Why overtaxing non-doms is not a good idea

Wealthy foreigners living in the UK are paying less income tax, but it is unclear whether this is due to relocation or rearrangement of their tax affairs. According to HM Revenue & Customs figures released under a Freedom of Information request, the amount of income tax paid by non-domiciled residents fell from £11.4bn in 2011-12 to £10.8bn in 2012-13, the most recent year for which estimates are available.

This was largely due to a £500m fall in the income tax yield from non-doms who elect to be taxed on a so-called “remittance basis” to £4.6bn. While this represents a 10 per cent year-on year decline in revenues in 2012-13, the number of individuals claiming the remittance basis that year fell by only 6 per cent to 46,700. Under the remittance basis, income and gains from UK sources are taxable along with any foreign income and gains brought to the UK. Income generated overseas that is not repatriated to the UK is not liable for tax. To benefit from this, an annual charge of £30,000 is payable after seven years as a UK resident, rising to £50,000 after 12 years. Non-doms who do not choose to be taxed on the remittance basis are liable to pay UK tax on their global income and gains.

Iain Tait, partner at asset manager London & Capital, said that the figures suggest that those claiming the remittance basis have, to some extent, restructured their affairs in the UK to pay less income tax. HMRC’s introduction of the higher annual charge of £50,000 in 2011, while very affordable, may have catalysed many non-doms to act. “The remittance charge is itself largely symbolic, but my concern is that the increase may have been interpreted as a statement of intent by wealthy non-doms and their tax advisers.” Andrew Cameron, a partner at Charles Russell, says that while the increased remittance charge may have encouraged some non-doms to switch to taxation under the “arising basis”, it is also possible that those reporting under the remittance basis may simply have earned less in the UK or repatriated less money.

Mark Davies, managing director of chartered tax advisers Mark Davies & Associates, said that these foreign residents – who paid an average of almost £100,000 in UK income tax in 2012-13 – should not be taken for granted by the government. “You could argue that it’s not fair that these people [
who claim the remittance basis don’t pay tax on all their income, but they don’t need to be here.” Mr Davies said that other countries, including Malta and Portugal, have looked to replicate the UK’s strategy in order to attract wealthy non-doms to relocate.

The government announced this week that the minimum cost of an investor visa will double to £2m from November 6. The visas offer wealthy foreign investors a fast track to permanent residence in the the country in return for a minimum investment in UK gilts or businesses.

In August, HM Revenue & Customs unexpectedly removed a concession that allowed money held overseas to be used as tax-free collateral for a loan in the UK, giving many less than two years to restructure their borrowing to avoid a large tax bill. Non-doms commonly used this loophole to borrow money for UK property and spending in a tax-efficient manner.

Source Financial Times