US unease at UK tax clampdown

US unease at UK tax clampdown

By Jean Eaglesham in London

Published: February 10 2008 18:48 | Last updated: February 10 2008 18:48

The UK and US are at loggerheads over the imminent tax clampdown on wealthy non-domiciled foreigners living in Britain, which threatens to hit Americans particularly hard by, in effect, forcing them to pay the £30,000 annual levy twice over.

The British government’s refusal to give way on the issue is exacerbating fears the “non doms” tax changes will drain talent from the City to other jurisdictions, damaging London’s pre-eminent status as a financial services centre. The US is lobbying hard behind the scenes to try to persuade the UK Treasury to change the wording of its draft legislation. The Americans want to ensure the £30,000 fee comes within the scope of a transatlantic treaty designed to avoid double taxation. A fiscal quirk means that, as the proposals stand, the levy will almost certainly not be “creditable” under US rules taxing worldwide income, and so cannot be offset against US tax.

Richard LeBaron, chargé d’affaires for the US embassy in London, told the FT: “The embassy has been consulting widely and hearing the concerns of American companies and taxpayers in the UK. We are communicating those concerns to HM Treasury and others in the UK government as part of our regular dialogue with them.”

US banks in the City are spearheading industry efforts to persuade Alistair Darling, the chancellor of the exchequer, to soften the impact of the new regime before it comes into effect in April. Ian Harrison, a director of the London Investment Banking Association, said: “We have significant concerns about the way in which the new proposals would interact with the US system.”

But the Treasury is resisting pressure to respond to the US concerns. An official told the FT: “Whether the tax charge can be credited against tax paid in the US is a matter for the US authorities.”

The stand-off compounds uncertainty over the precise impact of the tax changes. The Treasury is still consulting on plans to charge foreigners living in Britain for more than seven years £30,000 a year if they wish to keep their foreign income out of the British tax net. The government also intends to close loopholes allowing wealthy individuals to escape capital tax on UK assets in offshore trusts.

Details of exactly how the regime will work will not be finalised until the Budget on March 12 – just 18 working days before it comes into effect. The Revenue & Customs department stressed that the draft legislation implementing the changes it issued last month was “not in its final form” and “should be regarded as a work in progress”.

Tax advisers warn the last-minute nature of the changes is creating chaos.

Mike Warburton, senior tax partner at Grant Thornton, said it was “quite extraordinary” the changes had not yet been finalised. “This is not the way to run a modern economy,” he argued. “The government’s been bounced into this by the Tories – they had not planned to do it, and it’s not been thought through.”