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Saturday 22 November 2008

Fleecing non-doms is the thin end of a bad wedge

Allister Heath says that Brown’s poll tax on Britain’s 114,000 non-domiciled residents will drive away talent when our economy most needs it. Shame the Tories would do the same

For the first time since Labour came to power in 1997 it feels as if the City is under real threat — and not only because of the threat of recession and the turmoil on the markets. Tax lawyers are starting to warn their clients seeking to relocate to Britain that the current volley of tax hikes is likely to be merely the thin edge of a much more punitive wedge. Brown’s attack on the non-doms could easily become Brown’s very own Sarbanes-Oxley, the ultra-onerous piece of post-Enron legislation in America which chased away hundreds of companies to more welcoming shores.

But what is most distressing to non-doms currently based in the City, and to many of those considering moving here, is that the Tories support an almost identical policy. They originally hoped that the money raised would help pay for their cuts in inheritance tax. It is now clear that, at best, a raid on the non-doms will bring it a few hundred million pounds a year, a paltry bounty given the policy’s massive risks. The Tories should reconsider; the economy’s fragile state provides them with the perfect excuse to do so.

It is, of course, a myth that non-doms pay no tax, though they pay proportionately much less than the rest of us. They are only exempt from paying tax on income and capital gains earned abroad, as long as the money is not brought into the UK. Money earned in Britain is subject to the usual tax; non-doms pay £4 billion in UK income tax a year. Stonehage, the wealth management com- pany, believes they spend around £16.6 billion a year in the UK and pay £2.9 billion in VAT and £308 million in stamp duty. The Treasury calculates that non-doms contribute some £12 billion to national income (roughly 1 per cent of the total, which demonstrates that they punch hugely above their weight).

The mega-wealthy won’t be affected by the new tax; £30,000 is small beer for them. But the average non-dom earns about £100,000, not much by contemporary standards. Only those with foreign income in excess of £80,000 (or twice that for married couples) will find it worthwhile paying the charge; others will either opt into the full British tax system, or else move abroad. Regrettably for London, there will be far more of the latter than of the former.

It is only by maintaining the non-dom system for a small elite that Brown has been able to preserve some of Britain’s competitiveness despite a decade of excessive taxing, spending and regulating; to want to do away with it at a time when the City is facing intense competition from rival centres smacks of extraordinary complacency. No other country is as generous towards non-doms as Britain; but plenty levy very low taxes, regardless of where income is earned. Dubai, which boasts a booming financial services industry, levies no tax at all on income; it will attract many refugees from Brown’s Britain over the next year.

But whereas Brown is wrong to want to assault the non-doms, the current system is patently unfair. No taxpayer should be treated better than others, merely by dint of his place of birth. There is only one workable solution, however: the tax burden should be reduced for everyone over time, thus ensuring that it becomes once again globally competitive without the need for special privileges. That, unlike Brown’s deeply misguided class warfare, would be a policy well worth supporting.

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