13 February 2008

Independent: Non-doms fight their corner

Lobbying by the City has forced a retreat on government plans to tax non-doms.

The Government insists that it will press ahead with its core plan for taxing non-domiciled residents after furious City lobbying forced it to backtrack on details of its proposals. But it may have to do more work to regain the non-doms' trust and stop affluent and rich people leaving the country.

The Treasury says it has no intention of postponing the introduction of legislation – set for April – and that it has no plans for further revisions after "clarifying" its position on elements of the plan. The Government's basic proposal to charge non-domiciles £30,000 a year after seven years of residency still stands.

Dave Harnett, acting chairman of Her Majesty's Revenue & Customs, wrote to tax advisers yesterday setting out what the Government wants to achieve in the legislation.

HMRC says that those who pay the £30,000 charge and continue only paying tax on foreign income when they bring it into the UK will not have to give extra information on the source of the funds. It also says taxation of trusts will not be applied retrospectively. There had been concerns that non-doms could face bills going back 10 years.

The Government also softened its position on two key points on which it had taken a hard line before. Non-doms will not have to pay tax on the £30,000 charge, and HMRC will negotiate with the US tax authorities so that American non-doms are not forced to pay the charge twice. It also promised that it will be possible to bring pieces of art into the country for public display without getting caught in the rules.

The Government blames "confusion" caused by drafting of the proposed legislation, but tax advisers dismiss the claim and say the Government has had to backtrack. The Treasury announced the £30,000 charge in October for UK residents who have lived in Britain for more than seven years and who take advantage of a rule that lets them off tax on overseas earnings unless they bring them into the UK. The proposal came soon after a similar plan from the Conservatives which tapped into resentment of the growing super-rich class that had sprung up.

Draft legislation announced last month added further measures that increased alarm among the non-doms. A key feature was a clampdown on capital gains in overseas trusts, which would be taxed in the UK.

Bill Dodwell, a tax partner at Deloitte, said: "If this had simply been limited to the £30,000 charge, people would have said, 'OK that is fine. I am going to pay more tax.' If they row back on these five issues they have described, they will have mainly resolved the issue."

But the offshore trust issue is only of major importance to the super-rich, who use the structures to arrange their tax affairs. Also included in the rule change are bankers, lawyers and other City professionals who are important to the UK's position as a financial centre. Even Polish plumbers and other immigrant workers may have overseas earnings that could be caught in the net.

Some believe that the Government's handling of the issue has left a permanent question mark over the UK's willingness to impose knee-jerk taxes. A non-dom senior Greek shipping executive says: "Confidence has been badly damaged. We have opened the door and there is now an invitation for successive governments to probe how far you can go through that door, which is why we have to do long-term planning on the basis of leaving."

Jeremy Penn, chief executive of the Baltic Exchange, says that both main political parties reassured him regularly in the last few years that there would be no major change to non-doms' status. "The Conservatives were very clear that it wouldn't become an issue. Labour were not in a position to make a policy statement but they said it would remain in the long grass," Mr Penn said.

Many experts have sympathy with the Government's intention of ensuring greater fairness in taxing people who are effectively long-term residents of this country. But they are sharply critical of the speed and manner with which the plan is being introduced. The Society of Trust and Estate Practitioners called on the Government to postpone its legislation until next year. Keith Johnston, director of policy at STEP, says: "Problems remain and broad brush assurances are unlikely to calm advisers and their clients, who will expect to see detail. Given the complexity of the changes, it seems extremely unlikely that the Government will be in a position to give final and detailed assurances before the legislation takes effect in April."

STEP has claimed Britain would lose £2bn a year in tax revenue for an estimated tax take of £800m if non-doms leave the country in force. With the Government in retreat and with two weeks until the deadline for consultation, the non-doms will seek to exert greater pressure to get the plans delayed or amended further.

By Sean Farrell

© The Independent