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Simply unfair

24 October 2007 / Mike Truman
Issue: 4131 / Categories: Comment & Analysis , Residence & domicile
MIKE TRUMAN is not impressed by the unanimity between Conservative and Labour on the taxation of non-domiciles


  • Gibraltar and the Isle of Man already offer capped income tax regimes, Guernsey is considering one.
  • Conservative and Labour proposals are very similar to each other, except for the amount and the seven year delay.
  • There is no legitimate argument for allowing non-doms to make a payment such as this for a tax advantage.
  • What does the proposal to set a flat rate charge 'for all' mean?

Fifteen years ago Gibraltar hit on a wizard wheeze to raise a bit of cash and to provide a ready supplier of purchasers for the smart new residential flats it was keen to have developed. It launched a separate system for the taxation of high net worth individuals not resident in Gibraltar.

Provided they bought or rented accommodation of an approved standard, but remained non-resident in Gibraltar under normal rules, they could limit their tax liability in Gibraltar to between about £14,000 - 20,000 (the figures have since increased a little). That way the Gibraltar government got an injection of tax revenues and some benefit from attracting the wealthy to live in Gibraltar (for at least some of the year) rather than just register companies there.

More recently, the Isle of Man decided it was going to impose a tax cap on personal taxation, which would apply to residents as well. They did not, however, want to attract the riff-raff that went to Gibraltar, so they set the cap at £100,000 (of tax, not income).

Guernsey has proposed but not yet adopted an even higher cap of £250,000 which would not apply to Guernsey source income. Both the Isle of Man and Guernsey appear to have made a conscious decision that they should apply any tax cap across the board to all residents, because not to do so would obviously be unfair.

Bottom fishing

Whilst there is significant unfairness in any case in having such a regressive tax provision, it is the sort of thing which you more or less expect from tax havens — I'm sorry, offshore financial centres. They have small populations, generally few natural resources, and often the significant extra costs of being islands or having other limitations on land access.

And yet it seems to me that this must have been the inspiration for the Conservative proposal to charge a flat fee of some £25,000 to retain non-domiciled status.

Never mind that we are one of the largest economies in the world with per capita GDP three times the world average, never mind that we are legendarily one of the countries where 'it's not fair' is seen as a knock-down blow to deliver in an argument.

It appears that the Conservatives wanted to go bottom fishing for fiscally mobile multi-millionaires in competition with Gibraltar, leaving Guernsey looking like a model of fiscal rectitude by comparison.

Fortunately they're not in power. The Labour party had come into government saying they were going to address the issues of residence and domicile; surely this would finally force their hand and we would get a deemed domicile rule which applied after, say, ten years residence?

The speech

Listening to the pre-Budget speech, it certainly sounded as if such a change was on its way:

'Mr Speaker, I believe that it is right that everyone who lives and works here should pay their fair share. I therefore propose to close a number of loopholes which have allowed some people to avoid taxes that everyone else has to pay.'

So far so good. Non-doms live here, some of them even work here, and they have avoided paying their fair share; it seems clear that he is about to announce a deemed domicile rule. But what actually came next was rather different in tone:

'Mr Speaker, non-domiciled taxpayers already pay about £4 billion on their earnings. Any proposal for change has to be fair, workable and affordable.'

Next he rubbished the Conservative proposals, rightly pointing out that there is no way 150,000 non-doms are each going to pay £25,000, although the accuracy of his own figures might also be questioned. Finally he came to the specific proposals; consultation on:

  • '[A]s a first step introducing a charge after seven years, then a higher rate after ten;
  • and preventing people claiming they are out of the country when they are actually here, from disguising income as capital and from
    claiming in effect two allowances;
  • and for completeness on a flat rate charge for everyone.'

Illegitimate argument

What the first point disguised, of course, was that the Chancellor had simply adopted the Conservative policy, delayed it until the taxpayer had been resident for seven years, and upped the charge to £30,000. So after all the derision that had been heaped on the idea in the week or two since it was announced, suddenly it appeared that the Chancellor was proposing something which was scarcely distinguishable.

Now there is an argument to be made for the present non-domiciled system. It is not an argument I agree with, but it is a tenable one; that by definition, non-doms are not as connected with the UK as those who are domiciled, so it is therefore legitimate to only tax them on the income and gains which do have a close connection with this country, either by virtue of arising here or being remitted here.

There is equally an argument, with which I would agree, that after a number of years of residence in the UK you should not be entitled to any special reliefs or exemptions, and that we ought to have a deemed domicile rule for all taxes that kicks in at somewhere around ten years of continuous residence.

But there is no legitimate argument to be made for a policy which says that non-doms should be allowed to bung the taxman thirty grand in order to make him go away. It is a squalid, disreputable, grubby idea that has no place in the tax system of a major enterprise-driven, wealth-creating country.

It legitimates a transaction that would otherwise have advisers reaching for a money-laundering report, and I find it hard to understand how either of the two major parties who believe themselves fit to be stewards of our tax system came up with it, let alone both of them.

Legalised bribery

The claim is made that non-doms create wealth in this country. Some do, but so do domiciled entrepreneurs. Why do we deliberately want to create a playing field that is tilted against the latter? It is also claimed that non-doms bring capital into the country. Whilst this may be true, there appears to be no research to show that it is significant enough to justify such a blatantly unjust system, and as Richard Murphy of Tax Research has pointed out, the remittance basis actively militates against them doing so.

Finally it is claimed that if they were to be taxed in full they would leave, to which I would say 'good riddance'; if you are not prepared to accept that we have a broadly, though gently, progressive tax system, then go and find a tax haven to live in.

If I am wrong, and the Treasury sincerely believes that the damage to the economy would be too great, then I would prefer to do what can be done to amend the current system. To be told that fairness is not possible is regrettable, to be told that legalised bribery is the best we can do is insulting.

The second point made in the speech, spelt out in the PBR note, illustrates some of the things that can be done. The 'source ceased' rule, the basis of the 'three account trick', is to be changed, the rules on what constitutes a remittance are to be tightened up, the emerging idea of remitting in alternate years and disapplying the remittance basis for that year is to be stopped, and for good measure personal allowances cannot be claimed on the remittance basis.

That, together with a greater degree of challenge to non-domiciled status, would at least have been a skirmish that could have been won in the battle to make non-doms pay their fair share of tax.

Political stunt

And finally, just what is meant by the third point: that 'for completeness' they will consult on a flat rate charge for all? For all UK residents on their remittances? That would solve the problem of unfairly benefiting non-doms over those domiciled here, but only at the cost of an even more massive unfairness in our tax system.

Perhaps the more likely meaning is that the consultation will cover the Conservatives' idea of applying the charge to all non-doms, but that the Government is not minded to do it. I could get no sensible answer from the Treasury, and was left with the impression that they had no real idea what he was talking about either, which only reinforces the suspicion that this is a cheap political stunt dreamt up in a panic on a wet afternoon three days before the speech.

We have been promised consultation on the proposals. Whilst there is a danger of consultation fatigue at present, I hope that when this proposal is put out for scrutiny the profession will explain loudly and clearly just why this provision has no place in UK tax legislation.

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