Foreign millionaires have launched a furious lobbying campaign to protect the non-domicile loophole which saves them millions of pounds in tax each year while their accountants have started a rearguard action to shift their wealth so that Gordon Brown cannot tax it, even if he does change the law.
Following the revelation that the richest man in Britain, Hans Rausing, has used the loophole to pay UK tax on only a fraction of his wealth, Guardian research today suggests that a third of the country’s billionaires are among the 60,000 UK taxpayers who are entitled to use it if they choose to. The loophole allows UK residents to cite another country as their true domicile and to pay no tax on foreign earnings which they keep abroad. Norman Baker, the Liberal Democrat MP for Lewes, said: “The state of the law is clearly an enormous problem and an enormous scandal. It invites people not to pay the tax they could.”
Following Gordon Brown’s first hint, in early March, that he might close the loophole, millionaire shipowners and leading accountants have already started what one Whitehall source described as “the most fantastic lobbying campaign” to protect their privilege. There has been a torrent of letters to Treasury ministers and Inland Revenue officials, claiming that the economy would lose millions of pounds and thousands of jobs if they were forced to pay their tax.
The Baltic Exchange, which speaks for the London maritime industry, has written to ministers claiming that many members of the foreign shipping community would leave the country if they were taxed. They claim this would lead to the loss of 30% of the worldwide tanker chartering business as well as the loss of 4,500 jobs in the City of London and £100 million in taxation. Individual millionaires and chambers of commerce have also written as well as accounting firms, including Ernst and Young, who earn considerable fees from non-domicile clients.
Ministers are said to be unimpressed by the lobbying. They know that the Thatcher and Major governments considered changing the law and were cowed by pressure, including complaints from foreign shipowners who were funding the Tory party. Ministers are said to doubt whether there is any independent evidence to support the prediction of an exodus, and one senior sources describes the claims of economic damage as “unlikely to be true”.
In stark contradiction to this threat of exodus, specialist tax advisers have already drawn up emergency plans which would allow their non-domicile clients to remain in the UK without being caught by tax even if the loophole is closed. Rawlinson and Hunter, who advise Hans Rausing and other enormously wealthy non-domicile clients, circulated a memo to clients on March 19, suggesting a choice of manoeuvres which would help them to frustrate Gordon Brown’s plans.
Titled “Non-UK domiciliaries – change in the wind?”, the memo outlined four moves which had to be made within days, before the tax year ended on April 5. Those who were holding overseas assets in their own names could transfer them to trusts to avoid capital gains tax; those who had already accumulated capital in trusts should try to transfer it to beneficiaries to avoid capital gains tax; those who had income in trusts should distribute it to a suitable recipient outside the UK to avoid income tax; those who had registered UK property in the name of off-shore companies should rapidly dismantle the whole structure for fear that, without the loophole, they might be liable to pay more capital gains tax on a sale than if they had simply registered the property in their own name.
Norman Baker has tabled questions asking the Treasury whether they have commissioned any research to estimate the money which is lost to the Inland Revenue each year through the non-domicile loophole and to forecast the effect on the economy if the loophole were closed. He said: “It is completely discraceful that hard working men and women are scraping away to pay tax properly when the richest people in the country are allowed to get away with it.”
