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Brown moves to close expat tax loophole

TENS of thousands of British workers who spend long periods abroad will be hit by a new tax hidden deep in Gordon Brown's second Budget.

A parliamentary row is brewing over the abolition of the Foreign Earnings Deduction, which permits UK residents to avoid tax on earnings during the time they spend out of the country.

Treasury officials say it is only fair that the loophole, introduced by Denis Healey when Labour chancellor in 1977, should be closed in the current Finance Bill to bring foreign earnings into line.

They insist that the "vast majority" of residents working abroad are paid at least pounds 50,000 a year net, and often have free housing, healthcare and education for their children thrown in.

But David Heathcoat-Amory, shadow Chief Secretary to the Treasury, said: "I have been inundated with complaints from ordinary hard-working people who will be hit by this measure.

"The Government says it is designed to deal with a small number of media and entertainment personalities who use the rules to avoid tax. But it is not just the Spice Girls who will be affected. Thousands of ordinary people - construction workers, nurses, teachers, even overseas aid workers - will be hit."

Abolition of the FED is expected to bring in pounds 250m a year. A clause in the Finance Bill implementing the Budget measure retrospectively to 17 March will be debated on Tuesday in the teeth of Conservative hostility. Ministers say they are standing firm on the reform.

A Treasury spokesman said: "The Government believes in a fair tax system for all. It is not right that groups of workers on well above average earnings should be able to escape tax on their income, so obliging others to pay their share for them. That is why the Government is taking steps to close this loophole."

To qualify for FED, workers must spend 365 days of the tax year abroad, and some take extended holidays in foreign parts to ensure they retain their tax-free status. The Treasury has no precise overall figure for those involved, but insists that only 315 teachers will be hit.

The Tories claim that abolition of FED will also damage UK competitiveness, because companies employing expatriate workers will have to increase salaries to compensate for UK taxes, thus driving up costs to customers.

"This will reduce our foreign-exchange earnings just as the deficit on trade in goods and services is running at record levels," Mr Heathcoat- Amory said.

But the shadow Chief Secretary believes that the Government will change its mind. "I will be very surprised if they don't climb down. These people often live and work in unpleasant places and earn vital foreign earnings for this country. Yet they don't consume any services in the UK.

"The well-advised rich will devise other ways of avoiding tax on foreign earnings. These Budget measures will hit the people who went abroad on work contracts and suddenly find themselves liable for full UK tax."