Loophole could cost 1% of GDP

Pressure is mounting on the Treasury to close a lucrative tax loophole for wealthy foreigners living in the UK, and experts are warning the move could dent the country’s economy.

The row erupted after it was revealed several of Labour’s biggest donors were still benefiting from the loophole that Gordon Brown had vowed to close.

One tax expert estimated the loophole, which allows so-called ‘non-domiciled’ individuals to avoid paying a significant amount of UK tax, could be costing the taxpayer up to £5bn.

But because the wealthy non-domiciled individuals could leave the country if the tax laws were changed, he warned: ‘Deal with this at your peril.’

Non-domiciled status, granted to foreign-born individuals who are resident in the UK but have retained a ‘domicile of origin’ in another country, allows individuals to avoid paying tax on non-UK income so long as it is not brought into the country.

The status also allows these individuals to avoid having to pay inheritance tax.

A number of high-profile donors to the Labour Party have benefited from the loophole, including Lakshmi Mittal, who was at the centre of the ‘steelgate’ affair that engulfed Downing Street last week.

In 1994 the Labour Party produced a document, ‘Tackling Tax Abuse’ – widely attributed to Gordon Brown – which called for the loophole to be closed, but since coming to power in 1997 the government has failed to do so.

Now ministers stand accused of inaction because it receives one third of its election donations from those that benefited from the tax break.

But experts have warned such a move could cost up to 1% of the UK’s gross domestic product through lost expenditure if the ‘non-doms’ were to flee the country to avoid massive tax bills.

Mike Warburton, a tax adviser with Grant Thornton who calculated the £5bn loss to the Exchequer, feared any attempt to change the laws could result in a mass exodus of wealth.

He said: ‘Collecting the tax would be like trying to hold a bar of soap – in practice you would never get the tax.

‘The government would really be shooting itself in the foot if it changed the law,’ he added.

Maurice Fitzpatrick, economic director at accountancy consolidator Tenon, echoed this view, saying that it was not enough just to look at the tax revenue lost – the equivalent of the cash the government has said it needs to properly fund the National Health Service.

He said: ‘If the Treasury is to look at this, it needs to factor in the full economic consequences.’

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