HMRC Residency Double Taxation Guidance Note 4 - Transitional arrangements under the new UK/USA Double Taxation Convention

Background

The 2002 UK/USA Double Taxation Convention ('the 2002 DTC') came into force on 31 March 2003.

The provisions of the treaty took effect, so far as the work of HM Revenue & Customs (HMRC) Residency is concerned, for UK taxes withheld at source from 1 May 2003 by virtue of Article 29(2)(b)(i) (as amended by the Protocol to the treaty). The Protocol ends any entitlement of a US resident to the tax credit attached to dividends paid by a UK company on or after 1 May 2003.

However, Article 29(3) goes on to give a US resident the right to elect that the provisions of the old treaty ('the 1980 DTC') should continue to apply for a transitional twelve months.

The purpose of this HMRC Residency Double Taxation (DT) Guidance Note is to explain how such an election should be made, and how HMRC Residency will be applying these transitional arrangements.

What is a 'Grandfathering' election?

This is a shorthand way of describing an Article 29(3) election.

The Double Taxation Convention (DTC) text - Article 29(3)

Here is the relevant part of the Article 29(3):

'Notwithstanding the preceding sentence, where any person entitled to benefits under the prior Convention would have been entitled to greater benefits thereunder than under this Convention, the prior Convention shall, at the election of such person, continue to have effect in its entirety with respect to that person for a twelve-month period from the date on which the provisions of this Convention otherwise would have effect under paragraph 2 of this Article.'

Is there a set form of words that I need to use to make an Article 29(3) election?

The DTC itself does not prescribe a set form of words, referring only to an 'election of such (a) person'.

The special April 2003 Tax Bulletin (PDF 180K) devoted solely to the new DTC summarises (at page 18) HMRC's general approach to Article 29(3) elections:

'There is no form or set form of words provided for such an election. Instead, HMRC Residency will consider the provision invoked only where the claimant has expressly asked for it to apply, or has demonstrated a clear and unmistakable intention that it is to apply. The question will need to be determined on the making of the first claim to relief to which Article 29(3) could have relevance. If such an election is made, it will apply to all of the income arising in that 12-month period. A claimant making such an election will need to make any claim to which it relates using the appropriate form for the previous treaty. These forms will continue to be available on HMRC Residency's website, or obtainable from them on request, until the statutory time limit for making a claim under UK tax law (section 43(1) TMA 1970) expires. Claims relating to income paid in the period from 1 May 2003 to 5 April 2004 will have to be made no later than 31 January 2010; claims for the period from 6 April to 30 April 2004 will have to be made no later than 31 January 2011.'

What this will mean in practice

In the absence of an Article 29(3) election, HMRC Residency will automatically assume that the terms of the new DTC will apply to claims to repayment and applications for relief at source made in respect of payments made on or after 1 May 2003.

For relief to be given under the terms of the 1980 DTC, a claimant must make an express election under Article 29(2). This election should be made by writing to HMRC Residency preferably either prior to, or at the same time as, the first claim or application for relief at source is made. For example, the election can accompany the claim form.

Whether a Grandfathering election is either appropriate or desirable is solely a matter for a claimant to judge. HMRC Residency is unable to offer any advice on the merits or otherwise of this option.

In cases where no specific election is made, yet it appears that there is a clear intention for the 'Grandfathering' rules to apply, HMRC Residency will (on a case by case basis) seek to confirm the position before proceeding with the claim.

If HMRC Residency can accept that a valid election has indeed been made, then the terms of the 1980 DTC will apply in their entirety to all payments made in the transitional twelve-month period beginning 1 May 2003.

Where the merits or otherwise of making an election cannot be determined at the time of a first claim, and it is dealt with under the terms of the 2002 DTC, a resident of the USA may decide subsequently to make an election under Article 29(3). As the 1980 DTC will then apply to all payments made in the twelve-month transitional period, HMRC Residency will need to reconsider any relevant earlier claims and applications for treaty benefits. In any case where there is doubt about the availability of treaty benefits, further information will be sought from the USA resident person.

Which HMRC Residency claim form should be used?

As the Tax Bulletin makes clear, claimants are asked to use the new US/Company 2002 (PDF 280K) and US/Individual 2002 (PDF 120K) forms to claim relief under the new DTC. These are downloadable from the HMRC website .

However, if a claimant wishes to elect under Article 29(3) for relief to be given under the terms of the 1980 DTC, then the claim forms appropriate to that DTC are to be used for all payments covered by the election. These remain downloadable from the HMRC website.

Contact details

HMRC Residency helpline: Tel 0845 070 0040 if calling from the UK, or +44 151 210 2222 if calling from outside the UK.

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