Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss that schedule 6 be the Sixth schedule to the Bill.

We now turn to some rather technical clauses, but I am sure the Minister will illuminate the detail with his customary enthusiasm. Clause 19 introduces schedule 6, which in turn introduces the special mixed fund rules. According to the explanatory notes to the Bill, the rules

“broadly replicate the treatment that international employees who meet certain qualifying conditions currently receive under Statement of Practice 1/09”.

Schedule 6 also provides for such employees

“to apportion on a just and reasonable basis their earnings from an employment which covers UK and non-UK duties when they are entitled to overseas workdays relief.”

Again, this is intended to replicate the treatment currently available under statement of practice 1/09.

I am sure Committee Members will be aware that statements of practice serve to explain HMRC’s interpretation of legislation and the way in which HMRC applies the law in practice. I am sure Committee Members are also aware that SP1/09 provided a simplified tax treatment of income for employees who are

“Resident but Not Ordinarily Resident” in the UK; taxed on a remittance basis, rather than a normal arising basis; and carry out duties both in the UK and overseas under a single contract of employment. Such individuals will usually have their employment income paid into a single overseas bank account. There are around 15,000 such employees according to the tax information and impact note. They will, by definition, hold a mixture of UK and overseas earnings, making up the mixed fund. Mixed funds are accounts containing more than one kind of income—capital gains or capital—or containing income, capital gains or capital of more than one tax year.

Such individuals are of course liable to pay UK tax on their UK source income and gains, but employment income attributable to duties performed outside the UK is not normally subject to UK tax, provided it remains overseas through what is known as overseas work days relief. They are therefore liable to pay UK tax only on any amounts of foreign income and gains that are subsequently remitted to the UK:

“brought into, used in, or enjoyed in the UK”.

To establish tax liability, there needs to be an established way of distinguishing income attributable to overseas duties from income attributable to UK duties. If the  remittance to the UK is made from an account containing a single source of income for a single year, it is easier to identify what has been remitted and therefore what is liable to UK tax. However, as individual types of income and gains are taxed differently, statutory rules are therefore needed to determine how remittances to the UK should be taxed. Known as “mixed fund rules”, they work by determining, for every offshore transfer or remittance to the UK, what kinds of income and gains make up that transfer or remittance. The mixed fund rules therefore operate on a transaction by transaction basis, effectively requiring people to establish their UK tax liability on the basis of each individual payment into the account over the course of a tax year. It can be administratively complicated to apply to employment income, as each payment of salary would need to be apportioned in relation to the work done in each pay period.

SP1/09 provided a simpler tax treatment for qualifying individuals as it removed the obligation to operate the mixed fund rules on the main overseas account into which their salary was paid on a transaction by transaction basis. It enabled affected employees to apportion their annual earnings from their single contract of employment between UK and non-UK earnings on a “just and reasonable” basis, taking, for example, the number of days that they worked in the UK compared with the number of days they worked overseas during the whole year, and by reference to the value of deposits in, and transfers out, of the account in any given tax year.

SP1/09 was introduced following changes to the remittance basis of taxation in the Finance Act 2008, and it came into effect on 6 April 2009. It replaced the earlier statement of practice, which had been broadly in place for the same purpose and effect. However, in June 2011 the Government announced a consultation about the reform of the taxation of non-domiciled individuals, and they also announced their intention to put SP1/09 on a statutory basis via the Finance Bill 2012, as part of a series of measures to simplify or formalise the existing remittance basis rules.

However, a number of concerns were raised in the submissions to the 2011 consultation, which led the Government to announce in December 2011 that

“it is important to ensure that the legislation does not depart significantly from the way in which SP1/09 currently works. It—”

That is, the Government—

“will therefore give further consideration to these issues and take forward legislation of SP1/09 in Finance Bill 2013 to take effect from April 2013.”

Here we are in 2013. The Government also said in December 2011 that the deferral to 2013 was

“to co-ordinate with the parallel deferral of the abolition of Ordinary Residence for tax purposes”,

which is something the Committee will deliberate on a little later, in our consideration of clause 215, which deals with the “statutory residence test”, and clause 216, which deals with “ordinary residence”.

Subsequently, a further consultation was published alongside draft legislation in October 2012, which again prompted further concerns, resulting in a second summary of responses and a second draft of legislation being published for consultation in February 2013. In response to suggestions made to all of these consultations, the  Government have agreed that the simplified treatment previously offered by SP1/09 should be extended to provide further administrative easements or further simplification of the process, so that the simplification offered by clause 19 and schedule 6 will also apply, with effect from last month, to: existing bank accounts, where previously only completely new accounts were eligible for the simplified treatment; accounts held jointly by a spouse, where the spouse makes no economic contribution to the account; and accounts containing funds from more than one employment, which have duties both in the UK and overseas, where previously only funds from a single contract of employment were eligible.

Those changes, which were made as a result of the consultations that were undertaken, are of course welcome, particularly the decision that people will not be required to “nominate” their qualifying bank account before arriving in the UK, as was originally suggested by the Government. That suggestion would quite clearly have created practical difficulties for employees arriving in Britain who would not necessarily have known until after they had arrived here that they needed to “nominate” an account, and in many cases they would have needed to discuss matters with a tax adviser here in the UK before nominating an account.

However, as I have been unable to locate the Government’s response to the most recent consultation on these changes, perhaps the Minister could enlighten me as to where I could find that information. Will he also confirm whether any further concerns about the proposals were raised in response to the February 2013 consultation and, if so, whether any steps have been taken to iron out any of the most recent concerns that have been expressed?

The large majority of people impacted by the clause due to the nature of their employment and likely salary will be in a position to seek and pay for tax advice to get to grips with what remains a complex issue, regardless of the simplification measures that the Government have taken. However, for those few who are not in that position, will the Minister outline what steps HMRC is taking to ensure that people previously affected by SP 1/09, which is now clause 19, are aware of, and understand, their tax liabilities? It would be useful to know what initial cost HMRC expects to incur in providing further guidance to individuals and employers on these changes.

I thank the hon. Lady, both for her support for the measures and for setting out some of the issues involved in this area, which as she rightly says is one of the more technical, complex areas.

The clause introduces schedule 6, which puts statement of practice 1/09 on a statutory basis. SP 1/09 simplifies the tax rules that apply to certain employees who are taxed on the remittance basis. This gives certainty for key employees who normally come to the UK to work for a relatively short period of time.

At the risk of repeating what has already been said, I should like briefly to outline the rules incorporated in SP1/09. The rules were introduced in 2008, when the remittance basis of taxation was reformed. The remittance basis is an alternative basis of taxation available to  individuals who are resident but not domiciled in the UK. The rules incorporated in SP1/09 apply where an individual brings money to the UK from an overseas bank account that contains a mixture of different types of income, or a mixture of income from different tax years, or both. The purpose of the rules is to determine the amount of tax that is due when money is brought to the UK from a mixed fund. They do this on the basis of each transaction made throughout the tax year.

Employees who perform duties both in the UK and overseas will typically have their salary paid into a single overseas account. If they do so, that account will be a mixed fund. They will typically use that account to fund their day-to-day living expenses in the UK and elsewhere. Under a strict application of the mixed fund rules, they would have to examine hundreds or even thousands of transactions to determine their UK tax liability at the end of the tax year. Such employees may also have difficulty determining how much of their total employment income relates to duties in the UK and how much relates to duties outside the UK until the end of the year. SP1/09 was introduced to address both these issues and it provides such employees with simplified mixed-fund rules to eliminate the need to look at every transaction made through a bank account. It also allows them to apportion their earnings on an annual basis between UK and overseas duties based on the proportion of their total work days that were spent in the UK.

The schedule puts SP1/09 on a statutory basis. It introduces rules for individuals who are taxed on the remittance basis and who have duties in both the UK and overseas as part of the same employment. The schedule also introduces a number of easements, including allowing the use of joint bank accounts and pre-existing accounts, neither of which are permitted under SP1/09.

The changes will affect approximately 15,000 individuals, who are typically expatriate employees who come to work in the UK for a relatively short period of time. These changes are designed to be revenue neutral. They remove what would otherwise be an administrative burden for these individuals, their employers and HMRC.

On the question whether these measures may be too complex for taxpayers, and while acknowledging that many of those who are likely to be affected will be in a position to take professional advice, it is worth pointing out that these rules provide a significant simplification over the existing remittance basis, mixed fund rules for internationally mobile employees coming to work in the UK. For the vast majority of that group the rules will be straightforward to operate. In practice, most taxpayers using SP1/09 are already represented by advisers, but we are providing extensive guidance to help anyone using the new rules. HMRC has already produced a frequently asked questions page on its website that will provide some assistance. We do not believe that there is any significant cost to HMRC for providing this guidance.

I will deal, if I may, with the question about the consultation document response. We have not published a response document to the last round of consultation, but HMRC has discussed the changes with external representatives who broadly welcomed these changes. The legislation in this schedule reflects a number of very small technical changes as a result of the February 2013 consultation. We are not aware that significant concerns about the Bill remain. I hope that that answers the hon. Lady’s question. Clause 19 and schedule 6 are  a further step towards our objective of creating a more efficient and simpler tax system by removing the need for certain individuals to carry out potentially hundreds of computations during a year to calculate a UK tax liability.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.