Personal finance: Tax exile on Main St

The end of the Foreign Earnings Exemption is set to hit the little people hardest, says Nic Cicutti

MIX A FAMOUS rock band stuffed with 50-something millionaires with a Chancellor of the Exchequer determined to stamp out tax evasion and you have all the ingredients for a huge row.

Or so it proved earlier this week, after the Rolling Stones cancelled the British leg of their world tour, for which more than 300,000 tickets had already been sold, claiming that to carry on would land them with an additional pounds 12m tax bill.

Mick Jagger said at the time: "It would have meant the entire European tour ran at a loss and we just couldn't do that. It would have been foolish."

Jagger's comments relate to a tax change which came into effect on Budget Day on March 17. Until then, British people who lived and worked abroad for more than a year were exempt from British taxes on their earnings, so long as they did not spend more than 62 days in this country. The scheme was introduced in 1977 by then Labour Chancellor, Denis Healey, and was known as the Foreign Earnings Exemption.

The aim was to encourage UK workers to work abroad for periods of up to 365 days - straddling more than one tax year - and pay no tax, without having to become non-resident in their own country.

Under the former system, bands were able to set up a firm to act as their employers. A record company then pays the firm rather than the group. The firm then pays the stars "salaries" which are tax-free if they are working outside the UK.

That concession has now been ended. Any UK resident who works in Britain at all during a tax year must pay tax here on their entire earnings - a change that is expected to raise pounds 250m a year.

The Treasury, of course, played the game brilliantly. The Stones were accused of being multi-millionaire whingers who were just out to avoid paying a few more pounds in tax. Hence the "exclusive" leaks to sympathetic journalists to the effect that the Rolling Stones barely pay more than 2.5p tax in the pound on their UK earnings.

The problem, however, is that it won't be Mick, Charlie, Keith and Ronnie who are clobbered by Gordon Brown's ending of the exemption.

John Whiting, a tax partner at Price Waterhouse, points out that those most affected by the change weren't the band members but their 270 roadies working on the Road to Babylon tour.

Unlike the Stones, they aren't able to become non-resident and would have been hit by the retrospective change in tax law, even though they were already on tour when the Chancellor made his announcement.

Mr Whiting says: "The problem is that those most affected are construction workers, teachers, nurses and similar groups of workers who may have been on a one-year contract which straddled more than one tax year. If so, they would be liable to pay earnings on their tax in the current tax year."

Airline pilots and oil rig and charity workers have also been among the 20,000-plus people exempted by this loophole.

"Unlike the Stones, they don't have the option of deciding that they will not return to the UK for another year," says Mr Whiting. "Nor are they likely to be able in future to ask for a contract to be offered in such a way that it straddles more than a tax year, say for 14 months from March to May the year after next, thus making them not liable to pay tax in the UK for the intervening 12 months."

In the US, a rule similar to that announced by Mr Gordon Brown applies also. But there, Mr Whiting says, the US Revenue has granted exemptions to those earning less than about $70,000 US (about pounds 48,000), allowing many of its citizens working abroad to escape the tax trawl.

However, Mr Whiting says Revenue officials he discussed the matter with have been adamant that this is one tax-avoidance loophole they are determined to close. No similar exemptions will apply here. "We have tried every argument, including the unfairness of making it retrospective, that those most affected would not be rich people and so on. I have to admit that we have not got very far," he adds.

"The only hope may lie in what music the Chancellor listens to. If it is the Rolling Stones, we may be in with a very small chance."

Of course, the change does not affect just the Stones. Accountants for the Spice Girls, Elton John and Oasis are all reported to be planning protests. The Spice Girls alone stand to lose upwards of pounds 2m from their tour - or stay out of the country for far longer periods of time. "Of course, some people may see that as a blessing in disguise," says Mr Whiting.