Hugo Dixon: Squaring the UK's non-dom tax circle

(Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.)(Refiles to add related column)

By Hugo Dixon

LONDON, April 13 (Reuters Breakingviews) - Britain's treatment of its so-called "non-doms" gives some rich people an unwarranted tax break. If they qualify as being "domiciled" abroad, even if they live in the UK permanently, they can pay tax only on income generated in Britain. Britons usually have to pay tax on their global incomes.

The opposition Labour Party, which could win power in the upcoming general election, has seized on the anomaly. It says it will abolish the breaks for those who live in the UK but enjoy "non-domiciled" status for tax purposes. Labour also says it thinks this move will raise hundreds of millions of pounds in extra tax.

Labour is onto something. But the fairness case is not quite as crystal clear as Ed Miliband, its leader, makes out. There is also a risk that abolishing the non-dom status could deprive the British economy of valuable talent. Notable non-doms include Bank of England Governor Mark Carney and HSBC Chief Executive Stuart Gulliver.

Fortunately, there is a middle ground that tackles such unfairness but doesn't throw the baby out with the bathwater.

Non-domiciled status is an oddity of the UK tax system. At present, people born outside the country can normally qualify. If you are born in Britain to a father - but not a mother - who is himself a non-dom, that will also usually do as well. It may also be possible to be classified as a non-dom if you were born in the UK, spend time abroad, and then return to Britain - provided you can argue persuasively that that your real home is overseas.

The main non-dom tax benefit comes with the obligation to pay British taxes only on UK generated income - plus any income brought into the country. If non-doms have lots of foreign income, this can be an attractive perk.

There are currently 47,000 people who have chosen to take advantage of this non-dom privilege, according to the government. Non-doms who have been living in the UK for less than seven years, as is the case for nearly 90 percent of the total, get the tax break for free. The other 5,000 pay an annual fee starting at 30,000 pounds and rising to 90,000 pounds if they have been residents for 17 years or more.

It is hard to see why people who are born in the UK, and are living there, should be able to duck British taxes on foreign income. The idea of inheriting non-dom status from one's father is a nonsense. It is also unfair that people who have moved to Britain and have been living there for a long time, say over 10 years, enjoy these perks.

But what about those who live in the UK only for a short time? It is unfair to tax these people on their global income.

Labour has said there will be exceptions for people who are in Britain on a temporary basis. It will consult on the details of what exactly should count as "temporary" but has suggested a maximum of two or three years.

This seems reasonable. But what about those in the middle ground - those who have been living in the UK for between three and 10 years? Removing non-dom status could prompt some people with valuable talents to leave the country. Others might not bother coming in the first place.

Some Brits might say this would be no bad thing. They criticise rich non-doms for pushing up house prices in central London and flashing their cash ostentatiously.

While there is some validity in these criticisms, non-doms also bring benefits. They generate nearly 9 billion pounds in taxes, according to the government. What's more, the money they spend in the UK - and some are really big spenders - generates employment and tax revenue of its own.

Labour thinks that abolishing non-dom status would raise money because such people would have to pay tax on their foreign income too. But if some of the richest quit the country, it could actually reduce the tax take.

If people have lived in the UK for more than a decade, few will quit because their roots will be deep. But those in the three-to-10 year range could leave. So it would be sensible to offer them some intermediate deal.

One option is to allow this group to continue to avoid tax on their foreign income provided they pay a fee that varies with the value of their UK residences, say 1 percent each year with a minimum of 30,000 pounds.

Such a charge would raise more money than the current tariff of non-dom fees because it would hit people who had been living in the UK for less than seven years. In addition, really rich non-doms would pay much more than at present.

An oligarch with a 100 million pound residence, whether it was owned or not, would pay 1 million pounds. That's more than 10 times the maximum paid under the current system. But they would still not quit the UK since, for an oligarch, 1 million pounds would not break the bank. It would also be fair to impose a charge linked to the value of their residences as a quid pro quo for being allowed to be resident but non-dom.

If Labour wins the election, it should modify its plans in this way. The Conservative Party should adopt it as well, if it retains power.

CONTEXT NEWS

- The UK's opposition Labour Party says it will reform the tax system governing people who live in the UK but are non-domiciled for tax purposes, if it wins the May 7 general election.

- People who are permanently resident in the UK will pay tax on their global income. At present, if they are domiciled elsewhere despite living in the UK, they can choose to pay tax in Britain only on their UK income and any income brought into the country. In some cases, they have to pay a fee for doing so.

- Labour said the only exceptions would be for people who are in Britain on a temporary basis. It will consult on the details of defining temporary.

- Ed Miliband speech on non-doms http://bit.ly/1FBIVOH

- Labour Party plan to abolish non-dom rules http://bit.ly/1amugxR

RELATED COLUMN

Non-dom dispenser

- For previous columns by the author, Reuters customers can click on

(Editing by Robert Cole and Carol Ryan)

(On Twitter https://twitter.com/Hugodixon)