‘Non-doms’: keeping the baby, losing the bathwater

Non-domiciled tax status is not intrinsically illegitimate; the problem is its abuse by wealthy long-term British residents and citizens whose foreign domicile is spurious

Bishop_100I have a dirty secret: I’m a non-dom!  As a British citizen, the UK remains my ‘domicile’ – essentially my permanent residence – even though I’m tax-resident in Trinidad where I currently live and work.

For most people, domicile and residence are the same; when I eventually return home to live I’ll become resident again.  Many millions have also made the opposite journey to me: foreign expatriates or their offspring living in Britain who, by definition, are not domiciled if they have yet to make the UK their permanent home and who could in theory claim formal non-dom tax status if they so wished.

Yet in Britain, uniquely, there is one other group of non-doms – many of them British citizens – and these are the real source of the current controversy.

Before we come to them, though, we need to clarify some complicated taxation issues.

First, it’s important to get the concepts right.  In most countries your tax residence determines what you pay and where.  It’s a complex area, but if you live and work in Britain you are generally liable for UK tax on your worldwide income.  The only exception is that, if you do claim an overseas domicile, you pay UK tax on UK earnings, but not necessarily on foreign ones.  Your tax residence changes depending on where you live; it’s much more difficult to shift your domicile.

Second, because these issues are poorly understood in public discourse, there has been much confusion in the furore over non-doms.  For example, Will Hutton argued recently that ‘there are 180,000 potential taxpayers with very high incomes who claim non-domiciled status … to pay no tax’.  He also suggested that ‘Britain is the only country in the world to offer non-dom status’.  Both of these claims are untrue.  Non-domiciled tax residents in Britain do pay income tax on earnings arising in the UK; they avoid tax – legally – on those arising outside if they are less than £2000 and they do not bring them into the country.  If their gains are larger, or they remit them, they have two choices: pay UK income tax on the total (which can sometimes be offset against any taxes levied in the other jurisdiction) or claim the ‘remittance basis’ of taxation, meaning that they lose their tax-free allowances, but are taxed on money actually remitted.  After seven years, this privilege incurs an annual fee currently between £30,000 and £50,000 depending on the duration of their UK tax-residence.  Moreover, many countries recognise some variant of the domicile concept, or they exempt temporary residents from tax liabilities on income arising elsewhere.

Third, although the notion of non-dom status is undoubtedly anachronistic – introduced in 1799 to allow colonialists to shelter their plundered offshore earnings – it nonetheless remains legitimate as a means of attracting skilled labour.  It actually makes sense for a foreign worker living in London temporarily to pay UK income tax solely on money earned there.  Plenty of Britons living overseas still pay UK tax on UK-sourced income which is often not liable for local taxation in their place of residence.

Fourth, the problem is not foreign workers in the UK.  Compared to the global super-elite, expatriate professionals have had a raw deal since former Labour Chancellor of the Exchequer, Alistair Darling, introduced the fees for claiming non-domiciled status in 2008, particularly since they may be liable for tax in two jurisdictions on the same income (unless spared by a double-taxation treaty).  For most people whose affinities really do lie elsewhere, and who genuinely intend to end their days outside Britain, the maintenance of their non-dom status is arduous, indeed increasingly so, unless they are disproportionately wealthy.

Yet many non-doms have no intention of ever leaving, and this is the crux of the issue politically: people who are tax-resident and living permanently (i.e. they are domiciled) in Britain, often British citizens, being able nonetheless to avoid tax on earnings arising outside by virtue of a privileged non-domiciled status that they may simply have inherited.  The problem is exacerbated by the tax arbitrage possibilities open to them.  Many will structure investments so that the lion’s share of their income will accrue offshore in tax havens, meaning that their UK tax liability is artificially lowered even further.  Domicile is not a basis for taxation, but rather for not being taxed in one’s place of residence, so many non-doms will also not be liable for tax on overseas earnings in their – often spurious – place of domicile if that money does not actually arise there.  It’s unlikely, for example, that those caught in the recent HSBC scandal paid tax on their gains in either their supposed domicile or in Switzerland itself.  Indeed, this is probably perfectly legal avoidance for non-doms; the criminal evasive acts were the non-declaration of ‘black’ accounts or the clandestine remitting of hidden money, often in suitcases full of cash!

This is clearly unfair.  The list of influential Britons claiming non-dom status – including Tory MP Zac Goldsmith (until 2009), Viscount Rothermere of the Daily Mail and CEO of the corruption-tainted HSBC Stuart Gulliver – is quite staggering.  As the entrepreneur Duncan Bannatyne has long argued, this allows them both to enjoy market-distorting advantages which are unavailable to those who are both resident and domiciled in the UK, and shape national politics while not contributing their fair share.

So, what is to be done?

Essentially, countries have a series of choices about how they squeeze the goose without stopping it laying.  One option is simply to scrap the non-dom status and make all UK-residents, temporary or permanent, liable for tax on their worldwide income, as many other countries do.  Another is to go a step further and impose the (unorthodox) American system, rendering anyone with a British passport anywhere in the world liable to UK tax on their worldwide earnings.

However, both options could amount to throwing the baby out with the bathwater; they would generate many unintended consequences, and maybe even cost more than they save.

The former would undoubtedly be fairer in tax-arbitrage terms, giving global plutocrats less incentive to use the UK as a tax haven, but it could easily deter the skilled professionals on which many of the country’s most vibrant industries depend.  Why would someone come from Singapore or Bangalore to work in London’s creative or banking sector for a couple of years if their savings interest or rental income were immediately subject to up to 45% UK tax on top of any liabilities at home?

The latter is excessively punitive, as Boris Johnson recently discovered.  It would be accompanied by justifiably loud howls from Britons working in Dubai, Qatar, Hong Kong and elsewhere objecting to paying UK tax while they are not resident in Britain – and therefore barred from using many public services, including the NHS – on income which has already been subject to another country’s (often more favourable) tax regime.

Ed Miliband has rightly made the case for reform: if elected, Labour will not abolish non-dom status outright (as the headlines have suggested), but will rather place more stringent tests on who gets to enjoy it and for how long.

This seems sensible to me.  The primary objective should be to distinguish between the two different groups of non-doms: on the one hand, foreign expatriate workers who should enjoy the right to keep their affairs separate between their countries of temporary and permanent residence, paying tax on income in whichever country it arises; and, on the other hand, British citizens or long-term and permanent residents who are tax-resident and should consequently be taxed on their worldwide income in Britain.

The Labour proposal rightly suggests the former will be subject to a series of tests: once they have lived in the UK for a set period and have received permanent residency or a British passport, they automatically forfeit their privileged status, if they wish to stay.  As for the latter, it barely needs saying, of course, that they should never have enjoyed non-dom status in the first place.  To reiterate: this is the real scandal, not the existence of the category itself, or the principles underpinning it.