[Studies in the History of Tax Law, ed Tiley, Hart, 2004, p.15]

Taxing Foreign Income from Pitt to the Tax Law Rewrite—the Decline of the Remittance Basis

John F Avery Jones CBE MA PhD LLM Hon FTII

I. Introduction

Only in the United Kingdom could we still impose tax on foreign income by reference to the identical expressions originally contained in Pitt’s 1799 Act¹—“interest arising from foreign securities,” and “income from foreign possessions.” The courts have successfully adapted these expressions to encompass enormous business changes in the intervening 200 years. That is the most notable feature of our system of taxing foreign income. The second notable feature is that Pitt’s two categories of foreign income treat foreign income as a separate type of income unrelated to the categories of domestic income, such as trading profits, interest etc (although one should add that since 1956 foreign employment income has been treated as a type of employment income). The third is the remittance basis, by which, in Pitt’s Act most, and in Addington’s 1803 Act² all, foreign income was taxed to the extent, and at the time, it is brought into the United Kingdom, the scope of which has subsequently been reduced but which still exists today as an important basis of taxation for some individuals.

As to the first feature, the unchanged wording of the charging provisions, it is, fortunately, a principle of statutory interpretation that a statute is “always speaking,” meaning that the meaning of words should not be ossified the day the statute is passed.³ That the provisions taxing foreign income have not changed over the past 200 years and still manage to work provides what must be the foremost illustration of this principle. The courts have had no difficulty in accommodating the industrial revolution and all the changes that have taken place since then by enlarging the meaning of “securities” from mortgages to include company securities (taking in the development of companies on the way); and by enlarging the meaning of “possessions” from estates in the Colonies (and then recently former Colonies of America⁴) to include all possible forms of income from foreign assets. That is not to say that there were no problems on this journey; there have been doubts whether some types of income could be derived from “possessions,” and doubts about what made a possession foreign. As the 1955 Royal Commission said: “…it is not easy to find a category of income that corresponds precisely with the idea of ‘overseas income’.”⁵ It was nearly 100 years⁶ later that it was determined whether a foreign trade could exist, the courts ultimately deciding that it could but only with an extremely narrow definition. And 150 years later the courts were still trying unsuccessfully to work out whether an employment was a possession, and, if so, what made it a foreign one; the obvious factor, that of working abroad, seemed to be largely irrelevant. The definition of what was foreign employment income had eventually to be settled by statute, but not until 1956.

As to the second feature, that foreign income is a type (or two types) of income in itself, had we started to tax income later we would probably have dealt with foreign income as a category of the same type of UK income. Even in Pitt’s time foreign income was important; he estimated the amount of foreign income to be £5m out of a national income of £110m.⁷ But no doubt to Pitt foreign income seemed to be unrelated to domestic income. This aspect is to be remedied by the Tax Law Rewrite⁸ which proposes to integrate foreign income into the relevant category of income so that, for example, interest, whether domestic or foreign, will be dealt with together. With that will also end the first feature, the use of Pitt’s wording to tax foreign income,⁹ hence the reference to the Rewrite in the title of this paper, to which we shall return at the end.

We tend to think of the third feature, the remittance basis, as entirely different from taxing income on the arising basis and having to do with movements of money through the international banking system. Its origin was very different and, because of the business changes that have taken place since Pitt’s time, the remittance basis may now seem even more different from the arising basis than it did originally. In Pitt’s time most foreign trade was with the colonies. The dearth of any markets abroad coupled with rules requiring important colonial produce to be shipped to England in the first place meant that the remittance basis, so far as trading income was concerned (and there was probably little other foreign income), was essentially a basis that charged tax when the produce was sold, necessarily in England. Even in other cases, the system of payment necessarily by bills of exchange, rather than, as now, moving money through the banking system, meant that foreign income would be remitted.¹⁰ It merely meant that the tax was postponed until the income was received in money. It was therefore more of a timing provision than one where remittances were voluntary. When trading evolved and this ceased to be true, the Revenue’s attack changed to disputing whether the trade was a foreign one, on which they were broadly successful in the courts. To which taxpayers countered by trading through non-resident subsidiaries, on which in turn taxpayers were broadly successful in the courts, although the courts developed a strict definition of non-residence for companies.

We shall first examine the original charging provisions and the difference between Addington’s Cases IV and V, and then look at how the courts defined what income was foreign. Next, we shall examine the origins of the remittance basis and the subsequent reductions in its scope. Finally, we shall refer to the proposals for the removal of the remaining scope of the remittance basis from non-domiciled individuals and look at the Tax Law Rewrite’s proposals for reforming the whole system of taxing foreign income.

II. Foreign securities and foreign possessions

The original charging provisions for foreign income

In historical articles on taxation one expects to find it said that Addington’s 1803 Act¹¹ was an advance on Pitt’s, but in respect of foreign income the credit must go to Pitt. Addington took Pitt’s two categories of foreign income with some drafting changes¹² and introduced only one major difference: he extended the remittance basis to cover interest on foreign securities. The only difference between Addington’s Cases IV (interest on foreign securities) and V (income from foreign possessions) was that income was measured by a single year in Case IV and by an average of the three preceding years in Case V,¹³ a distinction also found in Pitt’s Act. Had Addington designed the system from scratch there might have been only one Case for foreign income, which in practice is where we are today as Cases IV and V are difficult to distinguish for individuals and Case IV no longer applies to companies (although effectively there is another Case for individuals since Schedule E now has its own foreign element; foreign employments were originally a foreign possession). In spite of reducing foreign income to virtually a single category of we have nevertheless managed to create many different sets of rules for different types of foreign income, so the single Case does not represent the reality. We shall start by setting out Pitt’s and Addington’s charging sections relating to foreign income and, for comparison, the provisions as they are still in force today.

Interest on foreign securities

Pitt’s 18th case.¹⁴ “Money arising from Foreign Securities. The Annual Income of such Securities if the same were existing in the preceding Year, to be estimated according to the Produce of such Year, and if the same were not then existing, to be computed upon the expected Produce of the current Year.”

Addington’s Case IV.¹⁵ “The Duty to be charged in respect of Interest arising from Securities in Ireland,¹⁶ or in the British plantations in America, or in any other of His Majesty’s Dominions out of Great Britain, and Foreign Securities,¹⁷ [except such Annuities, Dividends, and Shares payable [out of the revenue of Ireland] as are directed to be charged under Schedule C¹⁸ of this Act]¹⁹. The Duty to be charged in respect thereof shall be computed on a Sum not less than the Whole and just Sum or Sums (so far as the same can be computed) which have been or will be received in Great Britain, in the current year, without any Deduction or Abatement.”

Case IV today. “tax in respect of income arising from securities out of the United Kingdom.”²⁰

“Securities,” originally, were not securities issued by a company as we think of them today because there were then few foreign companies.²¹ The original meaning can be seen from a contemporary explanation of interest arising from securities:

“This is a species of interest payable on mortgage debts, bills of exchange, or other securities, and arising out of foreign profits whether from trade or property. As these remittances are generally received through mercantile houses who act therein as agents, the act is compulsory on them to deliver the following account, according to sect.65 [a list of names and addresses which is now TMA 1970 s.17].”²²

Mortgage debts are secured in the true sense but bills of exchange are secured only if endorsed or “accepted” when there is security in the sense of something other than the original promise to pay. However, the reference to bills of exchange suggests that the courts have subsequently given too much prominence to security:

“…the normal meaning of the word ‘securities’ is not open to doubt. The word denotes a debt or claim, the payment of which is in some way secured. The security would generally consist of a right to resort to some fund or property for payment; but I am not prepared to say that other forms of security (such as a personal guarantee) are excluded.”²³

“the word ‘securities’ has no legal signification which necessarily attaches to it on all occasions of the use of the term. It is an ordinary English word used in a variety of collocations: and it is to be interpreted without the embarrassment of a legal definition and simply according to the best conclusion one can make as to the real meaning of the term as it is employed in, say, a testament, an agreement, or a taxing or other statute as the case may be….Securities in the Fourth Case of Schedule D appear to me to mean securities upon something as contrasted with the possession of something.”²⁴

“A security…is a possession such that the grantee or holder of the security holds as against the grantor a right to resort to some property or some fund for the satisfaction of some demand, after whose satisfaction the balance of the property belongs to the grantor.”²⁵

“…investment of money upon securities.”²⁶

One is left with some uncertainty about precisely what the courts subsequently regarded as securities. A reason for this is that the only distinction between securities and possessions was the difference in basis periods, the current year for securities and the average of the three preceding years for possessions, which ceased to matter when the basis periods became the same for both in 1926.²⁷

Foreign possessions

Pitt’s 17^th Case. “From Foreign possessions. The full amount of the actual Annual Net Income received in Great Britain either estimating such Receipt in the first Year of being charged at the Election of the Person charged, according to the Year ending the fifth day of February²⁸ immediately preceding such Estimate, or according to the Average of the three Years preceding such fifth Day of February, or on such Day in each Year on which the Account of such Income has been usually made up; and in all succeeding Years, the Annual Receipt to be reckoned in the same Mode which the Person charged shall have chosen to make in the first Year.”

Addington’s Case V. “The Duty to be charged in respect of Possessions in Ireland, or in the British Plantations in America, or in any other of His Majesty’s Dominions out of Great Britain, and Foreign Possessions”²⁹…computing the same on an Average of the Three preceding Years,³⁰ as directed in the first Case, without [other]³¹ Deduction or Abatement.”

Case V today. “tax in respect of income arising from possessions out of the United Kingdom not being income consisting of emoluments of any office or employment.”³²

As with securities, the wording has effectively remained unchanged since Pitt’s time. Today “possessions” has to cover every type of foreign income other than income from securities.³³ Originally its meaning was much narrower. An idea of what was meant by possessions can be seen from a contemporary explanation of a provision of Addington’s Act setting out the various ways of making a taxable remittance to which we shall return:³⁴

“The Act considers that the value of foreign property may be brought into Great Britain. 1st, By bills. 2d, From the produce of the estate which it calls property, (meaning personal property,) imported into Great Britain, and turned into money here. 3d, From the produce of the estate sold in other countries, the value of which is received here. 4th, From money received by the party either on the credit or the account of the produce of the estate converted in any of the ways mentioned.”³⁵

The reference to an “estate” in the second, third and fourth items demonstrates that the typical foreign possession of the time was immovable property, perhaps a plantation. The reference in Addington’s Case V to the “British plantations in America” is to the same effect.³⁶ The estate in Antigua belonging to Sir Thomas Bertram of Mansfield Park³⁷ may have been a typical foreign possession of the time.

If foreign possessions originally meant estates abroad, suggesting tangible property, it might imply that intangible property like shares were securities rather than possessions. The distinction between tangible and intangible property may originally have been the practical distinction between the two Cases when securities were the main example of intangibles³⁸ but this was not the true distinction since it was only interest³⁹ on securities that was within Case IV, so that possessions must include everything else, including income from other intangibles. It is also relevant to whether intangibles are included that when the expression “possessions” was first used:

“there were few incorporated companies, fewer which were foreign companies, and fewer still which were foreign companies having shares owned in Great Britain, so that, while the Legislature has used language which has been construed as wide enough to include all foreign species of property, what were principally in mind at the time were investments in lands, or in plantations or factories abroad.”⁴⁰

The distinction between securities and possessions was still being argued about in 1920,⁴¹ although the courts had before this time consistently held that a share in a company was not a security.

The courts had no difficulty in enlarging the meaning of “possessions” to cover every kind of foreign asset because if they had not, there were no other charging provisions for foreign income:

“‘Possessions’ is a wide expression; it is not a word of technical meaning; the Act supplies no interpretation of it. I cannot see why it may not fitly be interpreted as relating to all that is possessed in His Majesty’s Dominions outside the UK or in foreign countries which is a source of income.”⁴²

Any apparent difficulty over the limitations of the four statutory ways of making remittances,⁴³ written with foreign estates in mind, was no obstacle to the courts finding a suitable intention of Parliament:

“…I cannot think it was ever the intention of the Legislature to say in effect that…under Case V only those sums received were to be computable which were attributable to the specified operations or sources. I think therefore that these four sub-heads, as they have been called, should be treated as illustrations (no doubt intended to form a comprehensive list of illustrations) of the way in which, when foreign income is transmitted to this country, the transmission can be effected and the sterling sums obtained. These sub-heads, which are not all very clearly phrased, should accordingly be construed according to their general sense without too much nicety of language.⁴⁴

It will also be seen that both Pitt’s and Addington’s provisions taxed foreign possessions on the remittance basis based on the average of the three preceding years.⁴⁵ The difference in the period used for measurement of the income reflects that interest is usually fixed and certain whereas other income is variable and uncertain.⁴⁶

There is an overlap between Cases IV and V and other Cases. A trade within Case I or V may receive interest within Case IV. A trade controlled abroad consisting of making loans secured on land abroad, where the security was inherent in the trade, has been held to be within Case IV.⁴⁷ The Crown has an option to tax under another Case of the same Schedule⁴⁸ and may choose Case IV rather than I or V because expenses are not allowed against a Case IV assessment or, as will be seen, after 1914 most investment income was taxed on the arising basis while trading profits were taxed on the remittance basis.

What made a possession foreign?

Whether income was from a foreign possession does not pose much difficulty when one is dealing with rent from land abroad or dividends or interest paid by non-resident companies. The answer is much less obvious when dealing with trading and employment income. We shall next examine how the courts dealt with defining whether these were foreign.

Trading income

One of the difficulties in determining whether a trade is a foreign one is that control may be exercised in one place and operations take place in another.⁴⁹ The Act was not exactly helpful in distinguishing UK and foreign trades, because UK trades included any trade whether carried on in the UK or elsewhere⁵⁰ and so it was not clear whether a trade could qualify as a foreign possession.⁵¹ Because the courts had jurisdiction in tax cases only from 1874 we do not know how these provisions were interpreted but material from 1880 indicates that it was thought that foreign trades did not exist.⁵² The point was settled by Colquhoun v Brooks⁵³ (relating to 1884/85) in which the House of Lords decided on the construction of the Act that a trade controlled abroad was a foreign possession. One of the main reasons was that, if this were not the case, the assessing provisions for trades did not deal with trades carried on wholly abroad so that they could not be classed as UK trades.⁵⁴ It was explained by Lord Sumner in Mitchell v Egyptian Hotels Ltd⁵⁵ that the distinguishing feature of a foreign trade was that the trade was controlled from abroad⁵⁶ and the UK resident took no part in carrying it on. Confusingly, foreign control of the trade was described as the trade being carried on abroad, so that conversely the trade of the San Paulo (Brazilian) Railway which was controlled from England could be described as carried on in England.

“A director does not get on an engine in America and drive it, but he can say what man shall get on the engine, and how many hours that man shall work and at what pace he shall drive the engine. Everything is done by the order of the directors. They make all the contracts; it is said that they buy all the materials, and it is said that they buy all the engines; and in the trade or business of a railway if you buy bad engines you are pretty certain to come to grief, and where will your whole trade go to? If you buy a series of bad engines your profits will never appear. Then no one in America according to the statement of this case, has any power to do anything but to obey orders. It is beyond discussion and beyond doubt that a great part of this business or trade is done in England by the masters of that trade who are the directors of the English company.”⁵⁷

Indeed the Lord Chancellor went further and said that the trade was wholly carried on in England.⁵⁸ This concentrates on the intellectual control of the trade, to the exclusion of the trading operations themselves. But the expression “carried on” could also mean where the trading operations took place;⁵⁹ the statutory provision “trade…whether carried on in the UK or elsewhere”⁶⁰ uses the expression in the latter sense. If there is no partnership and a UK resident can direct how his local agents carry on the trade, it is a UK trade even though the control does not “go beyond passive oversight and tacit control.”⁶¹ Thus the courts had effectively removed the remittance basis from trading income.

It seems strange that the result can be different where there is a partnership since in Colquhoun the Australian partner must have been acting as the UK partner’s agent in carrying on the trade. The distinction is that a sole trader or company must control the trade because he or it is the only possible “head and brain of the trading adventure”⁶² but with a partnership there are at least two heads and brains and one looks to which one actually controls the trade. Presumably this is a case of “the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners.”⁶³ One is concerned with who is actually directing the trade which in the case of the partnership controlled abroad is the non-resident partner and there is no reason to say that he is merely acting as agent for the UK partner.⁶⁴ The UK resident partner can even take part in purchasing goods, which is not regarded as trading,⁶⁵ without affecting the treatment as a foreign trade.⁶⁶ In deciding this, the court was, as we now know unrealistically, trying to find one country in which the trade would be taxed rather than the real issue of whether the trade was UK or foreign: “If a man were liable to income tax in every country in which his agents are established, it would lead to great injustice.”⁶⁷ If the head and mind controlling the trade is outside the UK there seems no reason in principle why there cannot be trading operations carried on (in the sense of physically carried on) in the UK, in which case that part will be taxed under Case I as a domestic trade.⁶⁸ It seems that this can no longer apply to UK domiciled partners, and the Rewrite makes clear that a non-domiciled sole trader must physically carry on the trade wholly outside the UK for the remittance basis to apply.⁶⁹

A company is in the same position as an individual,⁷⁰ although there was one exceptional circumstance where a company has succeeded in carrying on a foreign trade on its own.⁷¹ It carried on the business of running hotels in Egypt, including Shepheard’s in Cairo, and appointed a local board in Egypt which under the Articles of the company controlled the trade in Egypt.⁷² The UK board had no power over the local board in the running of the hotels and merely declared dividends out of the profits, although they could have starved the local board of funds. The trade was held to be a foreign one. The significant feature was that the UK board had no powers over the Egyptian board; the mere delegation of powers to them would not have achieved the same result.⁷³ That method of working may have been feasible in 1908/9 for the company running hotels in Egypt but it would not be a solution when communications improved. But what cannot be done with one company can be done with two.⁷⁴ The successor to this method of trading was to have a non-resident subsidiary under the control of its local board, with the parent company board exercising only shareholder control over the subsidiary.⁷⁵ The cases show an interesting transition, probably encompassing developments both in methods of trading and the understanding of the courts, from the foreign subsidiary being actually managed by the parent⁷⁶ to the separate trade of the subsidiary being accepted first for a 98% subsidiary (Kodak⁷⁷), and ultimately for a wholly-owned subsidiary (Deutsche Grammophon⁷⁸). Thus the courts, having removed the remittance basis for trading income in a single company, had effectively restored it so long as there was a non-resident subsidiary, but at the same time the courts developed a strict definition of non-residence. The dividends remitted to the parent company were taxed as income from a foreign possession. Even after the ending of the remittance basis for dividends from non-resident subsidiaries, the result was similar since the amount of dividends could be determined by the taxpayer, thus eventually leading to controlled foreign companies legislation.

The position was therefore reached that there was very little scope for a trade to be a foreign possession unless there was a partnership controlled abroad. Profits from carrying on, as opposed to controlling, a trade abroad were taxable in full and so the remittance basis had little application. This in turn led to a demand for double taxation relief for the foreign tax suffered on the same profits. Colonial income tax relief was introduced in 1916 although mainly as a result of the removal of the remittance basis for foreign investment income in 1914;⁷⁹ this became Dominion Income Tax Relief by the Finance Act 1920.⁸⁰

When the remittance basis did not apply, there was the additional problem of measuring the foreign trading income. Colquhoun demonstrates the difficulty of doing this nearly a century later. The Revenue were arguing for the arising basis to apply to a share of income from an Australian partnership carrying on the business of window glass, oil, and colour merchants, and storekeepers in Melbourne, the City General Commissioners, who correctly found against the Revenue, and one would expect to be financially sophisticated, record that the profit measured on the arising basis was computed “by an estimate and valuation on taking of stock on a certain fixed date after deducting therefrom the estimate and valuation of the preceding year, but as a matter of fact only a portion of the amount had been actually realised.”⁸¹ This does not bear much resemblance to the method of measuring profit for tax purposes either then or now. The remittance basis avoided all such accounting problems; it was easy to measure remittances of cash.

Trading income: comparison with the rest of Europe

The only way to avoid tax being charged on an arising basis on foreign trading activities was to carry on the trade abroad through subsidiaries managed abroad. It is interesting to compare the result with the European exemption system for foreign trading profits. The mainland European approach is not to try to measure foreign trading profits and just exempt them, at least where the profits are attributable to a permanent establishment.⁸² European countries did not, as we did, start an income tax from nothing, they had impôts reels, an untranslatable expression for a series of separate taxes imposed on different types of income on a source basis, such as a tax on land, and a tax on business profits etc.⁸³ The first income tax, the dixième, imposed in France by Louis XIV in 1710 was a tax on real property, salaries, securities and businesses.⁸⁴ No question of taxing foreign income arose. As late as 1923 impôts reels were the only form of taxation in Europe at the time of the League of Nations Report by Professors Bruins, Einaudi, Seligman and Sir Josiah Stamp, which report was the beginning of the search for a solution to the problems of double taxation. The Report has a section beginning: “In this section we shall discuss the income tax proper in its developed form, as found in Great Britain, the United States and the German Empire.”⁸⁵ When European countries adopted an income tax, this also had some source taxation; this applied to income from immovable property, mortgages, an unincorporated industry or business, and earned income.⁸⁶ The existing tax and the new income tax fitted together by means of the income tax exempting anything covered by other country’s source-based tax, leaving the income tax to apply to a residual category. Accordingly the European countries continued in their income taxes to exempt foreign earned, and property, income for both corporations and individuals, so the problems of measuring such income were avoided, and they had no need for the remittance basis. The measurement of foreign investment income (as opposed to making sure that taxpayers declared it⁸⁷) was not a problem for European countries by the time they started to tax it by their income taxes in the 1920s. By then the UK had substantially removed the remittance basis for investment income.

The UK and the European approaches thus define foreign trading income differently: the UK concentrating on the person controlling the trade, which meant that a trade controlled from the UK would be taxed as a UK trade wherever it was physically carried on, and the European concentrating only on the geographical source of income probably because that was the basis for their impôts reels, and exempting income from a trade physically carried on abroad.⁸⁸ Geographical source is not important for residents in the UK system because they are taxed on worldwide income; source (in the UK sense) merely determines how one taxes it, traditionally on the remittance basis if it is foreign source. For a non-resident, in both systems, geographical source determines what income is taxed so that a branch in the country concerned is always taxed to whomsoever it belongs.⁸⁹ In the UK this result is achieved by using a different expression, that a non-resident is taxed on a trade exercised within the UK.⁹⁰ A non-resident is not taxed under Cases IV and V, presumably on the basis that they are unlikely to be controlling a foreign trade from the UK, although since 1965 a non-resident company is liable to corporation tax under those cases⁹¹ in order to tax foreign income attributable to a UK branch.⁹² The difference between the two approaches can be seen at its most extreme in relation to the profits of a foreign branch. These profits are part of the UK trading profit and taxed in full if the trade is controlled from the UK because we look at it from the standpoint of the UK resident trader; in Europe they are not part of a domestic source but are a source of income in the other country and accordingly the residence state exempts them from tax. Thus while the UK system favoured trading abroad through a non-resident subsidiary, the European exemption system allowed trading through a branch of the same company. The results are similar; exemption of the foreign profits from residence state taxation until distribution to the shareholders as dividends in the exemption system or until distribution to the parent company in the UK system with a foreign subsidiary. The UK admits of the possibility of a third category, the overseas controlled trade carried on outside the UK which is effectively limited to partnership cases. Here the remittance basis applied; in the European approach, it is just another case of a foreign branch and exempt. The results are again similar; exemption until distribution to shareholders in the exemption system, and until remittance to the head office in the UK system.

This main discrepancy between the UK approach of taxing foreign branch profits in full and the European system of exempting them where the trading was carried out in one company led the 1955 Royal Commission to look at exemption but they found it impossible to agree to adopt exemption. There were three camps, which we would now recognise as those favouring capital import neutrality, those favouring capital export neutrality, and the pragmatists. In the end the pragmatists won and the Commission recommend a special case where exemption might be used, the overseas trade corporation on the lines of the US Western Hemisphere trade Corporation or the Canadian foreign business corporation.⁹³ This recommendation was taken up in 1957⁹⁴ and provided a method of exempting trading profits from a trade carried on wholly abroad until the income was distributed. In that respect it is very similar to the remittance basis. The difference is merely that the remittance basis taxes income reaching the UK, while trading profits of an overseas trade corporation were taxed on distribution. The exemption for overseas trade corporations was abolished in 1965. The debate about exemption was revisited in a discussion paper on Double Taxation Relief for Companies⁹⁵ but no changes were made to the present system. Exemption was, however, introduced for capital gains on the disposal of subsidiaries, including foreign subsidiaries, in 2002.

As we have seen, mainland European countries had no need for the remittance basis as they exempted foreign income. Accordingly it seems that Britain’s use of the remittance basis was unique although no doubt it is still to be found in countries which based their tax system on ours. The only current example of the use of the remittance basis is in Japan which uses it for taxing a non-permanent resident, meaning an individual who has no intention of residing permanently in Japan and who has been resident there for 5 years or less.⁹⁶ The basis of taxation on foreign source income is the income paid within Japan or remitted to Japan from abroad.⁹⁷

Employment and pensions income

The other difficult category for determining what constituted a foreign possession was employment income. The position here was complicated by the fact that some employments were taxed under Schedule E and some under Schedule D. Schedule E had its own territorial provision in taxing on a current year basis the emoluments of “every public office or employment of profit within the United Kingdom”⁹⁸; other employments, both UK and foreign, were taxed under Cases II or V Schedule D on the average of the three preceding years, the latter effectively being the residual category. For Schedule E not only was there a problem of determining what offices or employments were “public”, but it was also necessary to determine whether it was “within the United Kingdom”: “The office of a director is something notional; its locality is one degree, if that is possible, even more notional.”⁹⁹ Public offices with a UK resident body were treated as located in the UK.¹⁰⁰ Thus a non-resident director of a UK company, surprisingly even a private company was public for this purpose, performing all his duties outside the UK was deemed to hold a public office within the UK because the company was managed from the UK and he was entitled to attend board meetings in the UK. He was therefore taxable on the whole remuneration, an unusual example of a non-resident being taxed on work done outside the UK, which was another factor indicating that trade should be through non-resident subsidiaries.

The Schedule D position regarding foreign employments was no easier. There was still doubt as late as 1925 about whether an employment could be a possession at all, and if it could what made it a foreign one (the obverse of the Schedule E question of what made a public office one within the UK)?

“It was argued by the Solicitor-General that this gentleman’s (I can hardly state it) agreement, or his occupation, was a foreign possession….He really has not anything, if you use it as a word of possession. There is nothing he can sell; there is nothing he can leave; there is nothing which exists. He is de facto employed under a contract; he has a contractual right to keep on being employed, and I, for my part, cannot see how it is possible to say that he has got a possession; but if he has got a possession it is not a foreign one, because the only thing that is foreign is the place where his duties have to be performed. His rights are not foreign; they are as much British as anything else, if they have any locus, because it is a contract with a British company.”¹⁰¹

Rowlatt J was on this occasion overruled by the House of Lords which looked for a possession and in doing so perhaps over-concentrated on the employment contract, just as the courts did in relation to sales contracts in deciding whether a non-resident was trading in the UK.¹⁰² Having found a possession the more difficult question was what made a contract foreign:

“The House of Lords…in Foulsham v Pickles have definitely decided that, in the case of an employment, the locality of the source of income is not the place where the activities of the employee are exercised but the place either where the contract for payment is deemed to have a locality or where the payments for the employment are made, which may mean the same thing.”¹⁰³

It may be said that the question of how one determined the locality of the contract was never settled by the courts and it was determined by legislation in 1956, some 150 years after Addington’s Act. The Royal Commission of 1955¹⁰⁴ reported just before the question was determined by legislation in accordance with their recommendation. They said this:

297. “..it has been made plain to us that it is extremely difficult to say whether an employment which contains elements of a foreign character is or is not to be treated as a foreign possession for this purpose

298. There is no statutory rule. In the absence of one the Courts have had to treat each question as one of fact and to decide it according to the balance of what seem to be the relevant considerations. There is the nationality, domicile or residence of the employer. As the employer is normally a corporation, that test is likely to be somewhat artificial anyway. Then there is the country in which the contract of employment is made, which may or may not correspond with the national system of law by which it is to be governed. Thirdly, there is the country in which the moneys earned by the employment are paid, though it by no means follows that the whole salary will be paid in any one country. Lastly, there is the country in which the work is to be done: again two or more countries may be involved.¹⁰⁵

299. We regard this state of affairs as unsatisfactory….

300. We recommend therefore that a statutory rule should be enacted to the effect that (a) the income arising from an employment performed wholly abroad is income from a foreign possession, and (b) the income arising from an employment performed wholly in the United Kingdom cannot be a foreign possession.”

This recommendation was immediately adopted in a slightly different form which moved all employment income to Schedule E so that one did not have to identify any employment income as a foreign possession but it could contain its own definition suited to employment income.

In 1922¹⁰⁶ following the recommendation of the 1920 Royal Commission, all employments, except those which were taxed as foreign possessions, were moved to Schedule E and so this change did not affect foreign employments so long as they were not from public offices or employments within the United Kingdom. The 1955 Royal Commission recommended that this distinction between public and other employments be abolished as no one knew what it covered.¹⁰⁷ This recommendation was accepted and as a result the remaining employments were moved to Schedule E in 1956 and the treatment of the foreign element was set out in the statute for the first time.

The rationalisation of foreign employments in 1956 resulting from the Royal Commission’s recommendations was that the remittance basis applied to an employment all the duties of which were performed outside the UK. Secondly, and contrary to the Royal Commission’s recommendation in paragraph 300 quoted above, an exception was introduced to continue the remittance basis for those domiciled abroad on “foreign emoluments,” wherever the duties were performed, thus including duties in the UK. Foreign emoluments are emoluments of a non-domiciled employee from a non-resident employer.¹⁰⁸ This effectively continued the existing case law.¹⁰⁹ Thus non-domiciled persons retained their own provisions for the remittance basis, as they had done in the 1914 changes to taxation of investment income dealt with below. There was also a relief for non-ordinarily resident individuals which, in accordance with the Royal Commission’s recommendation in relation to investment income,¹¹⁰ was not limited to Commonwealth and Irish Citizens; they (and also non-residents) were taxed only on work done in the UK. For the first time one could identify what was a foreign employment.

There was no similar problem with identifying whether a pension was a foreign possession. The possession is the pension fund.¹¹¹

III. The remittance basis

The origins of the remittance basis

How did the remittance basis arise? The precedents available to Pitt for taxing foreign income were not helpful. The Land Tax did not attempt to tax land abroad which at that time would have been a breach of sovereignty¹¹² but it did, despite its name, at least in theory,¹¹³ tax personal property abroad:

“…all and every such Person and Persons…having any Estate in ready Money, or in any Debts whatsoever owing to them, within Great Britain , or without, or having any Estate in Goods, Wares, Merchandises, or other Chattels or Personal Estate whatsoever within Great Britain, or without, belonging to, or in trust for them…shall yield and pay unto His Majesty the Sum of Four Shillings in the Pound according to the true Yearly Value thereof for One Year; (that is to say), For every One hundred Pounds of such ready Money and Debts, and for every One hundred Pounds of such Goods, Wares, Merchandises, or other Chattels or Personal Estate, the sum of Twenty Shillings, and so after that Rate for every greater or less Sum or Quantity, to be assessed, levied, and collected in Manner herein-after mentioned;¹¹⁴

There is no attempt to do anything other than tax the full amount of the assumed yield of 1 per cent.¹¹⁵ Indeed it would not be possible to apply the remittance basis to an assumed yield.

The immediate forerunner of Pitt’s income tax, the Triple Assessment¹¹⁶ of the year before, during the debates on which Pitt promised not to impose an income tax, allowed persons to elect to pay 10 per cent tax, with some lower rates for smaller incomes and nothing on an income of £60, on their total income as an alternative to paying a multiple (not always three times despite its popular name) of the amount of the previous year’s tax on various luxuries, but it contained no provisions for computing such income. That the Triple Assessment yielded only half its expected yield¹¹⁷ with large numbers of people declaring incomes of under £60, was the cause of Pitt having to go back on his promise and impose an income tax in 1799, which turned out to be not much more successful, collecting only £6m out of the estimated £10m. It seems likely therefore that there was no attempt to tax the actual income of foreign property before Pitt’s 1799 Act.

Starting therefore with a blank sheet one might well come to the same answer as Pitt’s advisers about the remittance basis. For Pitt, but not Addington, interest on foreign securities was sufficiently certain to be taxed in full, not on the remittance basis. The administrative problems of taxing any other type of foreign income, particularly foreign trading income required a practical solution effectively taxing goods received in the UK when they were turned into money, in other words, the remittance basis. The arguments in favour of such a system were not only practical ones. Lord Herschell in Colquhoun¹¹⁸ made the argument of principle that the trade carried on in Australia did not enjoy the protection of the laws of this country.¹¹⁹

Although this article does not deal with the meaning of remittance, further understanding of the nature of the remittance basis can be obtained from the provisions of Addington’s Case V setting out the methods by which taxable remittances were made:¹²⁰

The Duty to be charged in respect thereof shall be computed at not less than the full Amount of the actual Sums annually received in Great Britain, either [1] for Remittances¹²¹ from thence payable in Great Britain, or [2] from Property imported from thence into Great Britain, or [3] from Money or Value received in Great Britain, and arising from Property [of any Person or Persons],¹²² which shall not have been imported in Great Britain, [or [4] from Money or Value so received on Credit or on Account in respect of such Remittances, Property, Money, or Value, brought or to be brought into Great Britain]¹²³….

This is explained by the contemporary work from which we have already quoted and repeat again:

“The Act considers that the value of foreign property may be brought into Great Britain. 1st, By bills. 2d, From the produce of the estate which it calls property, (meaning personal property,) imported into Great Britain, and turned into money here. 3d, From the produce of the estate sold in other countries, the value of which is received here. 4th, From money received by the party either on the credit or the account of the produce of the estate converted in any of the ways mentioned.”¹²⁴

The first item (“remittances from thence [abroad] payable in Great Britain”) is explained laconically as “by bills.” Suppose the British resident owner of the plantation wants profits in Great Britain. Moving money (necessarily bullion) internationally at the time was dangerous (storm, pirates, French warships) and expensive and was not in practice carried out. Instead bills of exchange were used. Here is an account from a book on the history of bills of exchange:

Consider a hypothetical English merchant who has sold goods through his factor¹²⁵ in Flanders. Suppose that there is someone else in Flanders who wishes to buy goods for export to England, but lacks sufficient funds. ….The English merchant’s factor in Flanders would deliver the money to the Flemish merchant, who would draw a bill of exchange on his factor in London, instructing him to repay the value to the English merchant. Needless to say, one would expect that the amount to be repaid in London would exceed the amount advanced in Flanders, the difference being the interest paid by the Flemish merchant on the loan.¹²⁶

If one substitutes an English owner of a foreign¹²⁷ estate for the English merchant, the transaction would have been exactly the same. This example incidentally shows the dual nature of bills of exchange as a substitute for moving money and as a method of financing. Alternatively, bills of exchange could be used to match trade in opposite directions, again without moving money between countries:

Suppose, for example, that an Italian merchant shipped spices from Italy to his representative in Flanders. Once the agent in Flanders had sold the spices, he would have funds in Flanders due to his principal in Italy. Suppose that another merchant in Flanders was in the business of buying English wool and shipping it to Italy. Once the Flemish wool merchant’s agent in Italy had sold the goods, he would have funds in Italy due to his principal in Flanders. The problem of making returns could be solved by having the Italian spice merchant’s factor in Flanders pay money to the wool merchant, and the Flemish wool merchant’s factor in Italy pay money to the Italian spice merchant. In effect, the Flemish wool merchant’s outward cargo would have become the Italian spice merchant’s return cargo, and vice versa.¹²⁸

The system becomes more sophisticated, as was beginning to happen at the time income tax was introduced, when a merchant banker accepts (or guarantees) the bill which makes it more marketable, and a bill broker brings the parties together. A remittance was essentially concerned with delaying the timing of taxation until the goods were turned into cash in Great Britain; it did not involve the voluntary element that it now has of choosing never to remit the income.

The meanings of the second type of remittance (“sums received from property imported from thence [abroad] into Great Britain”), and the third (“sums received from money or value received in Great Britain, and arising from property which shall not have been imported in Great Britain”) are clarified, as so often with income tax, by the administrative provisions. Foreign income was assessed by commissioners in London, Bristol, Liverpool and Glasgow, the main ports, as if it arose from a trade carried on there. The assessment was to be made at such port at, or nearest to, which the property was first imported into Great Britain (the second method of making a remittance), or in the case of remittances, money or value arising from property not imported (the third method) at such port at, or nearest to, which the person resided.¹²⁹ This emphasis on the ports shows that much of the income from foreign possessions¹³⁰ was imported in the form of raw materials like cotton, and sold in Great Britain. Goods from the colonies were forced to come here by the “Old Colonial System” deriving from the Navigation Acts 1651 and 1660 which required exports of the main raw materials, sugar, tobacco and cotton from the colonies to be sent directly to England or to another colony in English or colonial ships. They could not be exported direct to any other country. Unless, therefore, the goods went to another colony, they had to pass through Great Britain. In practice that was where the market was to be found and so they were likely to be sold here. After Independence, America was a major supplier of raw materials, particularly cotton, and purchaser of English goods, and so in practice imports from America came here too. The trade with America increased at the time because of the difficulties of doing business in Europe during the war with France.¹³¹ Effectively therefore most foreign trade or investment resulted in goods coming to England for sale with “sums received” here.¹³² The third method of making remittances in money or value for goods not imported to be assessed at such port nearest to the place where the person resided also suggests that such remittances were connected with ports. The reference to “money received” is the first reference to money itself (necessarily in the form of bullion) being moved, which would be through a port.¹³³ The reference to “value received” may have been from barter trade, with the resident sending the produce of his foreign estate directly abroad and receiving other goods here (through one of the ports) in exchange that are turned into money here.

Perhaps the fourth type of remittance (“sums received from money or value so received on credit or on account in respect of such remittances, property, money, or value, brought or to be brought into Great Britain”), which was added in 1805, reflects the change in banking practice that evolved around that time.¹³⁴ Previously transactions were financed by the financier buying goods for cash and selling the goods on credit, thus acting as a merchant; later, the financiers became merchant bankers, buying bills rather than the goods.¹³⁵ This would be a way of the owner of the foreign plantation receiving money in advance of the maturity of the bill of exchange.

Thus originally the remittance basis was more of a timing provision. The profits would be remitted anyway and tax was charged when money was received here. That ceased to be true when foreign trading was no longer restricted to plantations abroad, and this led to the Revenue disputing whether the trade was a foreign trade, on which, as we have seen,¹³⁶ they were generally successful, which in turn led to taxpayers successfully countering by trading through foreign subsidiaries. The subsequent history of the remittance basis is one of gradual reduction in its scope.

Cutting down the remittance basis

Investment income

By 1914 some of the advantages of the remittance basis for taxpayers were being exploited. Accordingly a change was made designed to tax:

“…the income that escapes taxation now owing to arrangements purposely made by men who are rich enough to leave their incomes abroad for reinvestment.”¹³⁷

This change removed the remittance basis from the easier types of income on which taxpayers could avoid tax and incidentally the easier income to compute: income from foreign securities, stocks, shares and rents.¹³⁸ Accordingly, we had now reverted to the position in Pitt’s original tax but for a wider class of foreign income than for interest on foreign securities. The three-year average still applied to income from foreign possessions.¹³⁹ The rather vague expression “securities, stocks, shares or rents” may have been necessary because, apart from securities (Case IV) there were no Schedules or Cases that could be used to identify the type of income as they all fell within the single heading of foreign possessions. The benefit of being able to reinvest foreign trading profits without paying tax was not affected. The change meant that giving double taxation relief became much more important. Initially a deduction in computing the income was given for income tax paid in the place where the income arose.¹⁴⁰ “Colonial income tax relief” for tax paid under the law in a British possession was introduced two years later.¹⁴¹ The removal of the remittance basis from foreign investment income was subject to the important exception dealt with in the next heading. Another consequence was that UK insurance companies were adversely affected which will be dealt with below.

The dividing line between income from securities, stocks, shares and rent, and other income may have seemed clear but like all dividing lines it led to what must be the longest running dispute in the history of tax, requiring two hearings in the House of Lords, three in the Court of Appeal, and four each in the High Court and the Special Commissioners¹⁴² to determine whether the life tenant of a trust receiving underlying income from securities, stocks, shares or rent received the same type of income as the underlying income, which meant that the remittance basis no longer applied, or a different type of income, trust income, from which the remittance basis had not been taken away. The first time round the answer was that quite reasonably the life tenant received the same type of income as the income from the underlying securities: “[the life tenant] is, in my opinion, as a matter of construction of the will, entitled in equity specifically during her life to the dividends upon the stocks….”¹⁴³ That was decided on the basis that New York law, which was the governing law of the trust, was the same as English law. When the case was remitted to the Special Commissioners to find the figures, the taxpayer tried to introduce evidence that New York law was different, which they refused to hear, resulting in the intermediate trip to Rowlatt J, whose judgment running just into the third line is short even by his standards, and thence to the Court of Appeal who agreed with the Commissioners.¹⁴⁴ This necessitated starting again before the Commissioners in relation to a later year.¹⁴⁵ Even that nearly did not succeed as the Commissioners initially decided the point was res judicata;¹⁴⁶ the point then came before Rowlatt J again when the Crown waived this contention and the matter was remitted to the Commissioners to determine the case on the basis that the matter was not res judicata,¹⁴⁷ following which the case proceeded via Rowlatt J and the Court of Appeal to the House of Lords again. This time in the light of expert evidence of a professor from Columbia University Law School, the House of Lords was able to find that position of the life tenant of a New York law¹⁴⁸ trust was different in that she had no property interest in the underlying income; she could only compel the trustees to carry out the terms of the trust,¹⁴⁹ which is perhaps surprising since New York trust law is derived from English law. Such a position is not supported by writers in the United States today.¹⁵⁰ The taxpayer was rewarded by her perseverance by remaining on the remittance basis.¹⁵¹

The exception to the 1914 change

The remittance basis was retained for resident foreigners, which gave rise to difficulties of definition. Although the remittance basis is now associated with non-domiciled persons this was not the original intention as can be seen from the following stages in the progress through Parliament of the section in the 1914 Finance Bill which, subject to the following proviso, removed the remittance basis for income from stocks, shares and rents, with the new material being shown in italics.

It will be seen that neither of the current limitations to non-domiciled persons and non-ordinarily resident British subjects (now Commonwealth and Irish citizens) was in the original Bill. The non-domiciled category was introduced at the Committee Stage because the original restriction to British subjects ordinarily resident in a British Possession would cover say a Canadian (who would have been a British subject) ordinarily resident in the United Kingdom, for whom the new wording continued the remittance basis.¹⁵⁵ This is the first time domicile became relevant for income tax, although it was then relevant for estate duty.¹⁵⁶ A further, possibly unforeseen at the time, effect of changing the exception from non-British subjects to non-domiciled persons is that companies could benefit from the exception because a company can have a foreign domicile, but not be a non-British subject. The domicile of companies was unknown territory. The Income Tax Codification Committee of 1936 records that there was then no judicial authority on the point but decided that defining the domicile of a company was going beyond codification.¹⁵⁷ The first case in the UK on the point was in 1940 and decided that domicile was the same as place of incorporation.¹⁵⁸

Report Stage amendments are usually a disaster and this is no exception. The relief for the non-ordinarily resident British subjects (now Commonwealth and Irish Citizens) was introduced to deal with Anglo-Indians, such as officers or civil servants on leave, who were domiciled in the United Kingdom paying short visits, and becoming resident but not ordinarily resident. An MP had argued that the original clause “produced feelings of soreness and resentment in the Dominions beyond the seas.” It was reported that the Chancellor had entered into negotiations with representatives of the Dominions and that the Report Stage amendment had put the clause into a form that did not produce resentment, and into a form which ensured that no such charge can fairly be made against it.¹⁵⁹ One may indeed agree that no such charge can fairly be made against it by the Dominions; it is merely that it discriminated against everyone else. The Royal Commission of 1955¹⁶⁰ later very reasonably recommended that the remittance basis should be applied to any non-ordinarily resident person as the reasons which made it fair to apply it to British subjects and Irish citizens applied just as much to persons who did not have such citizenship, but nothing was ever done.¹⁶¹ This provision is plainly discriminatory and must be extended to EU citizens and to citizens of countries with which we have a tax treaty containing a nationality non-discrimination provision,¹⁶² who are domiciled in the UK (because non-domiciled people benefit from the remittance basis anyway), and so the Royal Commission’s recommendation may have been achieved by another route. One wonders how many people claim the benefit of this provision today.

One of the side effects of the change was to put UK life insurance companies at a disadvantage compared to non-resident life companies. It is difficult to tax insurance companies on their profits as this requires an actuarial calculation which cannot be carried out every year, and mutual companies cannot be taxed on their profits at all. Effectively they were taxed on their income;¹⁶³ accordingly relief for their expenses of management was introduced in 1915, subject to not reducing the tax below what it would have been under a Case I assessment,¹⁶⁴ thus introducing the I minus E method of taxing insurance companies. Relief for expenses of management compensated for their loss of the remittance basis for their foreign income, particularly when the foreign income represented reserves to meet liabilities to non-resident policyholders incurred through trading through foreign branches. A further exception was made in 1915 retaining the remittance basis for the income from foreign investments of a foreign life assurance fund of an insurance company, meaning a fund representing liabilities in respect of policies entered into through a branch or agency outside the UK.¹⁶⁵ This survived the ending of the remittance basis for companies generally in 1965 and was eventually ended in 1990.¹⁶⁶ Non-resident life insurance companies could only be taxed on the profits from the UK branch and that was difficult in practice because of the difficulty in measuring profits from life insurance. Accordingly a method of taxing them had to be introduced in 1915.¹⁶⁷

Further reduction in the remittance basis in 1940

A further reduction in the scope of the remittance basis was made in 1940,¹⁶⁸ which, like the first change of 1914¹⁶⁹ (and indeed, the introduction of income tax itself), was made in war time, perhaps because raising additional taxes at such times is easier. The remittance basis was restricted to trading income,¹⁷⁰ but only where the income was immediately derived¹⁷¹ from carrying on the trade either alone or in partnership, and to employment (including offices) and pension income. This has the effect of removing the remittance basis for cases like the second Archer-Shee case which, according to the Parliamentary proceedings, was the main target of the change.¹⁷² The Solicitor-General said:

“The second category [foreign income not within the 1914 change] includes cases governed by the Archer-Shee case, which decided that income from trusts or settlements comes into the second category and therefore only income brought into this country is taxed. The hon Member is quite right in saying that the effect of the legislation to be introduced will be to put an end to that anomaly.¹⁷³

Lady Archer-Shee, the life tenant, was an American and the trust was set up by her father’s will but as she was married to an Englishman, Sir Martin Archer-Shee, she would have at the time automatically acquired his English domicile and would not therefore have been entitled to continue the remittance basis on that ground. Although not stated in the debates, a more serious anomaly than New York law trusts were trusts governed by Scots law to which the second Archer-Shee case also applied.¹⁷⁴ Much later, in 1993¹⁷⁵ in connection with the benefit of the lower rate of tax applied from that year¹⁷⁶ initially to dividend income, and extended in 1996 to all savings income, the life tenant of a Scots trust was deemed to have an equitable interest in possession in the underlying income, so as to be able to obtain the benefit of receiving dividend or savings income, thus bringing them into line with English trusts, just as the 1940 changes had removed the benefit of the remittance basis from Scots trusts receiving income from stocks, shares and rents as had been done for English trusts in 1914.

The change also removed the remittance basis generally for such foreign income as interest otherwise than on securities,¹⁷⁷ for example bank interest, and annual payments, particularly those on separation¹⁷⁸ or divorce.¹⁷⁹

The introduction of corporation tax in 1965 and loan relationships in 1996

A company ceased to be taxed on the remittance basis on the introduction of corporation tax in 1965:

“…corporation tax shall be assessed and charged for any accounting period of a company on the full amount of the profits arising in the period (whether or not received in or transmitted to the United Kingdom)….¹⁸⁰

The second major change affecting companies was that the taxation of loan relationships from 1996 moved foreign interest to Case III so that Case IV no longer applied to companies and foreign interest otherwise than on securities is no longer taxable under Case V for companies. There are therefore now no separate rules for the taxation of foreign income from loan relationships.¹⁸¹

Trading income of individuals

As has been mentioned, the remittance basis ceased to apply to companies on the introduction of corporation tax in 1965.¹⁸² It was not until 1974 (the only non-war time reduction in the remittance basis¹⁸³) that the remittance basis was removed from trading income for the unincorporated sector subject to the same exception for non-domiciled taxpayers and not ordinarily resident Commonwealth and Irish Citizens as had been applied to investment income in 1914. As the Chancellor said in his budget speech:

“As the House knows, it has been the law for many years that, where a man goes overseas to do a job, and all the duties of the job are carried out abroad, then the earning from the job are taxable on what is called the ‘remittance basis’—that is, if and when they are brought back to this country. This was, perhaps, a reasonable approach before the days of air travel and multinational companies. But under modern conditions these provisions can be, and are, used by United Kingdom residents to avoid their proper tax liabilities. For the future, it is clearly imperative that we should put a stop to the avoidance of tax by artificial devices of the kind which received so much publicity last year.”¹⁸⁴

One might object to the Chancellor’s reference to avoidance of proper tax liabilities when it was the law that laid down that the tax liabilities based on the remittance basis were the proper ones, but one cannot object to his reference to the remittance basis being a reasonable approach before the days of air travel and multinational companies. As a compensation for the loss of the remittance basis a reduction of 25 per cent in the tax base was given which was removed in 1984 by which time tax rates were much lower.¹⁸⁵

Employment income

As with trading income there was a major reduction in the scope of the remittance basis for foreign employment income in 1974. The remittance basis no longer applied to work carried out wholly abroad, unless the income was foreign emoluments,¹⁸⁶ so that non-domiciled employees once again retained the remittance basis for working abroad. In addition, the remittance basis was taken away from non-domiciled employees working in the UK, the only time that the remittance basis has been removed for such persons. The Royal Commission’s recommendation that working in the UK should not be a foreign employment was thus ultimately achieved.¹⁸⁷

The losers, namely domiciled employees working wholly abroad and non-domiciled employees working in the UK for foreign employers, were given a reduction in the tax base. This was a 25 per cent reduction for domiciled employees, and initially a 50 per cent reduction non-domiciled employees but from 1976/77 this was reduced to 25 per cent once the employee had been resident for 9 out of the preceding 10 years of assessment.¹⁸⁸ These reductions were repealed in 1984 by which time tax rates were much lower.¹⁸⁹ Thus for UK domiciled resident employees there ceased to be any significant concept of foreign employment, with one exception. A further 100 per cent relief was given for working abroad for 365 days in circumstances where because this spanned two tax years the employee remained resident.¹⁹⁰

Foreign pensions have been easier to categorise as foreign possessions; they were pensions paid by non-residents. The 1956 changes to employment income did not affect pensions which left all foreign pensions taxable on the remittance basis under Case V. This was also changed in 1974. UK domiciled pensioners who lost the remittance basis were given a reduction of 10 per cent in the tax base, which still continues in spite of the abolition of similar deductions for employment income. Non-domiciled pensioners remain on the remittance basis but cannot claim the 10 per cent reduction, making them worse off than domiciled pensioners if they remitted the whole pension.

Capital gains

It should be mentioned that capital gains tax had a remittance basis from the beginning for gains on foreign assets¹⁹¹ by a non-domiciled resident and no change has been made to this.¹⁹² There has never been a relief for non-ordinarily resident Commonwealth Citizens, and, unlike income tax, there are no special provisions for Irish assets.

Proposals to remove the remittance basis for non-domiciled persons

By 1974 the only persons benefiting from the remittance basis were non-domiciled individuals and trustees and, for income other than employment income, non-ordinarily resident Commonwealth and Irish Citizens. In 1974 a proposal was included in the Finance Bill¹⁹³ to take effect from 1976/77 to end the remittance basis completely for non-domiciled taxpayers who had been ordinarily resident for 5 out of the 6 previous years of assessment, by deeming such persons to be domiciled. On Second Reading the Chancellor proposed to change this to apply to those resident, instead of ordinarily resident, for nine out of the previous 10 years to meet the concerns that foreigners might be required to stay longer than 5 years for work, and also that the definition of ordinarily resident was less certain than that of resident.¹⁹⁴ A Government amendment to leave out the clause was agreed to without debate at the Committee Stage¹⁹⁵ following fierce debate outside Parliament.¹⁹⁶

A second attempt was made in a Consultative Document issued by the Inland Revenue in 1988¹⁹⁷ suggested that a new intermediate basis of taxation between that of a full resident and a non-resident should be introduced. This would apply to non-domiciled persons who had not been resident in the UK for 7 out of the previous 14 years, or, if it was not proposed to continue to use domicile as a criterion, the 7 out of 14 year rule should apply only to those who had been previously non-resident for a continuous period of 10 or 15 years. The form of taxation would be to replace the remittance basis with a graduated charge depending on how long the person had been resident, although a modified form of remittance basis including all receipts was also considered. Nothing came of these proposals.

There are no examples where the remittance basis has been removed from non-domiciled individuals apart from employment income for working in the UK. There are, however, two examples of the remittance basis being made less attractive, particularly where all the income is remitted. These are the 10 per cent reduction in foreign pensions already mentioned and that the remittance basis income does not qualify for the 20 per cent rate of tax for savings income.¹⁹⁸

The future

The first and second features of the system of taxing foreign income with which we started will change with the Tax Law Rewrite. Pitt’s wording will be dropped as will any remaining distinctions between Cases IV and V, and foreign income will no longer be a type of income in itself.¹⁹⁹ This is sad from the historical point of view but it is amazing that the wording lasted so long and the courts were able to continue to make it fit all current types of foreign income. In the Rewrite where a type of income is considered, this includes the same type of foreign income so that, for example, there is no longer any distinction between UK and foreign source interest; the charge is on “all interest.”²⁰⁰ After enactment of the Rewrite’s third Income Tax Bill in the 2004/5 session of Parliament²⁰¹ there will be very few separate rules for foreign income, an example of an exception being dividends from non-resident companies.²⁰² It is only necessary to define foreign income for the remittance basis and rules for unremittable income. For this purpose “foreign income” is defined to mean “income arising from a source²⁰³ outside the United Kingdom which is chargeable under or by virtue of” a list of provisions, such as trading income, property income, interest etc, all of which deal with both UK and foreign income together.²⁰⁴ Foreign source has the same meaning as foreign possession and so one could say that Pitt’s single category of foreign income lives on under another name.

The 1955 Royal Commission approved of the remittance basis because of the large numbers of people working abroad or coming from abroad and working here in 1955 when its use was more widespread than it is today:

“Although the remittance basis for persons not ordinarily resident or domiciled in the country seems to be peculiar to the UK, we think that its employment is appropriate having regard to the conditions that govern our trade and commerce. The large overseas connections of the UK do make a special tax problem for those persons who leave for or come back from service abroad for various purposes and for various periods: conversely, there are special problems with regard to those persons who, while truly belonging to another country, are led by business interests to centre in the UK for what may often turn out to be long periods of years.”²⁰⁵

The remittance basis continues in full force for non-domiciled individuals and non-ordinarily resident Commonwealth Citizens (and those other citizens who can claim it on the basis of discrimination). As this article is written, a further consultative document is awaited. The Chancellor said in his 2002 Budget speech:

The Government is reviewing the residence and domicile rules as they affect the tax liabilities of individuals. The Government believes that modernisation of these rules needs to be based on clear principles—the rules should be fair, clear, easy to operate, and support the competitiveness of the British economy. As this is a complex area, all those affected should have the opportunity to contribute to the discussion. The Government will report on this issue in time for the pre-Budget report.

How the remittance basis rates as a basis of taxing today in the age of air travel and multinational companies will be considered in relation to the promised consultative document. It will be interesting to see whether the outcome is any different from the previous two occasions that the issue has been raised. It is certainly a basis of taxation that is liked by foreigners working in the United Kingdom and it may be that their personal taxation is quite as important to decisions to work here as is corporate taxation. The original problems of the difficulty of measuring foreign income still continue but in different form. Probably the income needs to be measured for foreign tax purposes and so taxing it here on the arising basis would require computation on two different bases. That is particularly true of trading income but to some extent true of employment income where different methods of taxing benefits in kind, stock options etc. can apply.²⁰⁶ For investment income fewer problems of measurement arise, but there are still problems of measuring non-traditional income such as zero-coupon bonds, accrued income on purchase and sale of securities, and gains on life insurance policies. Perhaps the administrative arguments are just as strong. Can a tax authority really find out what a foreigner does with his assets abroad?²⁰⁷ Is it not better to accept defeat and tax what one can see, rather than say one is taxing worldwide income knowing that one is not?