BY ANDREW GIBSON
Labour’s Shadow Chancellor Rachel Reeves appears to have mis-read or wilfully misrepresented a report to conjure up over a billion pounds for a Labour Government to spend, and the establishment press have seemingly been taken in. Country Squire is not so accepting.
In response to the recent Autumn Statement, Reeves expressed outrage that the Government had not acted against “non-doms”, whom she said, “do not pay taxes”. Reeves subsequently echoed an academic report that said that taxing non-doms would raise £3.2billion.
But the report does not quite say what Reeves claims and, in any event, there are questions over its assumptions.
Importantly, non-doms “do” pay tax – on their UK income and gains, and on income and gains they remit to the UK. They do not pay tax on money flows left overseas. In lieu, they pay a Remittance Basis Charge of up to £60k p.a. A nice earner for HM Treasury.
Such incentives to reside here have existed since Georgian times. Many other European countries have similar arrangements. The rationale is that double taxation is avoided, and the host country benefits through tax revenues, purchasing power, skills, global networks, and the genuine cultural enrichment deriving from self-supporting people seeking new experiences. Think entrepreneurs, professional footballers, political rebels, and younger sons of the rich with something to prove.
Non-doms can claim that status if they live in the UK for up to 15 out of the past 20 years. Thereafter they are domiciled here or leave.
A report by academics from the LSE and Warwick University, cited by Reeves, argues that ending non-dom status would raise £3.2bn.
Labour has previously briefed The Guardian that it would consult widely on how its new “temporary resident tax regime” would work but that any tax advantages would be likely to expire after five years. (There are grounds for keeping a short non-dom window, as it would allow footloose capital to decide upon its home and get its affairs in order.)
However, the report is clear that were non-dom status to be retained for the first five years of residence, the revenues raised for the Exchequer would not be £3.2billion but would be £1.6billion.
That is, if Labour sticks to its previously briefed plans, the revenue raised would be half that which Reeves is claiming.
The difficulties for Reeves do not stop there.
The establishment press reported the academics’ findings as hard fact. In reality, the figures are based on many estimates, as the HMRC simply does not have the data on non-doms’ overseas affairs. The academics therefore make assumptions about the figures involved (which relate to 1997-2018 incidentally, another era). Some of their estimates are reasonable. For example, they assume as a lower bound that non-doms are only in the UK because it is cost effective to be here; in most cases that is probably true.
But there are contentious issues.
First, to estimate how non-doms might react to a loss of their tax status, the academics look at a control group of “similar” domiciled British citizens (their demographics and other variables mirror those of the non doms). The non-doms are assumed to act in the same way as this control group in terms of utilising ISAs, VCTs, etc.
This seems a stretch. First, cultures differ greatly in relation to issues such as renting versus buying, leasing versus borrowing, inheritance norms, charitable and religious giving, and more. Moreover, if I were a rich Malaysian non-dom in London who saw that Labour were likely to win an election and were gunning for me in a populist fury, I would not faff around with ISAs and VCTs. I would be on the blower to my accountant in K.L. re-ordering my affairs sharpish. I would pay in advance for my funeral and thereby get money out of my accounts. I would pay off any debts, stock the wine cellar, and distribute the family heirlooms.
Non-doms are not dumb.
The most significant difficulty of the report is with migration. This is the critical point; would non-doms leave (or not come to) the UK if the status was revoked or reduced?
The report looks at the response to changes made to non-dom status in 2017, and concludes that only around 0.3% of non-doms would leave if they lost their status. It also concludes that the emigration level would have to be fifteen times greater than that for the HMRC to lose revenue.
But tax experts have questioned this reasoning. The 2017 changes – limited to two specific categories of non-doms – allowed many of those affected to reorder their affairs and remain in the UK with some tax benefits (as the report acknowledges). Reeves proposals are likely to be far more far reaching and less supportive, and therefore more likely to drive successful people away or (perhaps more typically) deter them from coming in the first place.
Thus, the academics might have under-estimated the likely impact on migration, (though in reality we cannot be certain, as there are so many moving parts to these issues). Moreover, their findings can be re-stated. Fifteen times 0.3% is 4.5%. That is, if fewer than only 5% of the non-doms were to leave, HMRC could still be out of pocket.
When Labour was in office it studied the non-dom issue and made no changes. Ed Balls commented in 2015, “If you abolished the whole status then it probably ends up costing Britain money.”
Such are the intellectual perils for politicians who promise to spend more money yet want to pretend that “normal” people would not have to cough up.
They probably would.
Andrew Gibson worked in Investor Relations in Tokyo for five years. He now works in corporate communications. He tweets at @AndrewGibsonMBA .