Doubts raised over costing of non-dom rule changes

Labour will scrap the non-dom rules that exempt thousands of British residents from UK tax on their offshore income without any clear idea of how much it will raise - or lose - for the Exchequer, experts said on Wednesday.

Stuart Adam, of the Institute for Fiscal Studies, an independent think-tank, said: "We have very little idea about the revenue implications of Labour's proposals. The thing we know least about is how people are going to respond to a tax rise."

The Institute of Directors also stressed uncertainty over Labour's costings, describing the economics as "unconvincing".

Simon Walker, director-general of the Institute of Directors, said: "It's very unclear what additional revenue would be raised, but the UK's international reputation would be put at risk."

Some individuals were quick to voice their objections. One former non-dom who has now left the UK said he used to pay more than £2m of taxes to the UK. He pointed to the "many very attractive alternatives for wealthy non-doms, many of whom can and will leave if attacked".

Another said: "I wake up every morning and it seems that the solution to the UK's problems is to tax me more."

More is known about non-doms than at the time of the last big debate on the issue in 2008 because of the introduction of an annual charge for long-stay non-doms.

But the complexity of the rules and the paucity of information in the public domain make any estimates highly uncertain, leading some pundits to stress other aspects of the measure such as its impact on fairness.

The Conservatives questioned the reliability of estimates put forward by Jolyon Maugham, a QC who provided some help to Labour in drawing up its policy. His "finger in the air" estimate concluded that scrapping the non-dom rules would result in a yield "well north of £1bn". Richard Murphy, a tax campaigner, said that Mr Maugham's estimate was similar to his own.

Graham Aaronson, another leading tax QC, described Labour's policy as "economic folly", arguing that the losses to the Exchequer could be sizeable. He said the UK would "unquestionably" lose out because people would no longer choose to set up their businesses in the UK. It would also lose as wealthy and high-spending individuals from places such as Saudi Arabia, Dubai and Hong Kong decided to spend less time in Britain, he said.

Emma Chamberlain, a QC with experience of advising non-doms, also expressed doubts. "Clearly, there are abuses but the risk is we throw the baby out with the bath water. The danger is it will put people off from coming here in the short term."

Ms Chamberlain believes the new charge will not raise much, if any, money from the short-stay non-doms. Nearly nine out of 10 of the 46,700 non-doms who use the remittance basis - just paying tax on offshore income when it is brought into the UK - leave within seven years of arriving in the UK. "Such people are either going to just leave earlier or not come in the first place," she said.

If Labour opts to restrict the period in which offshore income is untaxed by the UK to just a few years, it will discourage wealthy and entrepreneurial immigrants, she said.

In addition, there are at least 70,000 long-stay foreign domiciliaries who do not use the remittance basis but who benefit from offshore trusts, according to Ms Chamberlain. These may include "some of the least meritorious domicile claims" but stopping these breaks would be difficult because of the constraints of EU law.

She said that if the tax breaks of this group were removed, a third of them might leave but she stressed it was impossible to say with any certainty. In addition, she said it would be very easy for people already resident abroad to avoid becoming UK residents while still spending up to 120 days here. "Then they will be unaffected by the changes but we won't get the same benefit of their families spending here and inward investment with head offices here."

The tax regime for wealthy non-doms has tightened in recent years, with the remittance charge increasing this month. For those who have lived in the UK for 12 out of the past 14 years, the annual levy has increased from £50,000 to £60,000, and a new levy of £90,000 has been introduced for those who have lived here for 17 out of 20 years.

Overseas tax residents now also face paying capital gains tax on the sale of UK properties, although this will only apply to gains made above values from April 2015.

However, since the annual remittance charge was first introduced in 2008, official figures indicate that the number of non-doms electing to pay tax on this basis has barely fallen.

George Bull, senior tax partner at accountants Baker Tilly, said he did not believe that Labour's policy would lead to an exodus of wealthy non-residents. Of the minority of non-doms who would be affected, it will probably only be those who are not working in the UK who will leave the country, Mr Bull said. He added that for most executives, their employers will pick up the extra tax bill.

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