The Times revealed yesterday that over 2,000 Britons in Monaco are costing the UK economy £1 billion ($1.6 billion) a year in lost tax revenue. But while this figure might have HMRC salivating, the tax authority is going to have more of a fight on its hands than it has had with other jurisdictions, says Fiona Fernie, a partner in the tax investigations team at BDO.

In its investigation, The Times identified hundreds of British businesspeople who control some 1,000 UK companies while claiming non-residence and benefitting from significant tax breaks.

But while HMRC is looking to recoup millions in lost tax revenue by entering into disclosure agreements with jurisdictions like Liechtenstein and Switzerland, Monaco will prove a harder nut to crack, says Fernie, as many Britons in Monaco avoid tax by claiming non-residency. The rules dictating the extent to which people have to break connections with the UK in order to be designated non-resident currently lack clarity and are to be overhauled in April of next year.

“Monaco has been on HMRC’s radar for some time but whilst recent deals have been agreed with Switzerland and Liechtenstein to clamp down on offshore tax evasion, this would not be practical in Monaco as many avoid tax by claiming non-residency. There are many factors to take into account when looking at residency and currently the test is rather subjective. HMRC is seeking to make the test more objective to allow easier determination of whether an individual is non-resident through the new residents rules which are set to come in in April 2013,” said Fernie.

“The new residency rules will outline a test that will be split into three parts: the ‘conclusive non-residence’ tests, the ‘conclusive residence’ tests and the ‘sufficient ties’ test. This is likely to be a lot more comprehensive in closing any potential loopholes.”