HMRC's Gordian Knot

There has been a veritable avalanche of newspaper articles and TV reports about the proposed changes to the so called "non dom" rules, which are planned to come into force from the 6th of April.

The majority of the reports and articles focus on the so called "wealthy non doms", who in the eyes of some are paying far less than their "fair share" of tax. Some believe that the imposition of the new rule will ensure that they will be made to pay what they "should".

This argument of course ignores the fact that these individual invariably generate wealth and prosperity for the country via their businesses and activities.

However, leaving the "wealthy" aside, this proposed legislation will affect others as well.

Under current "non dom" rules, income and capital gains from overseas investments and assets are only liable to UK tax if remitted or brought into the UK.

Under the proposed new legislation, drafted by HMRC, unless overseas income is below £1,000 the "cost" of choosing to be taxed on the remittance basis will be £30K a year (where the non dom has been resident in the UK for seven or more years) as well as the loss of the personal allowance and the annual capital gains tax exemption.

The alternative to the £30K fee is to pay UK tax on worldwide income and gains. This of course means that you have to be registered as a taxpayer in the UK.

However, there remains the thorny and politically embarrassing issue of illegal immigrants:

- The Home office estimate that there are 310,000 - 570,000 illegals in the UK
- Migration Watch estimate that there are 515,000 - 870,000 illegals in the UK

It is safe to assume that none of these people are registered in the UK tax system, therefore once they have been here for 7 years they are classified (under the proposed new rules) as "non doms".

This means that they will have to pay £30K.

Needless to say, this will not happen.

Now here is where it becomes rather messy for the government, by not paying the £30K fee and by not registering for tax the illegals will be committing offences under the laws relating to money laundering.

At first glance this may seem to be irrelevant, if they are illegal they should be deported and the problem is solved.

Not quite, for you see an offence under the money laundering rules is a criminal offence which requires a jail term.

The jails are already full, and the illegals are meant to be deported.

This rule change will cripple the government's drive to reduce the number of illegal immigrants living here.

As Alistair Darling presents his first budget today, he might want to think about how he can unravel this Gordian knot of his own creation.

Happy Budget Day!

Tax does have to be taxing.

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