Taxman cometh
Financial Times Published: December 17 2007 19:36 | Last updated: December 17 2007 19:36
The rationale behind a UK tax crackdown on rich foreigners is sound. At its heart is the notion of fair tax treatment: that all those who make Britain their home should pay towards public services. But the plan is high risk. Poorly executed, it could chase away thousands of City bankers and hedge fund managers and damage the economy. That would be a disaster.
The Treasury believes it is striking a sensible balance. At present, residents who claim ³non-domiciled² status through a long-standing link with another country can avoid paying tax on overseas earnings and capital gains on assets held offshore. Instead of charging these people an annual £25,000 to keep their tax status, as proposed by the oppositionConservatives, the government has suggested a £30,000 fee for those who have lived in the UK for more than seven years. The grace period cuts likely numbers affected.
Beyond the kneejerk protests of lobbyists lie genuine concerns. The biggest is that ending tax privileges for foreigners will simply drive them elsewhere. This could carry a heavy cost. Official estimates show non-doms contribute £12bn to national ouput and £4bn in income tax. A parallel crackdown on offshore trusts has compounded these fears. Steps to tighten residency rules threaten to widen the impact.
The document outlining the proposals has not helped the Treasury¹s case. It manages to be both overly complex and vague. With the botched handling of capital gains tax reform, the paper adds to the sense of a government dithering in the face of effective opposition. It estimates that only 3,000 of the 20,000 non-doms affected will leave. But it admits to being far from certain how much tax has been foregone. Why should anyone believe the estimates of numbers affected?
Moreover, as the implications begin to sink in, practical problems are emerging. The proposed inclusion of arrival and departure days in the 90 a year people can spend in the UK before becoming tax resident could draw foreign business travellers into the net. While there is a case that people living in Monaco and commuting to London should pay their share of taxes, the rules will have to be tightly drawn.
The complexity of the non-dom plans means much depends on fine detail. By tweaking the small print, they can be made to work without an exodus of smart workers. But ministers need to tread carefully to avoid any unintended consequences. Otherwise the simplicity of the Conservative approach will look attractive. Especially when set against the government¹s recent blunders.