Once upon a time, foreign income or gains (FIG) used as collateral for a relevant debt would not have been taxed as a remittance if the remittance basis user (RBU) borrowed the funds on commercial terms and made regular loan repayments.
However, on 4 August 2014, HMRC withdrew this ‘concession’ from its own guidance (RDRM33170) unexpectedly, and RBUs were told that they had to repay such loans before 5 April 2016 in order to avoid triggering taxable remittances. Transitional rules were put in place and HMRC later announced some ‘grandfathering’ provisions so that the 2014 changes did not apply retrospectively to remittances made before 4 August 2014.
HMRC has now updated RDRM35270 (on 18 May 2021, but note the latest RDRM update is RDRM10530 on 16 March 2021 according to the HMRC website). It subsequently appears that there was also an earlier addition of a new appendix 5 to the manual (RDRM37050) which took place in January, but which wasn’t spotted by practitioners at the time. There was no consultation or announcement in respect of these amendments, and most advisers are not aware of this update.
The detailed technical changes to HMRC manuals are set out below.
The main effect of these is a change in HMRC’s view of ‘how much is remitted’. If an RBU borrows 100, brings that 100 to the UK and offers FIG of 100 as collateral then the position remains unchanged: this is a remittance of 100 of FIG. However, life is rarely this straightforward. Usually collateral will exceed the amount of borrowing. Lenders are often keen to have multiple collateral for their loans.
What if an RBU borrows 100, brings that 100 to the UK but offers FIG of 250 as collateral? Previously HMRC would have said that that was a remittance of 100. But the new interpretation seems to say that in this situation there is a remittance of 250. This is seemingly without limit. If an RBU borrows 10 but offers collateral of 1m this seems, on the new interpretation, to be a remittance of 1m!
However, if less than the full amount of borrowing is brought to the UK, then the position is clear. If an RBU borrows 100, but only brings (say) 99 of that to the UK, offering any amount of FIG as collateral, then the rules already clearly state that the remittance is 99 (or the amount of FIG if lower).
Without further explanation from HMRC, it is difficult to understand why these changes were made. HMRC appears to have adopted a literal reading of ITA 2007 s 809P(4) which provides: ‘the amount remitted is equal to the amount of income or chargeable gains used’.
In contrast, the pre-May 2021 interpretation was more logical and is succinctly put by HMRC in RDRM35050: ‘The reason for this is obvious if you consider what would happen in the very unlikely event that the lender immediately ‘seized’ the collateral in the painting to repay the £100,000 debt in full. The lender would realise £160,000 from the painting; the lender would retain £100,000 to satisfy the debt owed and return £60,000 to Freda (ignoring accrued interest, penalties and service charges). So only £100,000 of the collateral is used in respect of the debt.’
Unfortunately for Freda and many RBUs, HMRC’s new interpretation could result in unexpected tax consequences if the amount of FIG used as collateral is far greater than the amount of the debt itself. It could be disastrous for the taxpayer but also for HMRC, as illustrated below:
The case of Aozora [2019] EWCA Civ 1643 confirms that taxpayers cannot rely on HMRC guidance if ‘it is only a representation as to HMRC’s opinion as to the law’. Although HMRC manuals could be relied upon in certain (albeit limited) circumstances, it seems unfair to expect taxpayers and advisers to keep up with these unannounced changes. It is also unhelpful when two different paragraphs in the manual contradict each other because HMRC has not tracked through its own changes.
At the time of writing, there are no transitional rules or ‘grandfathering’ provisions, so it is uncertain as to when and how HMRC plan to implement the new interpretation. Furthermore, is it legitimate for HMRC to change their practices without warning in instances which could amount to retrospective taxation? One would hope not.
We understand that the CIOT, STEP and other professional bodies are urgently seeking a meeting with HMRC to clarify the position here.
John Barnett & Myra Leung, Burges Salmon
First published on the Burges Salmon website on 22 June 2021.
Once upon a time, foreign income or gains (FIG) used as collateral for a relevant debt would not have been taxed as a remittance if the remittance basis user (RBU) borrowed the funds on commercial terms and made regular loan repayments.
However, on 4 August 2014, HMRC withdrew this ‘concession’ from its own guidance (RDRM33170) unexpectedly, and RBUs were told that they had to repay such loans before 5 April 2016 in order to avoid triggering taxable remittances. Transitional rules were put in place and HMRC later announced some ‘grandfathering’ provisions so that the 2014 changes did not apply retrospectively to remittances made before 4 August 2014.
HMRC has now updated RDRM35270 (on 18 May 2021, but note the latest RDRM update is RDRM10530 on 16 March 2021 according to the HMRC website). It subsequently appears that there was also an earlier addition of a new appendix 5 to the manual (RDRM37050) which took place in January, but which wasn’t spotted by practitioners at the time. There was no consultation or announcement in respect of these amendments, and most advisers are not aware of this update.
The detailed technical changes to HMRC manuals are set out below.
The main effect of these is a change in HMRC’s view of ‘how much is remitted’. If an RBU borrows 100, brings that 100 to the UK and offers FIG of 100 as collateral then the position remains unchanged: this is a remittance of 100 of FIG. However, life is rarely this straightforward. Usually collateral will exceed the amount of borrowing. Lenders are often keen to have multiple collateral for their loans.
What if an RBU borrows 100, brings that 100 to the UK but offers FIG of 250 as collateral? Previously HMRC would have said that that was a remittance of 100. But the new interpretation seems to say that in this situation there is a remittance of 250. This is seemingly without limit. If an RBU borrows 10 but offers collateral of 1m this seems, on the new interpretation, to be a remittance of 1m!
However, if less than the full amount of borrowing is brought to the UK, then the position is clear. If an RBU borrows 100, but only brings (say) 99 of that to the UK, offering any amount of FIG as collateral, then the rules already clearly state that the remittance is 99 (or the amount of FIG if lower).
Without further explanation from HMRC, it is difficult to understand why these changes were made. HMRC appears to have adopted a literal reading of ITA 2007 s 809P(4) which provides: ‘the amount remitted is equal to the amount of income or chargeable gains used’.
In contrast, the pre-May 2021 interpretation was more logical and is succinctly put by HMRC in RDRM35050: ‘The reason for this is obvious if you consider what would happen in the very unlikely event that the lender immediately ‘seized’ the collateral in the painting to repay the £100,000 debt in full. The lender would realise £160,000 from the painting; the lender would retain £100,000 to satisfy the debt owed and return £60,000 to Freda (ignoring accrued interest, penalties and service charges). So only £100,000 of the collateral is used in respect of the debt.’
Unfortunately for Freda and many RBUs, HMRC’s new interpretation could result in unexpected tax consequences if the amount of FIG used as collateral is far greater than the amount of the debt itself. It could be disastrous for the taxpayer but also for HMRC, as illustrated below:
The case of Aozora [2019] EWCA Civ 1643 confirms that taxpayers cannot rely on HMRC guidance if ‘it is only a representation as to HMRC’s opinion as to the law’. Although HMRC manuals could be relied upon in certain (albeit limited) circumstances, it seems unfair to expect taxpayers and advisers to keep up with these unannounced changes. It is also unhelpful when two different paragraphs in the manual contradict each other because HMRC has not tracked through its own changes.
At the time of writing, there are no transitional rules or ‘grandfathering’ provisions, so it is uncertain as to when and how HMRC plan to implement the new interpretation. Furthermore, is it legitimate for HMRC to change their practices without warning in instances which could amount to retrospective taxation? One would hope not.
We understand that the CIOT, STEP and other professional bodies are urgently seeking a meeting with HMRC to clarify the position here.
John Barnett & Myra Leung, Burges Salmon
First published on the Burges Salmon website on 22 June 2021.
.jpg?sfvrsn=335a554c_0 "300 x 250 (MPU)")