Tax advice please!

Can't tell you why the commercialista said what he did (maybe he was just thinking "how will the taxman in Italy ever know") but my understanding is that every resident in Italy needs to complete a tax return here unless their income is under a certain limit (I can't remember what it is but it was very low - a few hundred euros maybe).I think where Brits gets confused is that in the UK, only the self-employed, business owners and people with more than one income need to fill out a tax return. In Italy like a lot of other contries, everyone fills out a tax return, regardless of your type of employment. Therefore it doesn't automatically occur to us to fill one out here.I would have thought the double taxation treaty would apply to you if you are paing UK tax so there shouldn't be any tax due in Italy but technically you should still complete a return in Italy. The obligation to complete a tax return in the country of residence has always been there so it didn't  "come in" as such. I have no idea what would happen if you "own up". Personally I would be tempted to do it from this year onwards and forget the rest. You need to look at the probability of the taxman investigating a person who starts completing a tax return (not too likely) versus someone who says oops - I should have started 5 years ago Mr Taxman (more likely).IMHO at some point the taxman will wonder what you are living on and look a little deeper. Having said all this, I know plenty of people who don't complete a tax return here, haven't for years and have never had any problems. Your choice really.Why don't you contact Michael Murphy as he specialises in this stuff?

Thousand of rich UK citizens living abroad as tax exiles may find they have to pay UK taxes after all.

The Court of Appeal has upheld the right of HM Revenue & Customs to tax a businessman, Robert Gaines-Cooper, who has lived in the Seychelles since 1976. The judges said that he had never been exempt from UK taxes as a non-resident citizen.

Although he had abided by the rules to spend fewer than 91 days here, he had still not cut his ties with the UK. Mr Gaines-Cooper may now have to pay a tax bill of £30m, for the years from 1993 to 2004.

A key feature of the Revenue's old guidance on whether someone was resident in the UK for tax purposes - known as IR20 - was whether they spent, on average, fewer than 91 days here each year.

"If you read the old guidance at face value, as most of us did, and you spent less than 91 days here, you would have been treated as a tax exile," said Mike Warburton of accountants Grant Thornton, who was an expert witness in the case.

A lot of people think they are out of the UK tax system - they may now be caught
 

Ronnie Ludwig
Tax adviser, Saffery Champness

However, the three Appeal Court judges ruled that it had always been the case that any would-be tax exile, such as Mr Gaines-Cooper, first had to show they had really left the country.

Any continuing connections would mean that he had not actually cut his ties with the UK and would thus not be able to avoid UK taxes.

 The 91-day rule, they said, did not in fact establish non-residency, and was "important only to establish whether non-resident status, once acquired, has been lost".  

'Distinct break'

Mr Gaines-Cooer, now in his 70s, was born in Reading and made his fortune from international businesses, selling, among other things, juke-boxes.

Despite moving to the Seychelles in 1976, where he lives on a colonial plantation, the judges said that England had remained the "centre of gravity of his life and interests".

They decided that he had never cut his ties with Berkshire where he had grown up, or with Oxfordshire, where he still owns a mansion on a 27-acre estate near Henley and which the judges said was still his chief residence.

As such, he had failed to prove a "distinct break" with his family and friends in the UK.

The judges ruled there were "ample" grounds to rule that Mr Gaines-Cooper had in fact been "resident and ordinarily resident in the UK" throughout his apparent exile.

The barrister for Mr Gaines-Cooper - who says he will appeal to the Supreme Court - accused the Revenue of "playing games" with his client, and accused the tax authorities of mischievously reinterpreting their own guidance.

The barrister, David Milne, said this "involves a wholly wrong reading of the policy and turns it from a sensible, practical, guide into something meaningless and, which is worse, a devious trap".

Back taxes

There are six million UK citizens living abroad.

If upheld, the effect of the ruling will be to expose thousands of the richest, who wish to be tax exiles, to unexpected retrospective tax bills, not just ones for future years.

"The Revenue can go back up to six years and say they have discovered you haven't paid enough tax," Mr Warburton said.

Ronnie Ludwig, a tax adviser at accountants Saffery Champness, said lots of tax exiles would now have to rearrange their lifestyles and business affairs.

"A lot of people think they are out of the UK tax system - they may now be caught," he argued.

The HMRC's new approach, which replaced IR20, was codified in new guidance on residency and non-residency - called HMRC 6 - which was published in April 2009.

Mr Ludwig said the Appeal Court ruling gave extra force to this new guidance.

And he said this meant that the Revenue could look at various aspects of someone's life-style to determine if they had really left the UK or not.

"They will look at the time spent here, the regularity of your visits, if the UK is the main centre of your economic activity and business ties, if you have family connections such as children going to boarding school, if you are a member of a sporting club, and if you use UK credit cards, banks and even mobile phones," Mr Ludwig said.

An HMRC spokesman said it would study the 31-page judgement, but added: "It is also useful that the Court of Appeal has acknowledged that HMRC can increase compliance activity in an area so that it can ensure it catches those who may have previously not paid tax that is due."

http://news.bbc.co.uk/2/hi/business/8519803.stm

 What Penny says is pretty much correct in my opinion. (but UK employees, pensioners etc normally have to fill in a tax return as well).  I've withdrawn my original post and am happy to be corrected by SirTK. Hope this link helps though. http://www.hmrc.gov.uk/cnr/faqs_general.htm

 As far as UK taxpayers are concerned, domicile is only concerned with Inheritance Tax. It has nothing to do with income tax, which is governed by residence and ordinary residence. The guy in the Seychelles is most definitely of UK domicile. The issue is whether or not he is resident and ordinarily resident so they can tax his worldwide income and gains.

  Domicile is actually relevant for Income Tax and Capital Gains Tax purposes as well as Inheritance Tax. Until recently a non UK Domiciled individual resident in the UK for tax purposes was only taxable on non UK source income and income and gains remitted to the UK. Now, if a person has been UK resident for more than a few years they are taxable on their worldwide income and gains, or they can pay £30,000 and ignore unremitted income and gains for that year. The case of Gains Cooper, whilst relevant, is likely to have limited application to anyone who has established residence in Italy as the UK/Italy Double Tax Agreement (“DTA”) has a tie breaker if someone is tax resident in both countries under the domestic rules. Whilst it is dependent on the facts of each case, and each case must be considered individually, for most people who have retired to Italy and spend most of their time there they are likely to be Italian resident for tax purposes and therefore not UK tax resident. Where someone has retained homes in both countries and spends time in both countries then it can get very complex. If in doubt get proper advice as the consequences of getting it wrong can be very expensive. So far as pensions are concerned, the general rule under the DTA is that pensions are taxable in the country of residence and not the country of source with the exception of Government and Local Authority type pensions (ie pensions paid by the State to someone who has been employed in government service or by a local authority or similar), which are taxable in the country of payment unless paid to someone who is both a national of and resident in the other country.  To further complicate it pensions in respect of services rendered in connection with any trade or business carried on by the State or a political or an administrative subdivision or a local authority thereof is taxable in the country of residence. Non government service pensions received by a resident of Italy would, therefore, normally be taxable in Italy and not the UK. If in any doubt advice should be obtained in both the UK and Italy from a tax advisor/commercialista or from someone specialising in the interaction of taxes between the 2 countries. It should also be noted that n the UK, if you have paid overseas tax on income then relief is given for that tax. But this only applies if the overseas tax is actually due. If the tax has been paid and no tax is actually due then no relief would be given as the individual would be expected to recover the overpaid foreign tax from that country’s tax authorities. I do not know if it is the same in Italy but I suspect it is. Hope that helps.