Non-dom taxation: time for a re-think?

The BBC recently reported that the £30,000 remittance charge levied on non-domiciled (“non-dom”) individuals in the UK raised just £130m in its first year – way below the £650m that the former Chancellor Alistair Darling had hoped to raise.

Under legislation brought in by the Labour government in April 2008, a non-domiciled or “ordinarily resident” individual, who has been resident in the UK for seven out of the preceding nine tax years (whether continuous or broken), and who claims the remittance basis, must pay £30,000 per year in order to continue to be taxed on the remittance basis (unless their unremitted foreign income and gains are less than £2,000 in the relevant tax year.) If an individual decides not to use the remittance basis (or not to pay the remittance charge), he or she will be taxed in the UK on his worldwide income and gains on an arising basis.

The Government’s failure to raise millions of pounds in extra revenue from non-doms is due to the fact that only 4,300 people chose to pay the £30,000 levy in 2008-9 – just one in twenty of the 86,000 people who completed a self-assessment tax return in 2006-7 on the basis that they were non-domiciled in the UK (this being the latest year for which such data is available.) Since the tax legislation was introduced in 2008, thousands of non-doms have left the UK and fewer people who would be eligible for non-dom status are moving here. In recent years, the number of non-doms in the UK was rising by about 4 per cent annually, but this is now slowing, with 2 per cent of non-doms having already left the UK and many others reducing the time they spend here. According to a recent report by The Financial Times, there has been a 25 per cent drop in applications from non-doms seeking residency in the UK, though this may be as much to do with the recession as the tax legislation.

So, what does the future hold? Well, the new coalition government has already stated in its recently-published Coalition Agreement that it will review the taxation of non-doms over the next five years. However, no detail of its plans were given. It is therefore worth bearing in mind what the Conservatives and Liberal Democrats were proposing before the general election. The Conservative Manifesto proposed introducing “a simple flat-rate levy” on non-doms, and the Liberal Democrat Manifesto proposed that the remittance basis regime should not be available to non-doms who have been resident in the UK for more than seven years.

It remains to be seen whether either of the Conservative or Liberal Democrat manifesto pledges will be implemented. Although the government review may not recommend any substantive changes to the non-dom rules, there is likely to be political pressure for non-doms to make a greater tax contribution, particularly if capital gains tax and VAT do rise in the emergency budget on 22 June. However, whilst we should expect changes in the future, the Government should not discourage wealthy entrepreneurs from entering (and remaining) in the UK. Non-doms have a lot to offer: they invest in UK businesses, bring entrepreneurial skills, and create employment (which in turn contributes tax revenues.)

The future for non-doms is currently uncertain, but hopefully the emergency budget will reveal some of the Government’s future plans.