Politics, technology, and taxation

Date: 17 Jan 2024

Ashleigh John

In this feature, Citywealth uncovers how geopolitical uncertainty and technological advances are impacting taxation.

Taxation has always been an important aspect of wealth management for UHNW individuals particularly with homes and family in multiple jurisdictions; double taxation and U.S. taxes on foreign income rules. Threats of huge increases in taxation continue to be top of mind for the wealthy, as the world continues to experience unrest and with an estimate that up to 50% of the world will experience an election in the next year. We asked how firms are adapting their offerings to best cope with increasing tax uncertainty in their client base.

Tahir Mahmood, Director at London & Capital, said: “For UHNWIs, the world is increasingly accessible through the option of acquiring residency/citizenship thorough investments. Countries such as Spain, Italy and Malta allow this. This necessitates wealth managers to embrace a flexible approach, engaging in regular planning meetings to ensure compliance with the appropriate tax jurisdiction. A considerable number of clients residing in the UK hold US citizenship and may also spend time in a third country, like summers in France or visiting family in South Africa, as an example. Failing to plan for such scenarios can pose challenges. To address this, it is advisable to initiate early planning conversations with your advisor, clearly outlining your likely locations. This proactive approach enables flexibility in navigating multiple tax jurisdictions, currencies, offshore fund regulations, and various tax years. At London & Capital, our approach to wealth management is borderless, emphasizing adaptability and strategic planning to cater to the unique needs and complexities of our clients’ global financial landscapes.”

Michael Lewis, Partner at EY Private Client Services, said: “One of the huge advantages of being in a firm like EY is that we are by nature international and easily able to access experts across over 200 jurisdictions. UHNWI’s increasingly want and need that ability to work cross-border and, indeed recently, political uncertainty has led to clients looking to invest in ‘WHAT IF’ scenarios and consider residence/ business structuring right around the world. Firms not part of such formal networks such as EY are looking to join more informal networks of trusted international advisors to help ease the cross border function.”

Robert Salter, Technical Specialist and Associate Director – Mobility & Employment Taxes at Blick Rothenberg, discussed the important of specialist teams for particular groups of clients. In the last 6-7 years, Blick Rothenberg have established not only a significant UK/US private client team and US business support services, but country-based desks for China, Japan and France in order to provide UK tax support in the first language of their clients. Alongside the German desk, which has existed almost since the founding of Blick Rothenberg, and plans to establish an Italian desk this year, a great number of clients will be supported by professionals with specialist advice in their clients areas of concern.

Salter also noted that: “In addition, as a general principle, we are seeing an increasing number of taxpayers who may be ‘dual resident’ – that is resident in the UK and 1 (or more) other jurisdictions at the same time.  This dual residence status is – at least in some cases – superseding the traditional ‘non-domiciled’ basis of taxation for foreign nationals with UK links. When it comes to those HNWIs and UNHWIs who are also senior employees / executives, it is quite possible that the dual residence status (which is supported by the move to hybrid and virtual working after the Covid outbreak), will result in a loss of income for HMRC and HM Government.  This is on the basis that someone, for example, working 40% of the time in the UK and 60% in their alternative residence overseas will (if they are treaty resident in the other country), only be taxable in the UK on the income associated with the UK workdays. In our experience, there are a significant number of such executives, who have – or are at least considering – establishing their main home in another (typically European) country.  Whilst tax can be a factor in these moves (and countries like Italy, Switzerland and Spain, for example, have special tax regimes for some such individuals), the development is not purely a tax driven development.  Many people have become dual resident, as much, if not more because of lifestyle and family factors rather than the tax side of things.”

Election impacts

As elections approach for the UK and US, alongside general geopolitical unrest globally, one would expect this to infiltrate financial decision making for both the short and long-term. We asked the professionals what concerns their clients are bringing to them in this area.

Michael Lewis answered: “While clients are considering the potential of relocating there is an underlying fear that the UK will not be the only country to restrict attractive tax regimes and there might be whole scale changes (for instance recent changes to the rules in Portugal have been announced). For those with a foothold in the US, the common recurring fear is that the US will act unilaterally in addressing international tax concerns – it has done this in the past and this unilateral action can cause huge costs, structuring issues and tax exposure in case where the rest of the international community choose to address concerns in a different way.”

Tahir Mahmood commented on the “non-dom regime” and said: “The non-dom regime has become a focal point for the Labour Party. There is constant talk about reducing it to 10 years, 5 years or scrap it completely. Very few clients have made any changes on the back of this, as in the past any HMRC change like this would be accompanied by adjustments that allow for a period of adaptation. This trend was evident in 2017 with measures like rebasing/cleansing. The Labour party will no doubt try to use this point to win votes, but they need to take into account that, although non-doms save around £11 billion annually in taxes, they still contribute nearly £8 billion to the UK economy. The pressure is currently on Jeremy Hunt to address tax rates, considering they have been frozen until 2027/2028. The freeze on tax brackets, coupled with high inflation, is effectively a silent tax that has prompted individuals to explore more tax-efficient alternatives, such as QCB (Qualifying Corporate Bonds) portfolios. When invested correctly, these portfolios can yield a higher net return due to significantly lower tax rates.”

From the US front, Mahmood noted: “[T]here is a looming sunset of the estate and gift tax allowance set for the end of 2025. The allowance will consequently drop back down to approximately $7 million, indexed for inflation. The longstanding disparity between US and UK estate taxes has drawn attention, leading to a search for tax-efficient solutions.”

Tech and tax

As the world becomes more complex, technical solutions are doing their best to keep up. As financial tech and AI develop at a rapid rate, how is the tax management industry harnessing these innovations to improve their tax and accountancy offerings? We asked what has already been done, and what we could expect to see in the future.

Robert Salter said: “On the one hand, there has been cases where taxpayers have been trying to use AI / ChatGPT etc., to find their own answers to tax technical issues / cases – so far, with very limited success. For example, there is a recent case (Felicty Harper vs HMRC), where the taxpayer ‘found’ various cases on ChatGPT which she quoted in her tax tribunal case as evidence of ‘reasonable excuse’ (e.g. so penalties etc. could be waived).  The only problem was that the cases which came out of Chat GPT were in broad / simple terms basically ‘useless’ (or indeed totally fictious I understand).  On occasions, we have seen similar issues when dealing with our regular clients.  That is, they have seen or heard ‘X’ tax planning idea from somewhere and assumed it works.  Needless to say that this can take considerable time in explaining why it doesn’t work.  Whilst this basic issue has always been a potential problem, historically it was based on ‘what people heard down the pub’.  Now it can still be from that source, but also based on social media or AI feedback, so it is probably a bigger issue from a time / problem perspective (at least with some clients), that it has historically been.”

“Overall, however, I think there is still some uncertainty and concerns within the accountancy industry generally about AI and how / when it should be introduced.  This is based on a lot of factors including concern re training & software costs, for example.  Having said that if you look at areas such as ‘expense reporting’, you will find that expense reporting in many companies (whether in the accountancy field or generally) is much more automated that it has even been.  As such, I am sure this type of ad-hoc, small scale automation will continue to occur and gradually gain greater and greater ‘scale’. We have also seen executives and other HWIs usual ‘tracking technology’ (e.g. as one can have set-up on their phone), to provide travel records both for use by their tax preparer, but also to evidence where they have been living / working, for example, as part of a tax audit.  The technology can also have ‘warnings’ inbuilt into it – e.g. to warn someone if they are reaching a tax threshold for country ‘X’, for example.  As such, it can help ensure people don’t inadvertently trigger tax liabilities for example in particular jurisdictions.”

“From a Revenue perspective, there is also the fact that HMRC (and other tax authorities) – at least in theory – are starting to use more advanced data processing / AI as part of their work. This is combined with the fact that HMRC now has greater access than ever before (e.g. because of issues such as the international sharing of data between tax authorities).  This data should – at least in due course – result in more focussed HMRC tax enquiries, for example.”

Michael Lewis provided examples on how the power of AI is being harnessed in the industry: “Many technologies have been said to be revolutionary but most have turned out to be a lot less exciting than anticipated – ‘Blockchain’ being perhaps one such suggested tech – it is clear, however, that  AI is the real deal.  Harnessing the power of AI has been identified as the top strategic initiative for the firm. While my consulting colleagues will be looking to implement large scale AI consulting projects, of equal importance is the impact that AI will make internally and especially to the tax profession. The firm has already made significant investment. In September, the firm launched ‘EYQ’, an inhouse AI assistant, which operates (for client confidentiality operates within a closed architecture) in a manner similar to CHATGPT (all queries being saved and referenceable). I have used this numerous times when looking to research complex topics and while care definitely needs to be applied it is clearly a fantastic resource for starting that research journey. The firm is also piloting a project to use AI to track daily activities and intelligently complete staff timesheets. For any tax accountant (or lawyer even) timesheets are the bane of existence but hopefully there is an end in sight to this ongoing pain. AI has the power to provide intelligent risk protections – a triple redundancy on  activities looking to prevent mistake . The firm is not stopping there but looking at using AI to pull together reports and data effectively reducing the time to pull together deliverables and allow staff to concentrate on the more interesting aspects of the role. The impact of AI is only just starting but it is definitely a journey I am very excited about.”

Any other business?

Finally, we asked the professionals what other trends or top-of-mind concerns they are seeing in this sector, which may be flying under the radar for those less ‘in the know’.

Tahir Mahmood said: “In recent years, HMRC has intensified its efforts to uncover unreported income, employing mechanisms such as Tax Information Exchange Acts (TIEAs) and the Common Reporting Standard (CRS). Financial institutions are mandated to relay information to HMRC regarding their clients. If discrepancies arise between your year-end tax return filing and the records held by these institutions, you are likely to receive a notification. This process has already initiated, with several such letters having been issued. On the other side of the spectrum, the IRS (Internal Revenue Service) has long had the Foreign Account Tax Compliance Act (FATCA) in place, a significant factor causing foreign institutions to be wary of dealing with American clients.”

Under-resourced HMRC causing problems

Robert Salter responded: “The HNWIs and UHNWIs individuals are actually experiencing the same frustrations with HMRC – e.g. in terms of HMRC resourcing and staffing problems – that many ‘regular’ taxpayers feel.  This is a frustration is shared by accountants and tax advisors too. The lack of HMRC staffing (or in some cases, a lack of the necessary skillset amongst Inspectors), can be a real problem and burden to taxpayers (and advisors) – both from a cost perspective and from a wider ‘stress’ perspective too. For example, if you look at the cases of well-known media personalities such as Kaye West and Adrian Chiles, it took up to 9 years for their cases (dealing with the issue of whether they were ‘deemed employees’ or not for tax purposes), to be fully resolved.  In both of these cases, the taxpayers won their arguments but didn’t – per my understanding – actually qualify for any cost reimbursements from the Revenue.”

“Moreover, in many respects, the actual costs (professional fees etc.) of these individuals fighting their cases would have been greater than the tax at stake, and one cannot help but wonder whether HMRC is simply – at least in a number of cases – hoping that taxpayers generally just ‘surrender’ based on cost and / or stress grounds even when the taxpayers have strong legal arguments supporting their positions. As such, is it now time to provide taxpayers with more ‘protection’ when they are the subject of HMRC enquiries?  Clearly if taxpayers have acted illegally, they shouldn’t get any protection with regard to their costs, but when the courts have confirmed that they behaved correctly / legally, it does appear problematic that they can still be responsible for all of the costs incurred.”

Michael Lewis answered: “My concern is one of government aspirations vs practicality, especially when it comes to things such as making tax digital and the associated goal of looking to have more real time data. This often ignores the complexity of data, the need for it to be reviewed and audited and the way it needs to be adjusted for tax reporting purposes. On the accounting side, the cost of implementing this is not fully appreciated and especially the impact of introducing off the shelf solutions which don’t breach other obligations such as GDPR. The hurdles are only just being understood but while the focus is on things such as changes to domicile rules these ongoing issues have been sidelined.”

Thank you to all of the professionals who contributed to this article.