored the "use" of the income and gains as collateral – provided the loan was on commercial terms, the collateral was not treated as remitted. Instead, HMRC took the view that only the funds used to service and/or repay the loan would be treated as remitted. This was logical – the collateral is only "used" if it is claimed by the lender because the borrower defaults.
4 August 2014 Change
With immediate effect from 4 August 2014 HMRC take the view that where a loan is secured against offshore income or gains and the borrowed funds are remitted to the UK, there is a remittance of the offshore income or gains used as security (up to the value of the borrowed funds remitted to the UK). Further, if the loan is serviced using offshore income or gains this may generate a second remittance.
This is not affected by the announcement on October 15 2015.
Arrangements existing prior to 4 August 2014 – transitional rules
HMRC originally said that where taxpayers had existing arrangements which were affected by the 4 August change, they would either need to repay the loan or replace the security with clean capital before 5 April 2016 to avoid a UK tax charge on the borrowed funds previously remitted.
HMRC said it would take no action to assess past remittances provided:
- HMRC take the view that the existing loan arrangements are within the terms of their previous concession; and
- the loan is repaid before 5 April 2016 or a written undertaking is sent to HMRC by 31 December 2015 undertaking to replace the security by 5 April 2016.
Announcement on 15 October 2015
Following the October 15 2015 announcement these transitional rules will not apply to any arrangements where the loan was brought into or used in the UK before 4 August 2014. As such there is no longer any requirement to repay the loan or replace the security with clean capital before 5 April 2016 to avoid a UK tax charge on borrowed funds previously remitted.
HMRC's change in guidance is still effective from 4 August 2014 and so any loans on offshore income and gains which are remitted after that date will be subject to a UK tax charge on remittance under HMRC's interpretation of the legislation.
The change continues to cause several obvious issues. In particular, it is not clear what effect the change has on secondary and superfluous security, "all-monies" charges and floating charges. HMRC is relying on the idea that funds are "used" when they are offered to a lender as security. That seems questionable – funds are "used" in this sense only when the lender takes the security on a default. There are also serious problems with how this new treatment will apply to mixed funds and HMRC is yet to clarify this.
It is also far from clear whether HMRC's position is the correct interpretation of the legislation – it is arguable that the concession was not a concession at all but the correct interpretation of the legislation. A number of representative bodies are continuing to liaise with HMRC to put this argument to them and it remains to be seen whether any further announcements will be made on this in due course – we can but hope.