Fleecing non-doms is the thin end of a bad wedge
Allister Heath says that Brown’s poll tax on Britain’s 114,000 non-domiciled residents will drive away talent when our economy most needs it. Shame the Tories would do the same You would have thought that with the economy weakening, the stock market sliding, house prices tanking and Northern Rock’s botched rescue a daily humiliation, Gordon Brown would be doing all in his powers to help the City of London weather the gathering storm. Instead, he appears intent on making life even more difficult for it.
His reckless plan to crack down on Britain’s 114,000 non-domiciled residents, including many of the City’s most important financiers, will be the most damaging in a long list of spectacularly ill-timed tax hikes due this year. Even the Treasury now admits that 3,000 non-dom expats will leave Britain in April, when the changes, including a £30,000 annual poll tax, are due to kick in. This is a truly remarkable admission, of which far too little has been made.
Given how hard all economies, including Britain, strive to attract high-net-worth investors and the highly skilled these days, it is difficult to fathom why any government in its right mind would wish suddenly to begin penalising those it has sought to woo for so long. What is most absurd about this is that the Treasury readily acknowledges, in the very same document laying out its tax hike plans, that ‘in an increasingly globalised economy it is crucial for the UK’s competitiveness that the UK continues to attract international talent to this country’.
Rarely has there been a policy so glaringly incongruous with the government’s stated objective. In fact, no tax expert I have spoken to can recall any Treasury proposal in recent history which so openly and casually acknowl edged it would trigger an exodus of thousands of successful and wealthy taxpayers.
Brown’s decision instead to play the class war card has gone down well in some quarters, including among middle-class professionals jealous of their non-dom neighbours’ tax privileges and angry at being priced out of the best homes and schools. But by making the City a less attractive place to work, and by signalling an ideological shift towards higher taxes on the wealthy, it bodes ill for the long-term future of the British economy.
Its impact will be compounded by the downturn that is now engulfing the City. An economy can just about afford to be nasty to the rich during boom times; it cannot do so when everything else is going wrong. With the credit crunch intensifying, mounting layoffs at investment banks and a sharp decline in confidence, the last thing the housing, arts and luxury goods markets need right now is for their best customers to up sticks.
Yet Brown is now considering adding an attack on offshore trusts to his poll tax plans, a development which has brought a smile to the faces of relocation experts. To the expatriate community and their wealth managers, the attack announced in the PreBudget Report now looks as if it was merely the first salvo in a long war of attrition. The fine print of the Treasury’s consultation document makes it clear that the screws could soon be tightened further.
For good measure, the assault on the non doms is going hand in hand with a hike in capital gains tax, a rise in corporation tax on small companies, and a crackdown on the 29,000 non-residents who commute most weeks from Monaco or the Isle of Man. All of these changes add up to a simple message to the skilled, hard-working and above all footloose international talent to which today’s Britain owes so much of its success: don’t bother coming here, we don’t value you any longer.
For the first time since Labour came to power in 1997 it feels as if the City is under real threat — and not only because of the threat of recession and the turmoil on the markets. Tax lawyers are starting to warn their clients seeking to relocate to Britain that the current volley of tax hikes is likely to be merely the thin edge of a much more punitive wedge. Brown’s attack on the nondoms could easily become Brown’s very own Sarbanes-Oxley, the ultra-onerous piece of post-Enron legislation in America which chased away hundreds of companies to more welcoming shores.
But what is most distressing to non-doms currently based in the City, and to many of those considering moving here, is that the Tories support an almost identical policy. They originally hoped that the money raised would help pay for their cuts in inheritance tax. It is now clear that, at best, a raid on the non-doms will bring it a few hundred million pounds a year, a paltry bounty given the policy’s massive risks. The Tories should reconsider; the economy’s fragile state provides them with the perfect excuse to do so.
It is, of course, a myth that non-doms pay no tax, though they pay proportionately much less than the rest of us. They are only exempt from paying tax on income and capital gains earned abroad, as long as the money is not brought into the UK. Money earned in Britain is subject to the usual tax; nondoms pay £4 billion in UK income tax a year. Stonehage, the wealth management company, believes they spend around £16.6 billion a year in the UK and pay £2.9 billion in VAT and £308 million in stamp duty. The Treasury calculates that non-doms contribute some £12 billion to national income (roughly 1 per cent of the total, which demonstrates that they punch hugely above their weight).
The mega-wealthy won’t be affected by the new tax; £30,000 is small beer for them. But the average non-dom earns about £100,000, not much by contemporary standards. Only those with foreign income in excess of £80,000 (or twice that for married couples) will find it worthwhile paying the charge; others will either opt into the full British tax system, or else move abroad. Regrettably for London, there will be far more of the latter than of the former.
It is only by maintaining the non-dom system for a small elite that Brown has been able to preserve some of Britain’s competitiveness despite a decade of excessive taxing, spending and regulating; to want to do away with it at a time when the City is facing intense competition from rival centres smacks of extraordinary complacency. No other country is as generous towards nondoms as Britain; but plenty levy very low taxes, regardless of where income is earned. Dubai, which boasts a booming financial services industry, levies no tax at all on income; it will attract many refugees from Brown’s Britain over the next year.
But whereas Brown is wrong to want to assault the non-doms, the current system is patently unfair. No taxpayer should be treated better than others, merely by dint of his place of birth. There is only one workable solution, however: the tax burden should be reduced for everyone over time, thus ensuring that it becomes once again globally competitive without the need for special privileges. That, unlike Brown’s deeply misguided class warfare, would be a policy well worth supporting.
Allister Heath is editor of the Business and associate editor of The Spectator.
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