Countries such as Italy and Ireland have introduced equivalents to the UK's non-dom regime. Critics forget that if or when non-doms quit Britain, they will take the revenues and investments they create with them. Recent data should be a wake-up call.
(An earlier version of this item appeared on the sister news services of WealthBriefing. The article refers in passing to the worldwide tax system enforced by the IRS, in contrast to almost every other country. The US wealth industry must heed the arguments here because US citizens residing overseas can get into difficulties over their tax. It is also a broader concern for the world's wealth management industry when rich individuals and families are attacked even if they are taking advantage of laws enacted by democratic governments.)
The UK needs to be a welcoming place to wealth creators and innovators if it is to make a success of life outside the European Union, build new businesses, create jobs and pay for an aging population. New data suggests that this isn’t happening.
A plunge in the number of new resident nom-domiciled persons is a big flashing red light showing that the UK isn’t as attractive as it used to be.
The number of new non-domiciled taxpayers in the UK plunged by 40 per cent in the tax year ending 5 April 2021. Law firm Pinsent Masons said that the number of non-doms dropped from 14,200 to 8,500. As for the total number, the UK government said that in the tax year ending 2021, it estimated that there were 68,300 such people, falling from 76,500 in the previous year.
This is serious because non-doms bring in a net amount of revenue that otherwise would not be available. The UK operates a territorial tax regime like most countries (apart from the US and Eritrea) so, if non-doms leave, will the economic activity and tax revenues this gives rise to also disappear? And this shrinks the total tax base, pushing more of the burden on to the rest of UK citizens.
What’s going on with these numbers? It is possible that some of those who might have become non-doms don’t like the idea of the UK anymore because of Brexit (one suspects they were not coming for the weather). That said, it is hard to see how breaking away from the Brussels machine can have made a huge difference – remember, the UK was not in the passport-free Schengen area even before Brexit.
Another deterrent could be that Sir Keir Starmer, leader of the official opposition and Labour Party, wants to scrap the non-dom system because he claims it is unfair. His views matter because Labour has been significantly ahead of the ruling Conservatives in the opinion polls – an election must take place by the end of 2024. The issue blew up last autumn when it emerged that the wife of Rishi Sunak, now prime minister, is a non-dom. Akshata Murty, an heiress and businesswoman, has not, as far as I know, done anything wrong in terms of tax law. But the “optics” of her status at a time when her husband was raising the total tax burden to the highest level since the 1950s have been poor.
The system seems to be in trouble, although its demise has been wrongly predicted before. It has certainly been squeezed already by governments since the 2008 financial crash. And other countries such as Ireland and Italy see that they can win a piece of the pie. They’ve started to roll out equivalent regimes of their own. We cannot say that we haven’t been warned. James Quarmby, partner at law firm Stephenson Harwood, pointed out this threat a few months ago on this news service. But it appears that the message is not getting through loudly enough.
Some of the more egregious flaws in the system have already gone. In 2015, the Chancellor of the Exchequer of the day, George Osborne, changed the system so that one could not be a non-dom indefinitely. That seemed like a fair move because the idea of being a non-dom ought, by definition, to be a temporary matter, since otherwise such a person is a full-time resident. The “remittance basis” – under which a non-dom doesn’t pay tax on non-UK sources of income and gains provided these aren’t remitted to the UK – is now capped at 15 years.
Fair and logical
But to axe the entire system seems unfair and counterproductive. It is not obvious why non-doms are doing anything “unfair.” They pay UK tax only on UK sources of income and gains and those remitted to the UK from foreign sources. The money that is made in, say, India and stays in India will be taxed there – for instance, when there are transactions and events affecting that money in that country. If a person is a British citizen with all the rights – and obligations – that entails, then the picture will be different. Even so, if some of their wealth is permanently parked overseas and none of the income it generates enters the UK, it is questionable why the UK government, rather than the jurisdiction in which that wealth resides, should tax it.
The UK has a territorial system of tax. A non-dom who earns a living in the UK should, of course, pay UK tax on it because that person will have used the roads and other public goods the UK provides. This, incidentally, is why the worldwide system of tax employed by the US is, in my view, not just economically damaging but goes against the very freedoms the US was built on. An American who never spent an hour of his or her adult life in the US still falls under the IRS tax net, requiring double-taxation treaties and the like to remedy the problem. The UK should be proud that it does not have this absurd situation.
Ending the non-dom system would also be taking place at a time when the UK is, as I mentioned already, suffering the highest tax burden since the start of the Cold War. Let's not forget that other forces are hitting the attractions of the UK to the international wealthy, such as the end of the old Tier 1 Investor Visa regime. The top rate of income tax is 45 per cent and, when changes to lifetime pension allowances and other factors are taken into account, the marginal tax "bite" on top earners is around 60 per cent. The UK is falling down in the tax competitiveness leagues according to the likes of the Centre for Policy Studies and Tax Foundation.
To conclude, the non-dom system might appear to be an historical curiosity, but as long as the UK has a territorial system of tax, and wants to attract those who wish to spend some but not all of their lives here, it makes sense to persist with a system that has attracted billions of pounds in revenue, investments and entrepreneurs. With the UK in dire need of more investment and higher productivity, axing the system would be a grave mistake.