Non-dom crackdown: What impact will taxing the global rich have on the UK?
Tight finances and pressure to break the deadlock in the election campaign combined yesterday in a very focused new round of tax – on the foreign earnings of over 5,000 rich British residents.
Labour first introduced a levy on long-term non-domiciled residents back in 2008, and the coalition has hiked it since. In December, chancellor George Osborne announced another increase.
But Ed Miliband took it further yesterday, pledging to make all UK residents pay tax on worldwide income once they have been in the country for more than three years.
The Labour leader argues that it should raise hundreds of millions of pounds, and make the system fairer.
But it might not be that straightforward, as the targets are highly mobile.
WHAT IS A NON-DOM?
Most Britons with overseas earnings pay tax in the country where it is earned, and in the UK. Then they may get a rebate to make sure they pay up a maximum of the applicable UK rate.
Under a complex set of rules, those with ties to a foreign country can register as a non-domiciled resident. That means they only pay the foreign tax, as long as the money stays overseas.
Once a non-dom has been here for seven years of the past 10, a £30,000 annual charge is applied. This rises to £50,000 after 12 years, and will soon hit £90,000 for those who have been resident in the UK for 17 of the last 20 years, of £90,000 per year.
HOW MUCH TAX DO THEY PAY NOW?
The rich do pay a large share of tax in Britain. The top one per cent of earners pay roughly 28 per cent of all income tax, and the top 10 per cent pay more than 58 per cent of the total.
And non-doms paid £6.18bn in 2012-12, plus another £223m in the levy, according to lawyers at Pinsent Masons. On top of that, there will be taxes on capital gains and on property transactions.Nonetheless, extra charges fit the political consensus that the rich should pay more.
If the non-dom crack down does deter immigration by the global rich, then it could even cost the Treasury money
HOW DID WE GET HERE?
Income tax has existed for around 200 years, and the non-domiciled exemptions in their current form were brought in around 100 years ago.
According to tax lawyers Baker Tilly, the idea was to make sure “new money” earned by businessmen overseas was taxed in the same way as “old money” of British landowners. Brits with overseas earnings were suddenly subjected to the same taxes as those who earned money at home, and the non-dom bit was brought in to give exemptions to those who lived in the UK but had real foreign family links.
“How different the social and economic context is now! The UK landed gentry are no longer the world’s wealthiest and fewer ‘poor men’ of the UK make their fortunes overseas,” said Baker Tilly’s George Bull. “As the pendulum of tax fairness has swung so far away from its position in 1914, it’s sensible to reassess the place of domicile within a 21st-century tax regime.”
WILL THEY ALL JUST LEAVE BRITAIN?
Some will – but probably only a small proportion. Thousands of non-doms left when the levy was introduced and again when it was increased.
The Office for Budget Responsibility’s attempts to forecast the impact of the coming levy increase plan for some of them to exit the UK.
However, most of the more than 100,000 now registered as non-doms are only here for a few years, and Labour wants to keep this system, with a potential limit of three years. Around 5,000 pay the levy, which only kicks in after seven years in the UK.
Those who have been here for that long are likely to have deep ties with Britain. While it may make the UK look like a less stable place to work, it is unlikely to drive all of those people away.
A bigger impact may be that fewer will move to the UK in the future. If London wants to position itself as the world business and finance capital, it has to keep attracting global high-fliers.
“This country has benefited enormously from attracting some of the most successful businesses and entrepreneurs in the world, with the previous Labour government recognising the benefits of an internationally competitive tax system,” said Simon Walker from the Institute of Directors.
“While there may be little public sympathy for those who stand to be affected by reforms to non-dom status, the truth is that these things matter. There is a serious risk that large numbers of the international financial community, who have headquartered themselves in London at least in part because of our tax regime, will now exit the country.”
Beneficiaries could include Zurich and Gibraltar, while cities like Frankfurt and Paris may lose fewer wealthy citizens to London over the long term.
HOW MUCH MONEY WILL IT RAISE?
Possibly nothing. If it does deter immigration by the global rich, then it could even cost the Treasury money.
Labour hopes it will raise hundreds of millions of pounds but it all depends on how the non-doms react. Given they are internationally mobile, they may drain out of the UK shortly after.
“Non-doms bring entrepreneurial drive and choose to base their businesses in the UK, which lead to generating tax receipts from VAT and corporate tax, and income tax and National Insurance by employing individuals,” said Blick Rothenberg’s Nimesh Shah.
“The next government… could be unknowingly faced with a severe dent to the UK’s economy,” said Shar.