City banks hit by non-dom chaos

City banks may have to spend millions to beef up salaries paid to US employees because of the UK’s introduction of a £30,000 levy on non-domiciled taxpayers.

The prospect of making up the difference on non-doms’ salaries was more likely this week, after draft guidance on the rules gave little hope that the new £30,000 fee will be ‘creditable’ against US tax.

‘Although the draft legislation states that the remittance basis charge is to be accounted for as if it were income tax, this is unlikely to be sufficient for the IRS given that it is not similar to US income tax, nor can it be said to be excess profits tax,’ said Gray’s Inn Tax Chambers barrister Patrick Way.

The situation means global banks and other City employers may have to pay around £50,000 extra to each of their US staff to prevent the tax position of these workers from being adversely affected by the non-dom changes, in line with typical tax equalisation agreements.

The proposals, which advisers say are a mess, have also confirmed non-doms will forfeit personal allowances.

‘It seems that any non-doms coming to the UK will lose all personal tax allowances from day one. It seems totally unfair. The reach of these rules has been far larger than anticipated,’ said PricewaterhouseCoopers tax partner John Whiting

Criticism of the non-dom plans is gathering pace, just as the chancellor Alistair Darling also prepares to announce his final plans for capital gains tax today. Proposals for the tax have already caused controversy.

Such is the complexity of the non-dom legislation and the confusion caused by it being rushed through in time for the budget, advisers have called on the Treasury to delay the changes.

Fears have also been raised that the Byzantine rules will be open to widespread avoidance.

The regime was announced in the 2007 pre-Budget report, where it first emerged that the UK would be clamping down on the privileged tax status, which allowed non-doms to keep income and capital gains earned off-shore tax free.