Give the non-domiciles a break

UK governments and the Inland Revenue, who administer tax law, have long had a love-hate affair with non-domiciled individuals.

Broadly, an individual isn’t domiciled in the UK if his origins are in another country and he hasn’t shown an intention to remain here for the rest of his life. And it’s possible for a person who originated in the UK to put down such roots in abroad that he becomes domiciled in that other country.

For many years, the UK tax regime has been highly favourable to non-domiciled individuals. Such people are welcome to live here for extended periods and still be able to carefully control their tax liability. Unearned income and capital gains arising overseas are only taxed in the UK if they are physically brought in. The same rules apply to earnings from work carried out overseas. By careful use of these rules, and early and regular planning of personal financial affairs, it’s possible for wealthy individuals to move to the UK, continue to exercise multinational business activities, and only be liable to tax in respect of monies needed for cost of living.

These rules haven’t come about by accident. Not only are the basic provisions carefully spelt out in respect of both earned and unearned income, but each time new anti-avoidance provisions are brought into legislation relating to overseas transactions, special provisions exempt non-domiciled people.

It’s clear that there’s a belief that high-earners should be attracted to the UK with a tax-friendly status to stimulate business. It’s one element of ensuring the UK’s position as an international trader and financial centre.

There is, of course, an opposing school of thought which argues that individuals who come to live here should have the same tax liabilities as anybody else living in the UK. This is the case in almost every other developed country. This is reflected in intermittent proposals to change the law or changes in the attitude of the Revenue authorities to implementation of the law.

Suggestions of changes to the law regarding who is domiciled in the UK seem to appear roughly every five years. At present, it’s possible for most individuals who come to the UK to maintain their non-domiciled status if they are determined to do so and are properly advised.

It is usually proposed that these provisions are made more restrictive so that only short-stay visitors who will get the advantage of the favourable rules.

These ideas are doing the rounds once more. With Labour still high in the opinion polls Tony Blair has pledged a Labour government to encourage inward investment, the party’s Shadow Budget 1994 stated: ‘It is indefensible that a very wealthy few are allowed to work or live in the UK without making a fair contribution to taxation’. It seems that Labour would be more sympathetic to the Inland Revenue’s 1988 Consultative document which would have made it more difficult for individuals to preserve non-domicile and non-resident status in the UK for tax purposes.

Then there are examples such as the reported recent crackdown on Greek shipowners. It appears that the Inland Revenue have been carrying out in-depth investigations into certain traders based in the UK with a view to bringing additional earnings into the UK tax net. In such cases it’s difficult to be clear whether the Revenue’s actions are aimed at making the tax regime more difficult generally for non-domiciled people or simply that the particular shipowners have been badly advised or careless in their administration and so fallen outside the exemptions so readily available to them.

If the latter is the case, then they, or their advisors, have only themselves to blame. If it’s the former, it would help if the Revenue or a Minister made a statement outlining the proposed changes. Most people agree that many visitors to the UK who are attracted by the favourable tax regime add a great deal to our economy. Multinational businesses are based in the UK which otherwise wouldn’t come here . Even if the direct tax take is low, the expenditure of money in the UK and the infrastructure built-up add greatly to the country’s wealth and trading position. If there is to be a change, it would be sensible if it was made clear.

Patrick Stevens is a tax partner in Ernst & Young’s Entrepreneurial Services Division.