Cicero Policy Briefer

Issue 21, February 2008

Home advantage: Cleaning up the non-dom tax regime

By Laura Chisholm

Having originally announced a review of tax domicile rules in April 2003, the Treasury took until October 2007 to announce a package of reforms. It was responding to a Conservative proposal for a levy on non-doms and a growing sense in the UK that a class of ‘super-rich’ has emerged which doesn’t play by the rules. This resentment has been stoked over the last 12 months by the unions’ campaign against private equity, though those inside the tent have also pointed to a lax regime. One private equity practitioner told the Treasury Select Committee that weak rules mean that “people who have lived here 50 years…are still able to claim they are not liable to UK capital gains tax".

The Government’s aim is to increase fairness without damaging competitiveness. The main changes are in three areas: an annual charge of £30,000 on those non-doms who have been in the UK for seven of the last 10 years; a choice between using the remittance basis for taxation or accessing personal allowances (rather than both, as currently); and a tightening of the method used to measure the days spent in the UK that count towards residency. This last change brings the UK in line with international standards.

The Government has published a consultation (the deadline for submissions is 28 February) and HMRC has published draft clauses for the suggested measures. Taken together as a package, these reforms are expected to yield additional tax revenue of around £800 million in 2009-10 and £500 million in 2010-11.

The lack of data in this area (a gap acknowledged by the Treasury) is one obstacle to assessing what the impact will be. HMT’s figures reveal that the number of individuals indicating non-domicile status was 114,000 in 2005-6, up from 68,000 in 1996-97. As individuals do not need to report their unremitted income or gains to HMRC, there is no reliable means of knowing how much untaxed foreign-source income and gains this group has. The Treasury says in its consultation that “HMRC cannot estimate it, let alone with any precision”.

The proportionate reaction is to see this as an inevitable tidying up of the rules. Unlike the proposed changes to capital gains tax, which prompted outrage from the business lobby, the changes to the non-dom tax regime have promoted little discussion, apart from a few wild (hopeful?) predictions of a mass exodus on the first available private jet. This is partly because the change was long overdue. It is also because there is no room in today’s climate for an argument around the other contributions that non-doms make to the UK in terms of talent, wealth generation and philanthropy, for example. Maybe there should be, to ensure that the impact of these changes is balanced and effectively monitored.

This move will cause ripples that will have an impact on the UK’s international reputation as a competitive place to do business—the Government should try to dispel this anxiety by responding to businesses’ concerns in other areas.

Laura Chisholm can be contacted on +44 (0)20 7665 9536 or click here to email.