Ed Balls had warned non-dom changes could lose money

Labour's plan to scrap Britain's 200-year-old "non-domicile" rule ran into trouble on Wednesday after it emerged that Ed Balls, shadow chancellor, had previously warned it would drive people out of Britain and cost the Treasury money.

"If you abolish the whole status, it probably ends up costing Britain money because some people will leave the country," Mr Balls told BBC Radio Leeds in January. He said Labour would tighten up the rules.

However, on Wednesday Mr Balls cited "independent experts" as saying the abolition of non-dom status could raise £1bn, while Labour leader Ed Miliband scoffed at warnings by "some people" of an exodus of the wealthy.

The different accounts were seized upon by the Conservatives - caught on the hop by the Labour initiative - as evidence that Labour's policy was "unravelling".

George Osborne said the incident was evidence of a "total shambles" and showed how Labour was putting politics above economics and was unfit to run the economy.

The chancellor's aides said abolishing the status altogether could cause serious damage to certain sectors of the British economy, including shipping, oil and gas and financial services.

But they said that if the Conservatives won the election they were likely to scrap the rule which allowed non-dom status to be transferred from generation to generation.

However Mr Miliband, speaking at Warwick University, was adamant that ending the non-dom rule was both morally right and financially responsible and that the Conservatives had been rattled by the initiative.

"I don't buy the argument about it not raising resources," Mr Miliband said, citing contested claims by some tax experts that the move could bring in hundreds of millions of pounds for the exchequer.

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Mr Miliband's aides claim that Labour has devised a new system which is fair and would raise money and address some of the concerns raised by Mr Balls earlier in the year.

Under the Labour plan, foreign business people, students and others would qualify under new temporary residence rules to be taxed only on income and gains in the UK for a short period of time.

A consultation would establish the length of that temporary exemption from normal tax rules, but Mr Balls said it might be for two to three years, while other Labour sources have said it might last for four years.

The current system which allows non-doms to remain in Britain for many years and to avoid paying UK taxes on their foreign earnings - subject to an annual fee - would be scrapped.

The Labour initiative wrongfooted the Conservatives who initially described it as a mere "tinkering" with the system; Nicky Morgan, education secretary, struggled to say what her party would do instead.

Mr Balls was one of the architects of a New Labour tax policy in the late 1990s and 2000s under which wealthy foreigners flooded into Britain tempted by Britain's unique and generous non-dom regime.

Tony Blair's government saw the presence of non-doms as a boon to the British economy, bringing in investment with wealthy benefactors helping to fund museums and galleries.

Mr Balls's comments in January suggest he was sceptical about the merits of abolishing non-dom status altogether although Labour officials insist he was fully signed up to the policy.

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