Savings run for shelter: A tougher attitude over tax has led some societies to stop gross payments, writes Vincent Duggleby

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The Independent Online
A TOUGHER stance by the Inland Revenue on Britons who live abroad and leave savings in the UK has led some building societies to decide they can no longer offer gross interest. They are telling investors to close their accounts and transfer the money offshore.

The National & Provincial Building Society has just written to several thousand of its non- resident customers saying that because of the Revenue's regulations, all future interest payments will be made after deduction of UK basic-rate income tax.

Jill Cooke, the N&P manager involved, said societies were told by the Inland Revenue that they could only continue to pay interest gross if they were 'reasonably' aware that the customers were still not resident in the UK when each interest payment was due.

'We couldn't comply with this request, because the administration involved is overwhelming,' she said. 'It all boils down to the Revenue's interpretation of the word 'reasonable', and if gross interest payments are incorrectly made because the investor has (unknown to us) returned to live in the UK, then the society would be liable for the tax that should have been paid.' That view is shared by several other societies, including the Bradford & Bingley, which changed its rules on 1 February, the Britannia and the Nationwide. Taking a different view are the Halifax and Leeds societies and the Abbey National bank, among others. They have decided their non-resident investors can stay without being penalised. Mark Hemmingway, of the Halifax, said it was a matter of knowing your customers.

'We are confident we can monitor all the accounts concerned to see if there is a different pattern of usage, such as regular withdrawals from UK branches beyond what might be expected from someone coming back for a holiday'.

Gary Marlow, of the Leeds, agreed that the society would have to pick up the tax tab if it failed to spot a customer breaking the rules, but he thought this was 'not very likely'.

Paul Burgin, of the Abbey National, said all non-resident UK accounts were carefully checked, particulary those with box numbers or with care/of addresses. With more people going abroad to work during the recession, it had been a growing market for the bank, which now had more than 50,000 accounts.

Mr Hemmingway agreed: 'We would be loath to push our customers offshore, mainly because we have a much greater choice of accounts in the UK'.

Under the original rules, which were modified in the 1990 Finance Act, someone 'not ordinarily resident' has to sign form R105 to qualify for gross interest.

The declaration is similar to that on form R85, which is used by non-taxpayers in the UK. The key difference is that once someone has signed R85, the onus is on them to inform the bank or building society of any change in that status, knowing that the Revenue runs frequent checks to identify dishonest claimants.

With overseas accounts, the powers of the Inland Revenue were increased in 1991. The compliance rules have been considerably tightened, and there must be an independent audit of the society's internal procedures.

In a guidance note, the Revenue said: 'Previous experience has shown that in the absence of such powers or their effective use, there can be loss of tax and in some circumstances the system may be subject to serious abuse.'

Moira Elms, senior financial planning manager at accountants Coopers & Lybrand, said societies had to weigh up the cost of compliance with the possible loss of goodwill. 'I suspect most investors going to work abroad for two or three years will prefer to leave their money in the UK rather than move it offshore, as long as they are getting an equally good rate of interest.'

There are, of course, other possibilities: National Savings does not deduct interest at source, and for anyone with pounds 50,000 or more, interest is paid gross on deposits in the money markets.

(Photograph omitted)

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