How to rinse the rich without washing them away

'Doubts raised over costing of non-dom rule changes'Financial Times, April 8

I know I'm against this non-dom thing but I don't really know what it's about.

I think you speak for most of the British public.

Of course I do. Why should someone who lives in Britain not pay tax here?

I'm afraid it's a bit more complicated than that.

It shouldn't be. The principle is very clear.

But the tax code is not. Let's start with what non-dom actually means.

Is it something to do with Dom Perignon?

It refers to people who are not "domiciled" in the UK.

But I thought these people lived here?

Domicile does not mean nationality or citizenship or residence. You can be a UK resident and also domiciled in another country.

Huh?

In most countries the rule is essentially that, so long as you live there, any tax that you owe on your income and gains earned elsewhere will be due to that country.

OK.

But in the UK, we make an important distinction between resident and domicile. If you are a resident but "domiciled" elsewhere, you pay tax on income and asset gains made in the UK but you are only taxed on income or gains made abroad that are "remitted" to the UK.

Sounds great. How can I become a non-dom?

In a bizarre case of financial genetics, domicile status is granted at birth and can be inherited (only) via the paternal line. The criteria for that original status are often arcane but they come down to whether a resident intends to return "home" to their domiciled country in the future.

It sounds like it could be open to abuse.

In theory, the tax authorities can challenge people who claim non-dom status. In reality, they rarely do: HMRC has concluded only one challenge to domicile status in the past decade, according to Jolyon Maugham, a tax barrister.

I don't mind people coming here to work for a year or two and then going home. But don't some people reside in the UK for many years while claiming non-dom status?

Yes. Successive governments have tried to do something about this by introducing annual fees up to £90,000 for people who live in the UK for a long time and still claim the "remittance basis", ie the right not to be taxed on non-UK income and asset gains. Although there are many non-doms who are not wealthy, we can assume those who pay the fee are rich, says the Chartered Institute of Taxation.

So people can pay the government to avoid tax?

In effect, yes.

That's nuts. Why would the UK government want to let people do that?

Maugham calls it "a bribe" for wealthy foreigners to come or stay in the UK and spend their money. This is why London estate agents are among the most worried about Labour's proposals, announced this week, to drastically restrict non-dom status. It is also why opponents of the move say it is a bad idea - they claim it'll end up costing the UK.

And will it?

We don't know. As of 2011, there were perhaps 6,000 non-doms who paid the fee, according to the CIT. There are another 43,000 non-doms who could pay the fee in future but they haven't been in the UK long enough. But we don't know how much they have in income or assets outside of the UK.

And if you don't know what you're taxing it's hard to know how much you raise by taxing it.

Precisely. We don't know the "tax base" in this case - the amount of money that would be liable to taxation under the Labour plans.

Tricky.

Trickier still: we don't know how non-doms would adjust to any new regime. Would they spend less? Would they move house?

So it could actually cost the UK in taxes?

This is the argument from the Conservatives. It's impossible to know in advance who is correct and there are lots of knock-on effects that are all but unquantifiable.

Have a guess at least.

Well, we know that when the government introduced the fee it raised hundreds of millions of pounds. When it increased the fee it raised a few tens of million more. And we know that despite a tougher set of rules, the number of non-doms has not exactly plummeted.

What you're saying is that non-doms have so much money they don't care.

No, not at all. But non-doms are motivated by more than taxation. Otherwise many would already be living in Monaco or the Isle of Man or Singapore.

Frankly, I don't care if it costs us money.

You're not alone. But for those who also care about the tax yield, as one should, then in the end the only way to find out whether the UK needs its non-dom tax status is to try life without it.

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