PRINT THIS PAGE Taxing non-doms
20/02/2008. Source: SJ Berwin. Sunaina Srai-Chohan 
The UK government is certainly in difficulty over controversial new rules affecting those people who are "resident" in the UK but have non-UK origin - so called "non-doms". These rules are still expected to come into force on 6 April 2008 - although in what form is now not entirely clear, following a partial climb-down by the government last week. Policy-makers have been left in no doubt that the changes will damage London's position as a leading financial centre, and the political question they now face is how to limit that damage without being accused of a complete U-turn. Non-doms have enjoyed a favourable tax position in the UK for centuries: very broadly, they are taxed only on non-UK income and capital gains if those are brought into the UK. They have also been able to shelter capital gains through offshore trusts, making those an attractive way to hold assets (including carried interests). The rules are clearly an important part of the reason that London is an attractive home to many financial services businesses - including private equity houses, hedge funds, investment banks and numerous others.
As currently proposed, the new rules will limit the opportunity to shelter gains through the use of offshore trusts or companies, and make it more difficult to avoid foreign income and gains being treated as brought into or enjoyed in the UK (and therefore taxable). Details of offshore trusts will need to be disclosed to HM Revenue and Customs (the UK's tax authority), and a £30,000 (€40,400) annual fee will be payable by those non-doms who elect to be taxed only on income or gains brought into or enjoyed in the UK (the "remittance basis"). Related changes will also make it more difficult to avoid being tax resident in Britain, because, when determining residency, days of arrival and departure will be counted towards the number of days spent in the UK.
The widespread criticism could hardly have escaped the Government's attention. The starting point is that the rules are flawed in principle. Whatever the short term political merits, the economic effect seems to have been underestimated. The CBI estimates that non-doms account for £16 billion (€21.6 billion) of spending and £7 billion (€9.4 billion) of tax revenues annually, whereas all of the reforms taken together as a package are only expected to raise £800 million (€ 1,078 million) in 2009/10 and £500 million (€674 million) in 2010/11, according to the Treasury's own estimates. Non-doms make a significant contribution to the UK economy through investment, employment and spending, and they have been instrumental in achieving the global dominance of London as a financial centre that attracts intellectual talent from all over the world. The UK economy as a whole is heavily reliant on the financial services sector - more so than many of its European counterparts - and as the economy enters a fragile period this would seem to be a bad time to upset the delicate balance.
But there are other flaws too: the £30,000 fee should be creditable against tax paid abroad so there is no double taxation, which at the moment seems unlikely for the US at least (despite Government assurances of "discussions" with the US tax authorities). And the changes are still not clear even though the Government continues to say that they will take effect on 6 April 2008 - HMRC has admitted that they are a "work in progress". That gives affected taxpayers insufficient time to adjust to the changes, and leaves them with a sense that the Government is prone to hurried and capricious rule changes, which is a major problem in itself. That problem is compounded by the fact that the rules as originally drafted were retrospective - although this week's unclear announcement seems to back-track on this. At the very least, we are urging the Government to defer implementation of the detailed changes.
So these changes can only serve to undermine the competitive edge of the UK, and the economic environment across Europe, at a time when the UK financial services industry is reeling from the impact of last year's credit crunch, is worried about the world economy and is being wooed by other countries that are jealous of London's position. This week's government announcement - limited though it is in itself - signals a public recognition of the concerns expressed. If it also signifies that the tide is changing more fundamentally, it is not a moment too soon. In fact, to some extent at least, it is already too late - some damage will have been done, whatever the outcome.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit our website at www.sjberwin.com.
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