Professor Michael Mainelli, Executive Chairman, The Z/Yen Group
[An edited version of this article first appeared as “Dumb On Non-Dom” in Financial World,IFS School of Finance (February 2008) pages 12-13.]
“To dom, or not to dom”, that is today’s political question. “Non-Dom” is shorthand for people who are not domiciled in the UK for tax purposes. Non-Doms have tax advantages compared with ‘ordinary’ UK residents. Current UK tax policy discussions seem keen on curtailing these tax advantages. If Non-Dom tax advantages have helped London’s financial services grow, does their removal threaten London’s economy?
What is a Non-Dom? Your domicile is the country that you regard as your home, not the place where you happen to be living. Domicile is the country you assert as your true ‘homeland’. Domicile has been described as the country in which you intend to die. A person can live in the UK for many years, yet remain domiciled in another country. A UK national can be non-resident, but find UK domicile exceedingly hard to lose. A person can be resident in two or more countries, but only domiciled in one. Sure, a few people fib that they have the intention to airlift their near-corpse to another country to avoid IHT, but most Non-Doms are sincere – they are current UK residents who don’t intend to stay forever. Non-Dom status is complicated and this piece is not a tax advisory note, so I refer you to HM Revenue & Customs - http://www.hmrc.gov.uk/pdfs/ir20.pdf - for detailed guidance.
So what are the tax advantages? In essence, the tax benefits for Non-Doms are that they are:
only subject to UK income tax on income arising in the UK;
only subject to capital gains tax on overseas gains when the proceeds are remitted to the UK;
only subject to UK inheritance tax (IHT) on their UK estate.
How does it work? A Non-Dom earning £300,000 might take £200,000 in the UK as salary, pay a £100,000 UK tax, spend £100,000 living in the UK, and bill his or her firm £100,000 for a few days work done outside the UK payable in the Channel Islands. Clearly, being outside of the UK a few days per year greatly enhances their productivity!
While this state of affairs seems unfair because Non-Doms don’t suffer the tax burden that UK nationals suffer, mutual misery is hardly a sophisticated argument. Tax should be subject to competition as much as any other policy or industry. Surely, there should be concrete fiscal, ethical or economic arguments supporting Non-Dom taxation. The fiscal argument is the simplest – grab whatever we can in the UK because we need the money. This is not just unsophisticated but also counter-productive if added-value workers choose to go elsewhere.
In an unfair world where governments conspire to tax everyone everywhere for everything, the idea that the UK recognises that only income generated in the UK deserves taxation seems unusually fair. The ethical arguments seem to focus on the fact that Non-Doms don’t suffer the tax burden of UK nationals. Simon Jenkins writing in The Guardian on 10 October 2007 feels that anyone failing to suffer the heavy hand of HM Revenue & Customs has failed to have a life-enhancing, near-native experience with UK class problems. “You cannot excuse the rich from taxes because they might go and work in Monaco, and then tell ordinary mortals to cross-subsidise them.” However, we are not “cross-subsidising” the rich as they aren’t our rich. Too many commentators focus on the ultra-rich. The ultra-rich come to London because few questions are asked about how you made your money before last year and, if you’re rather rich, London is a nice place to live. But the vast bulk of Non-Doms are workers, albeit often richer than average, but workers.
When we (this includes me!) have to pay UK income tax on all earnings, some readers may think my exculpation of Non-Doms comes close to defending credit rating agencies at the moment. But Non-Doms do have a choice about where to pay tax. They seek tax havens. Tax policy is as important, nay more important, than industrial policy. This leads me to the true economic argument, shorn of marginal tax curves or complicated public policy arguments. Non-Doms bring business, significant amounts. In return for tax concessions, we entice them, particularly Europeans, to locate their business units here and emigrate for a short period to a country with a flawed education system, sub-standard transportation, scary health sector, scarier food supply system and mediocre infrastructure.
Non-Doms come to London, not the UK, for a complex set of reasons. All large cities can be improved and London is no exception. Thankfully tax is not the only thing on the list. An economy built solely on tax advantages would be pathetic indeed. Quality of people, regulation, the business environment, infrastructure and market access all matter, but so does personal tax. London has often competed on tax, for example the City’s revival in the 1960’s centred on Eurodollar markets avoiding US tax. Has the availability of Non-Dom status helped London’s financial centre grow? Definitely. Financial services is the biggest single employer of Non-Doms, about a third of the total estimated 110,000 to 150,000 Non-Doms, i.e. around 45,000 probably work in the City of London. With 325,000 people, many foreign, in the City of London generating well over £20 billion of service surplus, the problem is getting the rest of the country to add value, not to tax the City harder. London’s financial centre is built on middle and senior management decisions by foreign nationals.
We mistakenly “anthropomorphise” corporations and forget that it’s only people within corporations that make the decisions. Foreign investment and location decisions are made by the senior and middle managers that have to execute those decisions, not by some central bureaucracy. If Mega-Global Bank asks for someone to head up a new Asian office – the new head gets to choose between, say, Singapore or Hong Kong. The new head will decide based on a lot of personal factors, such as schools, parks, airlines, restaurants, visas, and … tax. After the office is established, someone may point out that corporately it would have been better located, marginally, elsewhere, but Mega-Global Bank has an entire team shifting profits around to ensure no tax is paid anyway. Personal tax trumps corporate in startup decisions and new office locations.
We do need a national discussion on taxation, including why we need so much, but Non-Dom taxation relief is part of a tax competition for business that has been working. Various global locations, from Ireland to Hong Kong as well as offshore centres, have successfully competed because of tax relief. If London and the UK are preternaturally attractive, fine. If not, let’s leave Non-Dom taxation alone until we are sure that we can compete.
The problem is that personal tax changes get entangled in political rhetoric by people who don’t realise that the UK depends on foreign financial institutions locating in this global neutral zone. Non-Doms do pay tax on their UK earnings and expenditures. The so-called ‘lost’ tax on Non-Doms is moot if they leave. Even the notion of charging you £30,000 for your Non-Dom status is other-worldly. Given that this charge is going to be shared with your home-domicile tax authority, would you want to explain to your domestic version of HM Revenue & Customs why you found it useful to pay £30,000? Perhaps you would prefer to purchase a red flag with ‘audit me’ emblazoned on it?
My fear? That the numerous Hans’s, and Francois’s and Maria’s and others who make the real decisions will silently slip away. They certainly won’t speak up for themselves. They don’t have votes. We will wake to find them gone. We will then blame the strength/weakness of the pound, the state of transportation, the 2007 credit crunch, the rigour of regulation, the level of corporation tax and many other factors. And we will have blamed the wrong things. We will have forgotten that in 2007 and 2008 our silly, point-scoring, political discussions took away senior and middle managers’ personal interest in locating their firms’ businesses in the UK. We have time to change our minds. The faster, more certainly and discreetly we do so, the better.