There’s been something unsavoury about the blazing row over the last week over the Government’s plans to change the tax treatment of non-doms.
I’ve been bombarded with emails and calls from these rich foreigners who live and work in Britain but, thanks to a 200-year-old loophole, only pay tax on their UK income and on money they bring in to Britain. They pay nothing on money they keep abroad.
Non-doms in the City modestly assure me this country would be nothing without them and that they will walk away in the blink of an eye if we tamper with their tax privileges. Private-equity and hedge-fund tycoons assert that there will be a mass exodus.
Much of this special pleading should be taken with a pinch of salt. Where exactly do they think they’ll go? Most answer Switzerland, clearly unaware that Switzerland would force them to pay far more tax than Britain. The Swiss “forfait” system, which operates on a similar basis to the UK non-dom regime, is only available to those who earn their money outside the country. That’s ideal for sports stars like Lewis Hamilton, or pop stars like Phil Collins. But private-equity tycoons thinking of relocating there to work will have to pay tax like ordinary residents – which means paying on their worldwide income and earnings. That’s far less attractive than working in London, even post our changes.
The only places in Europe where non-doms can expect better treatment are traditional tax havens, such as Monaco and the Channel Islands, or Ireland, which operates a similar non-dom regime to the UK. But these aren’t serious rivals to London. They might lure a few tycoons, but they won’t lure those who work for them.
The only real alternative for the determined tax avoider is to head to the Gulf. Dubai, Abu Dhabi and Qatar are making a huge push to lure financial services businesses. Inevitably, some will heed the call, more because of shifts in global power than UK tax rates. But I suspect a house next door to Posh and Becks on a palm-frond Gulf island is not what those threatening to quit Britain have in mind.
But even if the threat to leave is over-stated, clearly the Treasury under Chancellor Alistair Darling has made an unbelievable hash of things. The initial, headline proposal was that non-doms who have been in Britain seven years or more will have to pay £30,000 per year if they want to hang on to their non-dom status. Only 20,000 of the current 112,000 non-doms have been here more than seven years, according to the most recent Treasury figures. For most of them, £30,000 is not much. And those who don’t have enough worldwide earnings to justify paying the charge can always opt to pay normal UK taxes. That looks a fair enough deal to me.
The snag was that Darling could not resist the temptation for a major stealth tax grab. In the small print, he proposed changes to the tax status of offshore trusts, which is how many non-doms keep their wealth. That fundamentally altered the attractions of being a non-dom – and worse, would have saddled some non-doms with such huge tax liabilities they would have to quit Britain.
The Treasury says these changes were a drafting error and an “oversight”. But the accountants I’ve talked to are sceptical. The offshore trusts were a juicy target that the Inland Revenue had been wanting to get its hands on for years. Many City folk have stuffed offshore trusts with everything from the family home to huge investment portfolios as a way of avoiding UK tax. Certainly, there didn’t seem to be much accidental about the way the new rules were drafted.
Darling may have now retreated on the most controversial aspects of the reforms, but any damage may have already been done. The real problem isn’t the tax itself, but the way it plays into a wider perception that the UK is no longer a serious place to do business. Following hard on the heels of the Northern Rock debacle and Darling’s botched reform of capital-gains tax, the Government has now lost credibility in the City. Darling was heckled at a dinner in the City last week. The Treasury, once regarded as the Rolls-Royce of Whitehall departments, now looks like the incompetent plaything of a discredited government. That sense of institutional malaise extends to the Bank of England and Financial Services Authority, which has never inspired much confidence as a regulator and is regarded by many in the City as a joke.
For all the bluster, threats and special pleading this week, I don’t think the City is about to decamp to the desert over non-dom tax rules. And so long as the non-dom regime remains in place, the UK will still be one of the most attractive places in the world for foreigners to come and earn money – even with the £30,000 charge.
But the Government’s incompetence over the last few months has exposed problems with the quality of UK policy-making and public institutions. That has unsettled the City and created uncertainty. And there’s nothing investors hate more than uncertainty. Over time, Britain will pay a price for this shambles.
Simon Nixon is executive editor of Breakingviews.com