Alan Sugar’s Tax Advisers: You’re Fired!

The drawbacks of being a Lord

Many of you may have seen the news about Lord Alan Sugar’s tax bill which followed on nicely from our article last week about simple errors that can lead to large and unexpected tax liabilities.

In Sugar’s case, as reported by The Times, it seems he attempted to avoid paying income tax on his £390m dividend from Amshold by taking advantage of significant amounts of time he spent in Australia in 2021-22 and declaring himself a non-resident.

The error? His advisers had not considered The Constitutional Reform and Governance Act which treats anyone who is a member of either the House of Commons or Lords at any point in the tax year as resident and domiciled in the United Kingdon for the whole of that tax year.

The cost of the error on a £390m dividend? Just a small tax bill of £186m…

This story highlights how many quirks there are to the UK tax system but there was something else interesting which was not widely picked up by the media; the fact that even if he was not a member of the House of Lords at any point in the tax year, and therefore was not deemed UK resident, it is very possible that one year of non-residency would not have been sufficient to exempt his dividend from UK tax.

So why is this the case?

Non-residence vs temporary non-residence

It comes down to a set of rules that are more often applied to capital gains tax rather than income tax; the temporary non-residence rules. The rules broadly mean that dividends paid to a non-UK resident are taxable on them in the year of their return if:

• The period of non-residence is less than five years.
• The taxpayer was resident in the UK for four of the previous seven years (Lord Sugar was).
• The distributions were paid by a close company which is broadly defined as one controlled by five or fewer people (Amshold Group is controlled by Lord Sugar).
• The profits arose from periods before the taxpayer became non-resident.

Therefore, if the dividend declared derived from pre-departure profits, one period of non-residency would not have been sufficient to avoid tax in the UK. Assuming the period of non-residency would have been less than five years, the dividend would have been taxable on the year of Lord Sugar’s return to the UK.

The lesson

We like to think there are things to learn from every tax news story. The key takeaways from this one?

1. Even advisers get things wrong sometimes (sorry!).
2. If you are thinking of becoming non-resident, or claiming to be non-domiciled, double-check you haven’t been an MP or Lord at some point in the tax year.
3. If you want to avoid UK tax, you may well need five years on a beach in Australia rather than one.