What are the differences for tax purposes between domiciled and non-domiciled status?
A few months ago we published a case study concerning HMRC enquiring about foreign income. This can happen if you are a foreign national and are now living and working in the UK. An area we didn’t touch on was associated with how HMRC views your domiciliary status. The recent news about Rishi Sunak’s wife has highlighted this is somewhat complex and often misunderstood area of tax law. In this short post we’d like to help explain what it means to be ‘domiciled’ or ‘non-domiciled’ where tax in the UK is concerned.
What does ‘domicile’ mean?
In a nutshell, ‘domicile’ refers to that country a person treats as their main or permanent home. Also, it concerns where they actually live and maintain a ‘substantial’ connection with.
If you read our article on “Living Overseas - Do I Need Top Pay Tax if I Leave The UK?”, then you’ll be familiar with the tests that HMRC apply to decide how to treat your current tax residency status. As part of the Automatic UK Test, HMRC looks at your sufficient ties to the UK and whether they point to whether or not you’ve actually left the UK or still have reasons to come back, perhaps regularly. These tests help HMRC determine if you are legitimately living overseas for tax purposes or if perhaps you’re trying to avoid paying UK taxes by staying out of the country for 183 days a year.
Domicile of origin and domicile of choice.
Where UK tax law is concerned, there are three types of domicile - domicile of origin, domicile of choice and domicile of dependence. In the UK, you acquire domicile or origin at birth through your father, although this doesn’t mean the country the person was born in, but most often does. So, if your father is from India, India is your domicile, unless you choose otherwise.
Domicile is different to residency. In UK common law, every individual has one domicile, you can’t have two or have no domicile.
Your domicile of origin cannot be lost easily. Simply by moving overseas for an extended period, becoming a tax resident here or elsewhere, does not automatically remove for domicile status.
However, domicile of choice is a little harder to consider. Take for instance, a UK national. If they move abroad ‘permanently’ to settle in another country. Permanent means ‘indefinitely as it is really up to the person concerned, as is domicile of choice. It comes down to intention’s: if the new country will be their permanent residence, will they have family interests there, a business or other social interests. Do they own a property in that country? And, what about the existence of a Will and where that was created.
It’s quite a tricky area, as there are many variables and many ways to interpret somebody’s intentions. Hence, arguments with HMRC can arise and as always, you’ll need to prove your ‘innocence’ in the matter.
Domicile of dependence is for children under the age of 16 and their domicile will follow that of the person on whom they are legally dependent. However, it must be noted that if the domicile of the parent or legal guardian changes, the child will automatically acquire the same domicile and the child’s domicile of origin will be displaced.
[Read more about what happens if HMRC make enquires about you overseas income]
Important tax issues to consider
It is quite understandable why somebody would not wish to give up their domiciliary, as there may be intentions to return home, the UK being transitory, even though it may appear as somebody’s permanent home.
Take for instance somebody from India who has been living and working in the UK for many years. Their family may still predominantly be in India. They may’ve family business interests there too, or even own property there. In short, there may still be clear intent to return one day.
This means that although a foreign national living and working in the UK maybe a ‘tax resident’ and pay taxes on the income generated through their work here, their ‘non-domicile’ status will mean that their worldwide income does not have to be reported in the UK, as that will no doubt be payable to the tax authorities in the domiciled country. This highlights two options for non-domicile tax residents - being taxed on an arising or remittance basis
Taxed on an ‘arising’ or ‘remittance’ basis
If you are ordinarily considered as UK domiciled and a tax resident, then you are charged on an arising basis. This means that you pay tax on your worldwide income and you’re allowed to use your personal tax allowances and any annual exemptions to offset that income.
However, things are little different and often highly beneficial if you are considered ‘non-domiciled’ while a tax resident in the UK. In this case, you can choose to be taxed on a remittance basis, if that treatment is more favourable than the arising basis. By choosing the remittance basis, you’ll only be taxed on UK sourced income, not worldwide income, unless you decide to ‘remit’ that income. For instance, if you’re a Singapore domiciled national living and working in the UK as a tax resident and a retirement or an assurance policy matures yielding a gain. If you leave the gain in Singapore, no tax is due. If you bring that money into the UK - remit it, then tax falls due.
It’s important to note though that if you choose the remittance basis, you’ll lose your tax allowances and exemptions.
Other factors to consider when using the remittance basis
Do I need to claim to use the remittance basis?
Not necessarily. If your ‘unremitted’ foreign income and gains for the tax year are less than £2000, the remittance basis applies automatically, so you don’t need to claim. Also, it should be noted that at this level, you won’t lose your personal allowance or capital gains annual exemption either. This also allies, even if you are considered ‘domiciled’ for UK tax purposes.
If I choose to remit my income, how will it be taxed?
If you decide to bring some of the income you have earned overseas into the UK, that income will be taxed at the standard (non-savings) tax rates - 20% for basic rate earners, 40% for higher rate payers and 45% for the top tier incomes over £150,000.
Note though that dividend income, where you’d normally see these taxed at 8.75%, 33.75% and 39.35%, will be taxed as ordinary income - which would not be the case if you’d decided to opt for the ‘arising’ basis as opposed to ‘remittance’ basis.
How does the remittance basis work if I am a long term resident?
As the saying goes - “there’s no such thing as a free lunch”. At some point, HMRC will see your long term residency in the UK as a way of reducing your tax exposure and will look to make you pay for that entitlement. So, two bands of charges apply:
Resident for 7 out of the previous 9 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £30,000 per year.
Resident for 12 out of the previous 14 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £60,000 per year.
This is HMRC’s way of encouraging people to convert to the ‘arising' basis.
When am I automatically considered domiciled in the UK?
If you have been resident in the UK for 15 out of the previous 20 years, you are deemed as domiciled for tax purposes.
Domiciliary status for tax purposes is a complicated area, seek help
We have presented in rather simple terms the most commonly encountered tax aspects of being domiciled or non-domiciled in the UK. This subject is very complicated as the range of income sources can be extensive as can your ties to the UK if you are non-domiciled. Inheritance tax is another area affected by domiciled status that we haven’t covered here. Rules covering IHT and domiciled status changed in 2017.
If you are encountering issues with taxation as applied to domicile status, it’s likely that you require specialist tax assistance. We're based in London and our offices are conveniently located in Richmond-Upon-Thames, Putney and Cavendish Square. Our tax advisers are on-hand to help you navigate these difficult waters and arrive at an outcome best suited to your personal circumstances. Call 020 8108 0090 or use connect using the form here.
Working from home and claiming tax relief on expenses
As more of us are now working from home, more often, because of the recent impact has had on businesses and attitudes concerning the practice of working from home, how can employees be reimbursed for the extra expenses they incur working from home, and what exactly can they claim for?
It comes as no surprise to find that many of us have had to work from home over the past couple of years. While in most cases this was forced upon us, it has had a significant effect on the attitudes of employers towards this practice.
Many employees have found it beneficial, as indeed have some employers, and want to continue, at least for part of the working week. Working from home imposes a range of costs on both employer and employee that prior to the recent pandemic, haven’t drawn that much attention. So when employees spend a considerable part of their work time working from their own home, how much of the extra expense can they claim, and what exactly is claimable?
What types of working from home expenses are we talking about?
Enabling an employee to work effectively from home requires more than a little thought and planning, there are real costs and expenses to consider. These may include:
- The cost of a laptop or other computer
- An internet connection
- A printer
- Printer and general office consumables
- A home office space and furniture
- Heating
- Lighting
- Telephone / mobile phone
Most people typically discover that while working from home can be a great convenience, their household bills start to increase, especially if normally both adults are at work, working the typical 9 to 5 office shift.
Then there are other considerations that are often forgotten, issues such as insurance come to the fore, personal and for additional equipment. Also, can an employee now claim expenses for a trip to the employer’s office?
Reimbursement vs tax exemption
It is important to understand how expenses are treated for tax purposes.
Reimbursement
If, as an employee, your employer reimburses the expenses you incur as a part of your job, HMRC must be satisfied that:
- No matter who did the job, the expense would have been incurred.
- It was necessary to perform your job.
- It was incurred in the performance of your duties.
- It was incurred and paid back to you.
- The expense was wholly and exclusively for your work.
If HMRC isn’t satisfied, you’ll run the risk of expense payment being treated as additional income and be taxed accordingly.
Tax exemption
If your employer doesn’t reimburse you for expenses incurred during the performance of your duties, you may be able to claim these against your income. That may be the case if for example your employer doesn’t reimburse you for the additional expenses of working from home. You must be able to prove, just like reimbursed expenses, that they were purchased wholly and exclusively for your job.
If this is the case then your expenses can be claimed against your income. For instance, if you earn £30,000 and you incur £5,000 of expenses, you will only pay income tax on £25,000.
Some common questions about claiming working from home expenses
Implications exist for both employers and employees where claiming expenses related to working from home are concerned. Let’s look at some of these.
Can employers reimburse homeworkers for their household expenses tax free?
The simple answer is ‘yes’ an employer can reimburse its employees when they work from home with your full agreement, provided they are ‘reasonable’ and provided that the employee working from home is a regular occurrence.
HMRC allows different levels of payment to be paid free of tax and national insurance without supporting evidence. For weekly paid employees, this is up to £6, and monthly paid employees can expect £26 a month.
Can an employee be reimbursed tax free for working expenses greater than these figures? Again, yes. However, you must be able to prove that the payments are wholly in relation to ‘reasonable additional household expenses’ and that you have supporting evidence to this effect.
When employees are given equipment for home use, is there an income tax charge?
Income tax charges for this type of expense usually arise because the equipment concerned is also being used for personal use. As such it’s considered a benefit and tax arises as a result. So, if the equipment is supplied and owned by the company and supplied for business use, not personal use, then a tax charge will not arise. The other condition is that this ‘benefit exemption’ is offered to all employees with similar employment terms. The equipment must also be returned when the home working ends or when an employee leaves, if not a chargeable benefit will arise.
[Learn more about how benefits in kind are treated by HMRC here]
If an employee purchases their own home-working equipment, can we reimburse them tax free?
As a consequence of Covid-19, there was a government scheme in place up to April 5th 2022 that allowed employees to be reimbursed tax free for home-office equipment purchases, provided the same benefit was available to other employees in a similar role. This has not been extended beyond April 6th 2022.
Can homeworkers claim tax relief on household expenses?
Yes, because not every employer will cover the cost of an employee working from home. However, there are limits. Firstly, just like an employer reimbursing employees for home use, it has to be fully justified as an expense incurred wholly, exclusively and necessarily in the performance of their duties. Usually this is difficult to achieve as the employee should not have had a choice to work from home - i.e. it was forced upon them by the employer. If they did have a choice in the matter, then this would not be allowed.
However, because of Covid-19, an employee can now claim the same weekly £6 or monthly £26 allowance through their Government Portal for tax years 2020/21 and 2021/22. This claim is possible even if the employee was asked to work from home on a single day in either tax year. For a person on the basic tax rate of 20%, they are able to claim £6 per week which equates to £1.20 per week, or £62.40 per year. 40% taxpayers can claim double this.
Again, it is possible to claim more, but as ever, complete records demonstrating the authenticity of the claim must be kept and be justifiable.
If an employee works from home can they claim tax relief on travel expenses for trips to the office?
This is a difficult and complex area. It requires the definition of what is an employee's permanent workplace and temporary workplace. It also depends on whether the employee is permanent or part-time.
HMRC considers a permanent place of employment that location where an employee attends in performance of their duties. Regular relates to the frequency of attendance or pattern of attendance. This means that going to the office everyday is a requirement, a visit once a week, fortnightly or monthly, may apply.
On the other hand, HMRC considers a temporary workplace a location an employee attends while fulfilling a temporary role or one of limited duration. If an employee spends more than 40% of their time at one location over a 24 month period, HMRC will consider this as a permanent workplace.
So, if an employee ordinarily works from home full-time and is required to travel to the office, the employee can claim unreimbursed expenses tax free - provided the travel is not made regularly, else it may be considered that the office is the permanent place of employment.
Accordingly, if an employee shares their time between two locations, such as a home-office and their real office, HMRC will consider this as ordinary commuting between two ‘permanent’ places of work.
Can you backdate working from home allowance?
Yes, HMRC will accept backdated claims for up to 4 years.
Am I eligible for working from home tax relief?
Yes, provided you had no choice in the matter and your employer asked you to. Then you can claim £6 per week / £26 per month (monthly workers).
Note that you cannot claim this allowance if your employer reimbursed your expenses for doing so or paid you an allowance.
How do you claim payment for working from home?
You can make a claim if you have a government portal account or through your regular SA100 tax return.
Record keeping
Making expense claims is one thing, making sure you have the evidence to support them is quite another. Most employees are used to claiming ad-hoc expenses from their employer, such as when they attend an off-site client meeting, attend a trade show, stay overnight somewhere or claim subsistence expenses. When it comes to claiming expenses that relate to the use of your home, HMRC quite naturally regards these claims with little more skepticism.
It’s essential that you keep accurate documents in relation to what you are claiming. If you are claiming for heating that you might ordinarily expect not to have to pay because ordinarily you work in an office from 9 to 5, then make sure you apportion a reasonable amount of the bill. Don't, for instance, claim for heating your entire house when in reality you’re using just one room.
When you’re unsure, talk to a tax expert like TaxAgility
Personal tax addition can be a complicated area and making claims for expenses if not properly validated and justified, can lead to serious consequences with HMRC. If you have any doubts or would like a tax expert to help you in making claims for tax relief, call TaxAgility today on: 020 8108 0090 and speak to one of our personal tax experts.