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So long, farewell

19 February 2008 / Mike Truman
Issue: 4146 / Categories: Comment & Analysis , Income Tax , Residence & domicile
MIKE TRUMAN points the way to the exit for aggrieved non-domiciles


  • Contrary to the scare stories, the new rules on domicile will not cause the collapse of the City of London.
  • Removal of personal allowances from all non-residents claiming remittance basis is unfair.
  • However, all long-term residents should be treated equally.

What's the connection between the Archbishop of Canterbury and the Chancellor of the Exchequer?

Well yes, memorable eyebrows, obviously, but what else?

They have both been castigated by the media recently over proposals that, allegedly, would allow certain groups of people, thought of by some as 'not really British' (even though they have been living here for decades and may have been born here) to be subject to a separate system of law in some respects.

The Archbishop of Canterbury was incorrectly reported as having proposed a parallel system of Sharia law running alongside domestic law, and was roundly condemned by the redtops for doing so.

On the other hand, the Chancellor of the Exchequer was proposing that some of the parallel provisions which apply to the non-domiciled should be brought into line with those that apply to everyone else, and was roundly condemned by the broadsheets for doing so.

Personally I'm having trouble seeing why the principles applying to the two groups should be different.

What a surprise

It is scarcely surprising that the Archbishop of Canterbury, whose arguments are so densely worded that you need a brain the size of Doctor Who's Face of Bo to follow them, was so wilfully misunderstood by the press.

What is not so clear is why the supposedly quality end of the market would fall for the apocalyptic and eschatological predictions of some of the self-interested in the non-domiciled debate.

Let's get some facts on the table, to the extent that they are known. The total UK tax paid in 2005-06 by those claiming to be non-domiciled on their self assessment tax returns was £3.9 billion, significantly less than the value of one percentage point on income tax.

The total number of individuals concerned was 111,000. Of those, some 25,000 had no reported employment income, but were claiming the remittance basis, and at a rough guess probably some 15,000 of those had substantial unremitted income and gains.

Those, therefore, are the ones who might decide to leave — not the average non-domicile, who (the research shows) is working in the financial services industry and is here on secondment with their multinational employer for a single term of no more than five years.

On the admittedly limited data available, only 8% of non-domiciles were resident in the UK for more than seven years anyway, which would cut the target group even more.

So the idea that the financial services industry will collapse is nonsensical. A better target, which has been mentioned by some commentators, is the Greek-owned shipping industry run out of London.

Some 100 family-owned companies might relocate back to Greece, taking £10 billion of revenue with them.

However, since the start of the decade some 30 companies have apparently already returned to Greece without the City of London fainting with shock, and it is far from clear that tax was the only reason for them going.

A simple balance

Which leaves the argument that it is a simple issue of balancing the extra tax that would be paid by the non-domiciles that stay against the tax lost from those who leave.

The direct tax total may only be £4 billion or so, goes the argument, but then you also have to add on the VAT paid when the non-taxable capital remitted gets spent, and so on.

If you would lose more of that than the amount you would gain from tightening the rules, then on the basis of this argument you shouldn't make the change.

Much the same argument was made against increasing the rate of capital gains tax, particularly for private equity firms, even though their partners are still going to pay a lower marginal rate than their cleaners because of the BVCA memorandum which prevents them from being taxed under the employment-related securities rules.

In fact, it is an argument that is invariably made by the rich saying that the marginal rates of tax which apply to everyone else should not apply to them.

Maybe I've just been in this game too long, but I've grown tired of this line. As a tax assistant in the late 1970s, I filled in forms 930 (ask someone older if that means nothing) that quickly ran up to tax rates of 83%, with 15% investment income surcharge.

I was very sympathetic when those clients said that the tax rate they paid stifled enterprise and innovation. Then the rate dropped to 60%, and a few years later the investment income surcharge disappeared.

Still, that's more than half your marginal income taken, so I was still sympathetic, though surprised that the complaints about swingeing tax rates (which started up again a year or two after the changes) were just as vociferous as when the rates had been far more severe.

Then the rate dropped to 40%, and when a few years later the same arguments were repeated yet again, I realised how naïve I'd been to think that any rate of tax would actually have been acceptable.

The basis of this assertion is that the richer you are, and the more mobile you are, the lower your average rate of tax should be.

The logical conclusion is that the rich end up negotiating a flat amount of tax that they are prepared to pay in order that the UK can be graced by the favour of their presence, in which case we might as well go the whole hog and apply to become the 27th canton of Switzerland.

A fair system

There are two principles which are generally accepted as being fundamental to a fair tax system — horizontal equity and vertical equity. Horizontal equity says that people who are in the same position should face the same tax liability; vertical equity says that the greater your income, the greater your average rate of tax.

The upward curve on the latter may be gradual, and in most modern jurisdictions a historically low top rate means that it flattens out, but the effect of allowances and lower rate bands should mean that the marginal rate is always slightly higher than the average rate for any individual at any level of income.

But what about horizontal equity and the non-domiciled? Are the government's proposals fair, when tested against that principle? If I say that it's a bit of a curate's egg, you have to remember that the point about the cartoon where the curate said his egg was 'good in parts' was precisely that this made it inedible as a whole.

I won't rehearse again my objection to the £30,000 bung to the taxman, except to say that horizontal equity would clearly have required that long-term residents were treated in the same way, regardless of whether they were UK domiciled.

What that principle does highlight, however, is the unfairness in the rules about withdrawing personal allowances, and in some, though by no means all, of the anti-avoidance provisions.

Short-term residents

The key decision in questions of horizontal equity is which taxpayers are sufficiently alike to be treated in the same way, and which have significant enough differences to be treated differently.

The subsidiary question which then has to be asked is 'in what respect are they different'? It is that which should determine whether a differential tax treatment is appropriate.

Take the example of American expats on secondment to the UK branches of the financial institutions they work for. When they first come here on a five-year secondment, it is reasonable to treat their overseas income and gains which are not remitted to the UK differently to that of someone who is a permanent resident here. 

The centre of their life, looked at over the longer term, is not in the UK, so what stays in the US ought to be taxable only in the US, if at all.

It represents that part of their life which was put on hold when they came over here, and which will be picked up again when they return.

However, their work in the UK and their earnings in the UK are no different from those of those domiciled and long-term resident here. If income and gains are not being remitted to the UK from overseas, then they have to meet all their living expenses from their salary, and it seems illogical to impose a higher than normal tax bill on it.

And yet the proposed new regime would impose a penalty of over £1,000 even for a basic rate taxpayer, by removing the right to claim personal allowances.

While it could be argued that the £1,000 non-remitted income de minimis provision will exempt most such 'normal' expatriates, the same limit also has to cover non-remitted gains — and unless multiple accounts are set up, it is hard to remit gains without remitting income first.

The original rationale for the change was that allowing those on the remittance basis to also have their allowances gave them a double benefit — they could remit income and gains up to the allowances only and avoid tax on the rest by not remitting it.

If that is the mischief being aimed at, then say that remitted income and gains are fully taxable without deducting allowances — that would reflect the difference between non-domiciles who are here to work, and live off their salary, and those who live off remittances.

Three tenners?

While we're looking at the personal allowance provisions, it might be worth highlighting the proposed new ITA 2007, s 809E (2) (c), which denies relief under any of ss. 457-459 of the same Act.

So what are these valuable reliefs which it would be unfair to allow those claiming the remittance basis to enjoy?

They are relief from tax on half of the premiums paid to trade unions and police organisations for superannuation, life insurance or funeral benefits, or to the employer so that benefits can be paid after the employee's death to their dependants, but limited to £100 a year of relief in each case.

What on earth is the point of removing a relief like that for the non-domiciles? It is pointless complexity for the sake of a few tenners in tax which will have no impact whatsoever on the non-domiciles concerned.

Unless there is some issue related to European law, or human rights (which seem to be the normal culprits in these situations) I really cannot see why the parliamentary draftsman should have been troubled with the need to include them.

And, frankly, if there is some such problem, then given the miniscule levels of relief they offer even to those not on the remittance basis, wouldn't it be simpler to just abolish the sections altogether? That would at least be simplification.

Avoidance provisions

In a fair tax system, it makes sense to remove the non-domicile exemption from anti-avoidance provisions in many cases. Why, for example, should it be possible for a non-domicile to convert a UK property into a non-UK situs asset simply by putting it into a non-UK company, and then sell the property without the gains being attributed through?

Other provisions seem more doubtful. Is it really fair to say that a remittance from a mixed fund must be treated as income first, then gain, and only after that capital? It is certainly easier than apportioning it, but is it fair?

And some of the trust provisions were clearly unfair, as has now been accepted by the government and reported elsewhere in this issue.

Long-term residents

But once a number of years has passed — and seven seems to me to be pretty fair — the argument that the non-domiciled should be treated significantly differently from those who are domiciled here evaporates, or so it seems to me.

What significant difference is there, for tax purposes, between someone UK domiciled and resident, who might at some point decide that they want to emigrate, and someone who has been resident for many years but who remains non-domiciled on the basis of an expressed intention to return to their 'home country' at some time in the distant future?

Horizontal equity seems to me to demand that they are treated equally. A £30,000 annual charge does not achieve that, but it is at least a start.

Some non-domiciles have expressed the fear that this may just be the start of a process which will lead to a removal of all their tax privileges; all I can say is that I hope their fears are realised.


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