Wealthy foreigners in the UK are celebrating a first-round victory in their battle to stop Gordon Brown closing the non-domicile tax loophole which allows them to avoid paying millions of pounds in UK tax each year.
Following the Guardian’s revelation that the richest man in Britain, Hans Rausing, had used the loophole to pay UK tax on only a fraction of his wealth, the chancellor announced in his spring budget that he would review the law and make an announcement in time for his pre-budget report this autumn. City accountants and foreign chambers of commerce were told to expect a series of meetings with Inland Revenue officials to discuss possible changes.
But, following intense lobbying by Greek shipping millionaires and a handful of specialist financial advisers, the meetings have not taken place. Treasury sources say there is now no chance that the consultation can take place before the chancellor’s report, due before the end of November.
According to one source, there has been an internal struggle between the chancellor’s office, where political advisers support a change in the law, and the Treasury’s council of economic advisers, where specialists with strong links to the City have tried to suffocate the initiative.
The loophole allows some 60,000 UK residents to pay no tax at all on income and gains in the rest of the world simply by claiming that their true domicile is the country of their family’s origin. The law – which is unique to this country – has turned the UK into a tax haven for Greek shipping magnates, Saudi princes and American corporate heirs. Mohammed Al Fayed, the controversial owner of Harrods, and Lakshmi Mittal, the Indian steel magnate, are among those who use it.
A Guardian investigation in April revealed that Britain’s richest man, Hans Rausing, who made a fortune of more than £4,000 million from his family’s Tetra Pak packaging company, was avoiding tax with such success that he and his UK businesses were receiving more from the Treasury in VAT refunds and grants than they were handing over in tax. Rausing, who has lived in Sussex for 18 years, has been allowed to claim that for tax purposes he is domiciled in Sweden, where he was born.
Following this revelation, the chancellor announced in his budget: “The Government is reviewing the residence and domicile rules as they affect the tax liabilities of individuals… As this is a complex area, all those affected should have the opportunity to contribute to the discussion. The Government will report on this issue in time for the pre-budget report.”
According to City sources, the Inland Revenue’s attempt to follow the chancellor’s lead, has been mired in delaying tactics. Shortly after the budget statement, Revenue officials are said to have submitted plans for a series of meetings, but the Treasury first failed to reply for weeks and then replied only with a series of questions. Although ministers have continued to declare that a series of meetings would take place, the consultation has never happened.
As shadow chancellor, in 1993, Mr Brown warned that the Treasury could be losing £1 billion a year as a result of loopholes in the law on domicile and residence. He said then: “The question is ‘Is Britain’s tax system in need of being cleaned up?’ The answer is Yes, but the Tory party doesn’t have the will to do it.”
In the weeks after he announced his review, the Treasury and the Inland Revenue were bombarded by hostile letters from wealthy foreigners and their accountants. Twice in the past 15 years, the Treasury has considered changing the law only to back down in the face of this lobby. Officials then privately blamed Treasury weakness on the fact that Greek shipping millionaires were key funders of the Conservative party.
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The non-domicile rule is a distant echo of empire. It allows some residents of the UK to cite some other country as their real domicile and then, unlike all other residents, to pay UK tax on their earnings in the rest of the world only if they ‘remit’ the money to the UK.
The idea of taxing anybody on this ‘remittance basis’ was introduced when income tax was first imposed, in 1799, in order to allow those who owned land in His Majesty’s dominions to escape tax on their colonial wealth unless they brought it back to England. This remittance rule was then attached, for the first time, to the idea of a ‘non-domiciled resident’ in 1914 to allow those who had been born in the colonies to live in England without paying tax on their foreign rents and stocks so long as the money remained abroad.
Today, however, the rule has been taken over by some of the wealthiest people in the country who can claim to be linked to some other domicile and who thus are allowed to escape UK tax on all of their income and capital gains in all of the rest of the world, providing they do not bring the money into the country. On the best estimate we can find, there is a shifting population of some 60,000 of them. In the past, the German-born Tiny Rowland, the Czech-born Robert Maxwell and the Cypriot Asil Nadir were all entitled to this enormous break. Today, the UK accepts non-domicile status for Greek shipping magnates; Saudi princes; American corporate heirs; Mohammed Al Fayed, the controversial owner of Harrods; Lakshmi Mittal, the Indian steel magnate; and an assortment of foreign business executives.
Apart from the Irish Republic, who inherited the rule, we can find no other country in the world which allows any of its residents to claim that their real home is elsewhere. The United States says it does not matter where you were born, if you qualify as a resident of the USA, you must pay US tax on all of your income and capital gains all over the world. The Australians, the French and the Danes do the same if you spend more than six months of a year there. The Canadians and the Spanish do it if you spend 183 days of a year there. The Germans and Belgians and Greeks do it if your “customary place of abode” is there. The Japanese have a version of the UK domicile rule but only if you stay there for less than five years.
Those who wish to take non-domicile status in the UK find the route is simple and easily negotiated. During their first tax year as residents in the UK, they can fill in a short Inland Revenue form, known as a Dom One, in which they provide their family background, list any “business, personal, social or other connections” with their country of birth, and state their intention not to stay permanently in the UK. Tax advisers say they have never heard of an application being rejected and that, on occasion, the Inland Revenue have granted non-domicile status even to wealthy people who were born in the UK simply because their parents could claim a different domicile.
The debate about the value of the rule centres on two points. First, its defenders argue that it promotes inward investment. However, its critics point out that, in itself, the rule appears to deter investment by requiring a non-domiciled resident to pay tax on global earnings precisely and only if they are remitted to this country. They say that Parliament can better encourage inward investment with tax-breaks which are specifically designed for the purpose.
Second, defenders of the rule suggest that, if it is scrapped, the result will not be that wealthy foreigners in the UK start to pay full tax but that they will leave the country, thus taking with them the little UK tax that they do pay. Critics, however, point out that they would have no incentive to leave, because no other country will accept them as non-domiciles and that, in any event, it is essentially unfair that a small group of wealthy people should be given such a tax advantage over the rest of the population.
Twice in the last 15 years, the Treasury has considered abolishing the rule only to be confronted by a powerful lobby of foreign millionaires claiming such a move would cost the economy hundreds of millions of pounds because non-doms would flee the country taking their investment with them. A senior government source describes these claims as “unlikely to be true”, primarily because there is no hard evidence that the non-doms have invested any substantial extra funds as a result of being encouraged to live in the UK.