How to cook a frog, or how to tax a non-dom

How to cook a frog, or how to tax a non-dom

Mark Davies, Managing Director of Mark Davies & Associates, talks about taxing a non-dom and the outcome of the current policy for the Exchequer.

The trick to cooking a frog is to place it in a pot of cold water and slowly bring it to the boil, and before it knows what’s happening it’s poached nicely. Fling a frog in hot water, in alarm it would jump out immediately.

Taxing foreign domiciliaries or “non-doms” is much the same.

Abolition of the non-dom regime, which was Labour policy under Ed Miliband, would have almost certainly cost the Exchequer a great deal of money as many non-doms would leave immediately.

The Conservative policy under George Osbourne was more measured. New laws in 2008 redefined what constitutes a “remittance” to the UK, introduced the remittance basis charge (“RBC”) and resulted in the closure of many of the common loopholes. This caused in a drop in investment in the UK and in consequence Businesses Investment Relief was introduced from April 2012 to curtail this unintended outcome. Then from 2015-16 the RBC was increased to £60,000 (for persons UK tax resident in more than 12 out of 14 tax years, and £90,000 (for persons UK resident in more than 17 out of 20 tax years). Then in July 2015, George Osborne announced that non-doms could no longer claim the remittance basis once they had been UK resident in 15 out of 20 tax years and scrapped the £90,000 RBC. Thus, slowly the frogs have been poached.

Or have they?

The changes came into effect on 6 April 2017 and on 8 August 2019, HMRC disclosed the amount of tax paid by non-doms in 2017-18, which is the first chance we have to see the impact of these measures.

Table 1 (below) shows the numbers of persons claiming non-dom status and the total amount of tax collected (income tax, capital gains tax and national insurance).

Table 1 – Tax Collected

Tax Year

Number of people claiming non-dom status Total Tax and NIC collected (£ millions)
2014-15 123,000 9,338
2015-16 119,000 9,313
2016-17 90,500 9,489
2017-18 78,300 7,539

In 2017-18 roughly 64,100 of the persons claiming non-dom status were UK tax resident (75,900 in 2016-17).

There is a downward trend of people claiming non-dom status and in 2017-18 there was a further drop of 12,200 persons.

The fall in numbers is in consequence of several factors.

Firstly, people have left the UK due to socio-political reasons. Brexit and the chance of a Labour government have made many non-doms feel unwelcome.  The majority of non-doms live in London, and the rise in knife crime and terrorism in recent times have made many non-doms feel unsafe.

Secondly, the changes to the Tier 1 Investor visa, doubling the required UK investment to £2 million, has made it too expensive for many to move to the UK.

And finally, there have been the substantive changes as to how non-doms are taxed from 2017-18 onwards.

The arising basis and the remittance basis

HMRC claim that the £2 billion reduction is not a real loss to the Exchequer because roughly 6,000 non-doms became deemed domiciled in the UK and now pay tax on their worldwide income and gains, but the tax they pay is not recognised in this table.

But they say roughly 6,000 non-doms have left the UK in the year which is troubling as each non-dom pays on average roughly £100,000 tax per annum.

Table 2 (below) shows the split between those persons paying tax on their worldwide foreign income and gains as they arise (the “arising basis”) and those paying tax on their UK income and gains and on their foreign income and gains but only to the extent that they are remitted to the UK (“the remittance basis”) in 2016-17.

Basis of assessment

Number of claimants

Total Tax and NIC collected (£ millions)

Arising basis 22,600 1,695
Remittance basis, but not paying RBC 48,700 5,435
Remittance basis, and paying £30,000 RBC 1,400 558
Remittance basis, and paying £60,000 RBC 800 462
Remittance basis, and paying £90,000 RBC 2,500 1,259
 

Total

 

76,000

 

9,409

Tax per average non-dom

HMRC has not released data relating to how much tax was collected from each group in 2017-18.

But the amount of tax per average non-dom who was resident in more than 17 out of 20 tax years was over £500,000 p.a. in 2016-17. This group is just 2,500 persons, but collectively they paid almost £1.3 billion in tax in a single year. This is the group will have become deemed domiciled on 6 April 2017, and therefore are those most likely to leave.

George Osbourne claimed that these changes would result in an extra £1.5 billion for the Exchequer over the next Parliament. The Office for Budget Responsibility, commenting on the 2017 changes, cautioned that the additional revenue depended on the numbers of non-domiciled taxpayers staying constant, the amount of foreign income they have, and their behavioural responses.

It is disappointing that the behavioural response of the small group of less than 5,000 non-doms paying the RBC couldn’t be canvassed. But what is clear is that many frogs have decided to jump.

Mark Davies, Managing Director of Mark Davies & Associates

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