An ill-judged reform could cost more revenue than it would raise.
The taxation of resident non-domiciles is once again a live political issue. This was inevitable following the controversy over the tax affairs of Akshata Murty, the chancellor’s wife.
The Labour Party first called for the abolition of the status during the 2015 general election but initially held off announcing their current approach until their policy review had been completed. With local elections imminent, it was no surprise that this holding line was replaced with a promise to replace non-dom status with a new transition scheme for those newly resident in the UK.
The case against non-dom status is a simple one: why should those who are able to claim non-dom status be able to escape paying UK tax like everyone else? It is a perfectly reasonable question, although there are at least two areas of confusion that can increase anger about the current regime.
First, it is common to hear people complain that non-doms are let off paying UK tax altogether. Obviously, this is not true: it is a regime that applies to overseas income only. Recent analysis by economists from Warwick University and the London School of Economics (The UK’s ‘non-doms’: who are they, what do they do, and where do they live?, see bit.ly/3vJ57JO) suggests that 80% of non-doms have UK earnings as their main source of income on which they pay tax in the normal way.
The second confusion, of which we saw much evidence in the coverage of Ms Murty’s tax affairs, is between residence and domicile. ‘It is ridiculous, how can she claim not to live here when she lives in Downing Street?’ was the gist of many comments on Twitter. It is a confusion that leads many to consider that claiming non-dom status is inherently suspicious.
All of this makes the issue of a special status for wealthy foreigners (93% of non-doms were born overseas) potentially very dangerous politically to any government, especially at a time of a cost of living crisis and rising taxes.
It is also a legitimate question with which successive governments have wrestled, including twice in my time in the Treasury. The system has been frequently tightened – introducing remittance fees, increasing those fees and restricting eligibility for the status – but never scrapped. Why?
The concern has always been that abolition will cost more revenue than it will raise. By definition, non-doms have looser ties to the UK than most of us and have choices as to where to live. Typically, they already pay a lot of tax directly to the UK exchequer, so the risk is that the entirety of this revenue is lost if they cease to be resident here.
Then there are the indirect costs. A typical non-dom would be a French investment banker. They might not necessarily abandon the UK if they had to pay tax on overseas income, but would the next generation of French bankers be quite so enthusiastic about moving to London in the new circumstances? Possibly not, and with the City already facing challenges because of Brexit, there is a risk that this might send another signal that the UK is not quite as open for business as we once were. Does there come a point when London loses the critical mass that has been essential in it becoming a great financial centre?
I put these points as questions not assertions because the nature of this debate is that there is much uncertainty as to the answers. The Treasury or HMRC (or anyone else) cannot predict with much confidence what the behavioural response will be to a change of policy. The sky has not fallen in so far, some will argue, but an ill-judged reform could still provoke a fiscally and economically damaging behavioural response.
In the current circumstances, announcing a policy of abolishing non-dom status was politically irresistible to Labour. But, were they to find themselves in office and introducing a new regime, they will be faced with the same dilemmas and uncertainties as their predecessors.
An ill-judged reform could cost more revenue than it would raise.
The taxation of resident non-domiciles is once again a live political issue. This was inevitable following the controversy over the tax affairs of Akshata Murty, the chancellor’s wife.
The Labour Party first called for the abolition of the status during the 2015 general election but initially held off announcing their current approach until their policy review had been completed. With local elections imminent, it was no surprise that this holding line was replaced with a promise to replace non-dom status with a new transition scheme for those newly resident in the UK.
The case against non-dom status is a simple one: why should those who are able to claim non-dom status be able to escape paying UK tax like everyone else? It is a perfectly reasonable question, although there are at least two areas of confusion that can increase anger about the current regime.
First, it is common to hear people complain that non-doms are let off paying UK tax altogether. Obviously, this is not true: it is a regime that applies to overseas income only. Recent analysis by economists from Warwick University and the London School of Economics (The UK’s ‘non-doms’: who are they, what do they do, and where do they live?, see bit.ly/3vJ57JO) suggests that 80% of non-doms have UK earnings as their main source of income on which they pay tax in the normal way.
The second confusion, of which we saw much evidence in the coverage of Ms Murty’s tax affairs, is between residence and domicile. ‘It is ridiculous, how can she claim not to live here when she lives in Downing Street?’ was the gist of many comments on Twitter. It is a confusion that leads many to consider that claiming non-dom status is inherently suspicious.
All of this makes the issue of a special status for wealthy foreigners (93% of non-doms were born overseas) potentially very dangerous politically to any government, especially at a time of a cost of living crisis and rising taxes.
It is also a legitimate question with which successive governments have wrestled, including twice in my time in the Treasury. The system has been frequently tightened – introducing remittance fees, increasing those fees and restricting eligibility for the status – but never scrapped. Why?
The concern has always been that abolition will cost more revenue than it will raise. By definition, non-doms have looser ties to the UK than most of us and have choices as to where to live. Typically, they already pay a lot of tax directly to the UK exchequer, so the risk is that the entirety of this revenue is lost if they cease to be resident here.
Then there are the indirect costs. A typical non-dom would be a French investment banker. They might not necessarily abandon the UK if they had to pay tax on overseas income, but would the next generation of French bankers be quite so enthusiastic about moving to London in the new circumstances? Possibly not, and with the City already facing challenges because of Brexit, there is a risk that this might send another signal that the UK is not quite as open for business as we once were. Does there come a point when London loses the critical mass that has been essential in it becoming a great financial centre?
I put these points as questions not assertions because the nature of this debate is that there is much uncertainty as to the answers. The Treasury or HMRC (or anyone else) cannot predict with much confidence what the behavioural response will be to a change of policy. The sky has not fallen in so far, some will argue, but an ill-judged reform could still provoke a fiscally and economically damaging behavioural response.
In the current circumstances, announcing a policy of abolishing non-dom status was politically irresistible to Labour. But, were they to find themselves in office and introducing a new regime, they will be faced with the same dilemmas and uncertainties as their predecessors.
