April 9, 2015 by Paul Goldsmith
In 1799, at the same time as introducing the first income tax in the UK, Prime Minister William Pitt introduced a rule that gave a tax allowance for ships bringing goods back goods from the colonies. This ‘Non-Domiciled’ status has morphed into a situation where 115,000 people in this country don’t pay income tax on their foreign earnings. Instead, they pay a fee to have this status, starting at £30,000 a year, rising to £90,000 a year if you have lived in this country for 17 years. Therein lies the problem. A load of very rich people are living in this country, and have lived in this country for the entirety of their lives, yet are allowed to claim “non-domiciled” status because it is hereditary from their fathers and grandfathers (not mothers and grandmothers you might notice).
These people thus live in the UK, were educated in the UK work in the UK, earn money in the UK and still are registered as having their main domicile abroad. They use roads, education and health services paid for by the taxpayer, are protected by armed and police forces paid for by the taxpayers, but may not be paying their full amount of tax. Non-doms don’t pay tax on earnings from foreign income and capital gains. All they have to do to prove they retain strong links with the country in which they officially ‘domiciled’ is to own a home there, have a burial plot there, and, apparently, have a newspaper delivered there. Also, the deal is that the Non-doms pay tax on income in the UK but pay tax on foreign earnings in the countries they are domiciled in. The trouble is that they can claim to be domiciled in countries with no income or capital gains tax (like Switzerland or Belize) and they are minimising their overall tax bill. This is obviously open to abuse, and the Labour Party’s moves yesterday are to crack down on those abuses.
It’s not that we don’t get any money from them at all. These non-doms pay £6.2 billion a year annually to the Treasury but could pay hundreds of millions more. £4 billion of that money is collected in fees from Non-Doms allowing them not to be taxed on overseas earnings plus income tax on earnings in this country. The rest is from Non-Doms who pay the full amount of tax charged, probably because it is politically expedient for them to do so, like the Conservative MP Zac Goldsmith (no relation!)
Political expediency is what this is all about. As can be seen by watching Ed Miliband’s performance in the press conference at which he announced this policy yesterday, he knows he is onto a political winner here. It seems like he can add this onto the list of ways (50% tax on higher earners, mansion tax, now non-doms) in which he can say that Labour are going to make those with the broadest shoulders take more of the burden of clearing the deficit. So it is nothing if not consistent. Political journalists noted yesterday morning that the Tories tried about five different ways to respond before settling on a message that didn’t set them against such a politically forceful policy whilst pointing out the problems with Labour’s plans.
The Conservatives ended up pointing out that reading the small print of the policy shows that it will not make a difference to most of the Non-Doms. They reminded everyone that Ed Balls had said in January that completely abolishing Non-Dom status would actually cost money. Balls has responded by saying that the two to three year exemption needed to give current Non-Doms time to respond to the policy may cost money, but in the long term it will bring in more revenue. Of that we cannot be sure. Balls also pointed out that the rest of the interview in which he said it might cost money wasn’t being quoted, and he said in that that the rules needed to be “toughened up”, which they are under this policy.
The Tories also express concerns that some of the wealthy Non-Doms invest in this country, creating companies and jobs, thus raising living standards. Labour have responded that the link between rich people coming to the country and job and wealth creation has been broken, with many Non-Doms working in hedge funds (who create few jobs) and banking (who create little of anything). French investment banks have been basing their employees in London for a while now, all claiming non-dom status but also not paying tax in France. Also, jobs created are tending to be low waged with insecure hours. Furthermore, the threat by Non-Doms that they will leave the country is being put with the threat to leave when the minimum wage, 50% tax rate and bankers levy was brought in, all of which didn’t materialise.
So, all in all, clever politics from Labour. Attacking a wealthy minority who don’t contribute as much as they could. Economically? Pretty irrelevant really.