Let’s imagine a state with only 25 people living in it. Say they collectively agree to let a wealthy foreign taxpayer join them, thereby reducing their collective tax burden by half. Let’s say that the foreign taxpayer pays proportionately less than the state’s wealthiest citizens, but less than he would normally pay in the state that he comes from. Is this morally wrong? Arguably it is a populist concept as, although it benefits all citizens, it is least fair to the wealthiest citizens. However, if the citizens do decide it is unfair and increase the foreigner’s tax share, is it not logical to suppose that this foreign taxpayer would leave the state, leaving its citizens with all the tax to pay?
This rule does exist in the UK for foreign domiciliaries but Mr Ed Miliband will announce plans to scrap the non-dom status if he is elected with effect from April 2016.
He intends to say “There are 116,000 non-doms costing hundreds of millions of pounds to our country. It can no longer be justified and it makes Britain a tax haven for the few”.
Labour claims that changing the tax system will raise hundreds of millions of pounds, but they have been careful to avoid giving exact numbers because it is not possible to calculate what it would raise, particularly because they cannot estimate how many non-doms tax payers would leave the country.
The fact of the matter is that there are many millions of people who are potentially non-doms, but only just over 100,000 people actually claim non-dom status.
If you do claim non-dom status this means that you can either pay tax on your worldwide income and gains or elect to pay tax on your UK income and gains and pay tax on your foreign income and gains but only to the extent that you remit them to the UK. This is known as the “remittance basis”. Of those who claim non-dom status only 46,700 actually claim the remittance basis.
Non-doms who claim the remittance basis need to pay the remittance basis charge once they have been resident in the UK in 7 out of the previous 9 tax years. The charge starts at £30,000 per annum, increasing to £90,000 per annum for those who have been in the UK in 17 out of the previous 20 tax years. The remittance basis charge alone collects £150 million in tax each year.
Non-doms are less than 0.2% of the taxpaying population yet collectively paid £8.27 billion of income tax and NIC in 2012-13, representing nearly 4% of the country’s income tax take. This it because all non-doms pay tax on UK sources of income or gains and remittances of foreign income or gains regardless of any tax planning, refuting the common misconception that they make no contribution. The average non-dom claiming the remittance basis pays £132,762 of income tax per annum. This is roughly the tax paid by 25 ordinary British tax payers. It can hardly be said that non-doms “cost hundreds of millions of pounds to our country” where the facts show that non-doms make a significant direct financial contribution to the country. The indirect financial contribution to the country, such as SDLT on property, VAT and spending in the UK, is unmeasurable.
Ed Miliband claims that there is a moral obligation to change the regime to be fair. He says “We all use the same roads, we are all protected by our police and armed forces, even those who go private sometimes rely on the NHS. It is the common good. We use these same services, therefore we all owe obligations to help fund them according to our ability to do so.”
It is a common held belief that tax should be fair, but tax, by its very nature as an arbitrary construct by society, is not fair. All taxpayers benefit from the regime in consequence of the inbound investment but arguably it is least fair on the wealthiest. It could only be morally wrong if we lived in a utopian society where everybody paid the same taxes worldwide, so that a non-dom would not have any motive to leave the UK if the UK changed its tax system.
In reality, non-doms have a choice where they chose to live and pay their taxes. Tax systems similar to the UK’s non-dom regime exist in Ireland, Portugal and Malta, to name but a few. Of course there are countless other tax havens worldwide. The UK is not the only option for non-doms, it is certainly not the cheapest option.
Labour argues that non-doms will not leave, citing previous changes to the laws on energy companies, banks and utilities. In our view these examples are incomparable. Of course big businesses with infrastructure and customers needing servicing will not leave as long as it remains profitable to stay. It is a different situation for wealthy non-doms, who by their very definition are not tied to the UK and can leave quickly choosing to pay tax (or no tax) elsewhere.
In conclusion it is not the system that needs to change, it is how it is enforced and seen to be enforced that should change. For a UK domiciled person to lose his domicile status he needs to show an intention to permanently make his home abroad and to demonstrate that intention by living in that new home. There have been some very public examples of people claiming to have non-dom status with seemingly little connection to their “home” abroad. I think, if asked, most British people would say they don’t care about foreigners paying tax on an alternative basis, but what does stick in their throat is when they see a quintessentially British person claiming it.
Mark Davies & Associates
About Mark Davies & Associates
Mark Davies & Associates are a London based boutique firm of chartered tax advisers who specialise in the taxation of international clients.