Budget – US citizens, over here, over taxed

In the run-up to the Budget, there were are few press articles suggesting that UK Treasury officials had been busy in negotiations with their USA counterparts to secure a credit against US federal taxes for those USA citizens who would be paying the new stand alone £30,000 remittance charge to the UK government. We were told that we would soon hear of the expected success of the UK in this regard. Yeah right.

We can now safely assume that this was nonsense and that the minutes of these meetings can be summarised as ... "US told UK to sod off". This much was predictable given that any consultation, or even thought, to the proposals before they were so hurriedly released would have served to highlight that the original proposed stand-alone charge was highly unlikely to meet the stringent requirements, in the USA/UK tax treaty, for credit to be given in the USA.

Undeterred, we now have the UK government trying a workaround to save face, with what, at this early (or should that be late ?) stage is going to prove a far from satisfactory solution. The workaround necessitates the re-badging of the charge as an income tax which will fall within the terms of the treaty. In support of this, we have the publication of a 26 page memorandum from Skadden, Arps, Slate, Meagher & Flom LLP (known as Skadden, much to the relief, no doubt, of their receptionists) to explain how it all works for US purposes. Unfortunately, we don't get to see the instructions from the Treasury to Skadden, and no one, including Skadden, yet gets to see the re-drafted UK legislation.

The inherent problem with all of this for those US citizens affected is that, even if the US authorities agree with the interpretation of the creditability of the new charge for US purposes, there will many instances where only a small part of the tax paid in the UK will actually be creditable in the US. This takes us right back to the initial problem of the charge having the potential to raise the overall tax payable by the US citizens who are resident in the UK, a good many of whom are in the City or academia and, not without some justification, already consider they are paying their fair share of taxes to one government or the other.

For those opting not to pay the charge to secure the remittance basis but, rather, paying UK tax on the basis of their worldwide income and gains, the level of UK tax can be expected to exceed that currently payable in the USA.

There is, further, a suggestion that the new rules will encourage those affected US citizens to mitigate the consequences of the new UK exposures by moving their US situs investments out of the US and into tax haven structures. If so, this must surely have the potential to cause an almighty political stink.

All told, it looks like a mess, with huge technical doubts and complexities which are sure to take months, if not years, to resolve. With the extra tax take in the UK going to be relatively trivial in any event, and with the US citizens here in the UK tending to be in positions of considerable importance to the UK, one can but hope that commonsense will prevail and USA citizens will be exempted from the new charge.