so one must wonder if they are really serious about it or just making noises.
This is Labour smoke and mirrors designed to appeal to the “tax the rich” feelings heard in the union halls and working men’s clubs, but in practice this is a totally meaningless announcement and may well actually end up costing Britain more than it earns.
I have nothing against the concept of making the rich pay more tax, but I feel that it must obey two important principles: (1) it must be avoidance proof. In other words there must be no way the targeted people can work their way around it. Is this the case with Ed Miliband’s proposal? I think not, but I’ll return to that later. (2) it must raise more in tax than it costs to implement. Does Ed’s proposal do this? Not on your life. According to his own Shadow Chancellor it may cost more than it earns. To date I haven’t heard Ed Balls retract this statement.
On the Jeremy Vine radio show on Wednesday 8th April, when pressed on the subject several times, another Shadow Treasury spokesperson failed to say how much more it would earn Britain, even in broad terms. That in itself speaks volumes. If you can’t say how much a tax proposal will earn then the answer is probably “not a lot”.
So, do I have alternative proposals? As it happens I have. More of those later.
Currently some non-doms have to pay an annual levy to maintain their status. This starts at £30,000 and rises over time to a maximum of £90,000. That means that non-dom status must save them at least that much in tax and probably a lot more. Currently 5,000 people pay this levy, raising around £227 million for the British Treasury. If you are going to remove the non-dom status it means you can’t impose that levy anymore, so any increase in tax raised must exceed this sum before the country ends up in profit. So let’s look at how this may be avoided.
First there is the simple fact that those currently claiming non-dom status can just move abroad permanently. That means one major change as far as tax is concerned. If those people earned any money in the UK they used to have to pay tax on it. By moving abroad they won’t have to pay that any more, thereby losing that tax for the Treasury. That means that the Treasury doesn’t just have to raise that £227 million to make a profit, they also have to raise the amount of tax that they would have got, but now won’t.
However, that is just the direct cost of a non-dom moving abroad. There are a lot more hidden costs involved.
First of all there is VAT. Rich people spend a lot of money in the UK and VAT (currently 20%) is charged on many of the things they buy. If those people move abroad permanently then the UK Treasury will miss out on all that VAT because the money will be spent in other countries. Our loss will be their gain.
But the tax losses don’t just end there. Wealthy people don’t clean their own houses, they don’t cook their own food, they don’t dig their own gardens, they don't even look after their own children. They employ people to do all that, along with secretaries, personal fitness trainers, chauffeurs; the list goes on. All those people pay tax and national insurance. If they lose their jobs then we don’t just lose that tax revenue, we actually have to start paying those people benefits. Yes, it’s the classic double whammy.
Then there are all the people who work in the industries that serve wealthy clients. I’m not saying that a business would be driven to the wall just because a few non-doms move abroad, but they may decide they don’t need quite so many staff down at the Mercedes showroom or in the expensive restaurant. More tax and NI contributions lost and more benefits to pay.
What about those that stay? Well, it is a basic rule of law that you can only be directly taxed on income once, so all those people have to do is produce a certificate to prove that they have paid tax abroad, however little, and they can’t then be taxed again here in the UK.
The only money that the Treasury can hope to get is by taxing income that has been squirreled away in tax havens without tax being paid on it. Will the non-doms tell the truth about that? I think we all know the answer to that. They may declare a small amount, so they can justify why they had claimed non-dom status in the first place, but it will be the minimum they can get away with. The big bucks Ed is promising us just won’t appear.
Are you still convinced Britain would end up in the black rather than the red as a result of this proposal?
So what is the answer?
First of all it's about time we got rid of the hereditary nature of non-dom status. Just because someone's great grand dad came to Britain a hundred years ago to start a business it is no reason for their tax status to be passed on to generations as yet unborn and unimagined. A hundred years ago rickets and diphtheria were still common but I don't hear anyone proposing that we pass those on to future generations. Pitt the Younger introduced this measure 200 years ago, but at that time we still had an emprie to run and granting non-dom status to the people who went abroad to run it made perfect sense, but it doesn't make sense now.
I think it’s also about making it uneconomical for non-doms to claim that status, so that they willingly pay more tax in the UK. The clue is in that £227 million that is claimed from just 5,000 people. The amount is too low and the number of people affected is also too low. Why aren’t the other 110,000 non-doms also paying something for the privilege of not paying so much tax here?
Now, Labour have made much of not wanting foreign students to be affected by any changes, and I have no beef with that. I see no reason foreign students should be taxed on whatever allowances their families give them so the first thing is for students to be exempted, subject to tight, auditable controls, for a fixed period. It takes 3 years to study for a degree and a further year for a Masters, so I think we can agree that they should be exempted for a period of up to 4 years providing it can be proven that they are genuine students. What about PhD students? You also grant them the right to non-dom status, but set a time limit within which they must gain their qualification (at present it’s open ended) and you also set a cap on the amount of income they can earn abroad without being taxed on it; somewhere around the national average wage would seem sensible.
Labour also made it clear that they didn’t want foreign workers who come here to work for short periods to be affected. Fine by me, but let’s place a tighter time limit on that, say two years, and also introduce tighter rules on returning so they can’t work for 2 years, go home for one, then come back for another 2 etc. Let’s place a threshold of working in the UK at a maximum of 2 years and if they leave and then come back they can’t claim non-dom status for 5 years. That doesn’t preclude the person from returning, that might fall foul of EU freedom of movement rules, it just prevents them from claiming non-dom status for five years after their return. This would give foreign workers three options: They can stay here and enjoy the benefits of living in our wonderful country and be taxed like any other citizen, they can pay the levy to supplement the cost of them living here or they can return home. That seems eminently fair.
Everyone else then pays the non-dom levy, but we stop this shilly-shallying about with three bands starting at £30,000 and topping out at £90,000. Let’s go straight in after two years with no minimum earnings threshold at £100,000 and increase it by £100,000 per year, with no upper limit. After 10 years a non-dom will have to pay £1 million just to retain their status, which means they would have to make at least twice that in foreign earnings to make it worth their while. And the real beauty is that it can’t be avoided. If they want to retain non-dom status they have to pay. Rich non-doms, the choice is yours.
In the first year that would increase the contribution from non-doms from £227 million to £500 million just for those 5,000 currently paying the levy. It would be bound to double each year after that. After ten years it might be worth £5 billion. If more people have to pay as a result of tighter registration criteria then that amount increases rapidly.
And the beauty is that it is totally unavoidable so long as the person wishes to retain their non-dom status. Many would, because it would still save them money. Others might still move abroad, and I have already described the possible consequences of that, but that is no more of a risk than Ed Miliband is already willing to take but with much less of a guarantee of a net benefit. However, we mitigate that risk by getting more money from those who stay, which at least offsets some of the loss of taxes through the routes I described.
However, there is more we can do to discourage the use of non-dom status in the first place. I’ll give you an analogy.
Britain is very unhappy with the way Russia is behaving towards the Ukraine. To try to encourage the Russians to behave better we, along with the EU and other countries, have imposed economic sanctions. We could do exactly the same with non-doms. They wouldn’t be economic sanctions, however, they would be social sanctions. Make it clear that if they want to live in Britain then we expect them to pay their full whack of tax in order to enjoy the privilege. Here’s a list of things that we could do:
- Make them ineligible for honours and awards; no more gongs and knighthoods and strip them of any that they already have.
- Not award peerages to non doms, and those that already have them are stripped of them. Therefore no more seats in the House of Lords.
- Not allow them to sit on the Board of Directors of any British registered company.
- Not allow them to own more than a small percentage of shares in a British registered company. Under present legislation, anyone who owns more than 2% of shares in a company has to declare it so it would be sensible to set that as the threshold.
- Performers shouldn’t be allowed to appear on any UK based TV or radio channel and their recorded performances wouldn’t be allowed to be broadcast either. How’s that Sir Sean, Sir Roger, Sir Michael and Sir Cliff?
- Non-dom sports stars could be excluded from national teams, especially Olympic and Commonwealth games teams; tennis stars from Wimbledon, golfers from The Open, F1 drivers from the British Grand Prix etc.
- Any MP, member of the House of Lords, public servant or local/county councillor could be banned from business or social contact with a non-dom, or would have to declare it, however minor or unintended, in a register of interests. The press would have a field day with that one.
You may be able to think up a few more ideas for sanctions of your own.
These suggestions may appear draconian, but if we want to get the message across that if you want to live here you must pay your taxes then the message must be a strong one. They have a choice: pay full UK taxes or become persona non grata.
I suspect most strongly that those that want to be seen as British, with all the benefits that go with that, will pay up. If we can voluntarily reduce that number of 115,000 non-doms to half of that then we will have a higher tax take than if we just remove the non-dom status in a way that still leads to tax avoidance or doesn’t yield a net benefit.
Why are none of the political parties suggesting the use of sanctions in this way? There are many reasons and I think you can guess some of them.
Of course the use of those sanctions doesn’t have to be limited to non-doms. They can be applied to all those who use aggressive forms of tax avoidance. Some won’t care, of course, they’d rather have the money. But enough would care and will be shamed into paying their taxes and that is what counts.