The most important announcement in the Budget on Wednesday will not be about
the public sector borrowing requirement, the Treasury's economic forecasts
or the outlook for government spending. The Treasury is as clueless as
anybody else about what will happen to the global economic and financial
system in the year ahead, so its economic forecasts are of no greater
interest than the private predictions published at the back of The Economist
every week.
Gordon Brown's fiscal rules have been abandoned or suspended since the
Northern Rock debacle, so nobody really cares about them. And public
spending plans have been set for three years ahead, so the only issue of
importance is whether the Government will manage to stick to them in the
run-up to a general election, information that only hindsight will reveal.
What, then, is left for the Chancellor to do on Wednesday? It is tempting to
echo Richard Lambert, the CBI Director-General, who has suggested that the
Budget speech should consist of only one sentence, announcing that there
will be no new tax and spending measures or changes in public finances until
the economic outlook is clearer in 2009.
There is, however, one crucial statement that Alistair Darling must make on
Wednesday that will have more impact on Britain's prosperity and the outlook
for the public finances than any amount of tinkering with economic
forecasts, corporate or personal tax rates and public finance rules. This is
the decision on whether the Government will implement the new tax regime for
foreigners living in Britain that was announced out of the blue in last
autumn's Pre-Budget Report as part of the preparations for “the election
that never was”.
Although this reform initially attracted less attention than the reform of
capital gains tax, it actually entailed far greater economic and political
risks. The Treasury was well aware that tinkering with the tax arrangements
for foreigners who are resident but not “domiciled” in Britain would open up
a Pandora's box of economic troubles. Yet Mr Brown, in his pre-election
panic, seemed to forget all the Treasury reports that he himself had
commissioned, which concluded that Britain derived significant economic and
fiscal benefits from maintaining a unique 200-year-old distinction between
tax “residence” and tax “domicile”.
The main benefit of the fiscal red carpet laid out to foreigners by Britain
has, of course, been the City of London's success in maintaining its status
as the financial centre of Europe and, arguably, the world.
The City's international success has not been based solely on tax advantages. Other
big advantages have been the English language and legal system, the
regulatory regime and even the private school system, which has made London
an attractive home for globetrotting foreigners. But with English now a
universal language of business and legal and regulatory systems around the
world converging, taxation is, in many cases, a critical factor. After all,
the City's financial dominance, lost after the Second World War, was
restored only because of a US tax change.
When Washington introduced an onerous “interest equalisation tax” on
international bank profits, Britain decided to exploit this by creating a
tax-free environment for eurobonds. This is generally agreed to have been
the origin of London's financial dominance since the 1960s. If Mr Brown now
argues that Britain's system of taxing foreigners must be reformed because
it is an international anomaly, he had better acknowledge that Britain's
international financial dominance is an unsustainable anomaly, too - as is
the high proportion of British government revenues coming from taxes paid by
foreign companies and non-doms. Britain's unique tax system and its unique
success as a financial centre are two sides of the same coin.
In the past few weeks Mr Darling has been hearing about all sorts of other
unintended consequences of the non-dom tax reform: the Greek shipping
industry is planning to move en masse back to Athens; pharmaceutical
companies are preparing to shift expansion plans to Switzerland and New
Jersey; aerospace engineers are moving back to France, Germany and Italy;
and the museum world is facing demands for the return of artworks loaned by
non-doms.
Even Moscow is expected to benefit from the exodus as Russian businessmen wind
down their offshore operations and delist their companies from the London
Stock Exchange.
Why, then, has the Treasury decided to take such risks with the British
economy and public finances? The answer is that the Treasury has not.
Treasury officials have consistently opposed reforms to the non-dom regime
since the 1960s and are known to have advised against it as recently as last
summer. Since then the global credit crisis must have made them even more
worried about potential job losses and revenue losses from the City of
London. Officials at HM Revenue & Customs (HMRC), by contrast, have long
been urging chancellors to move against non-doms. When Mr Brown abruptly
decided last autumn to back the HMRC position, the balance of power between
the two institutions suddenly reversed - and this shift in the institutional
dynamics in Whitehall has greatly increased the potential damage from the
non-dom reforms.
Once HMRC got prime ministerial backing in the battle with the Treasury over
non-doms, it pressed home its advantage and sneaked in several other
measures that foreigners in Britain will find even more oppressive: sweeping
demands for disclosure of worldwide assets, the restrictions on trusts and
tightened definitions of tax residence, which will make it difficult for
foreign businesses to use London as a base or even to hold conferences in
Britain or fly through British airports.
Having won its battle with the Treasury over non-doms, HMRC has behaved,
according to a senior insider, like a rottweiler unleashed. The most
important question to be answered on Wednesday is whether Mr Darling has got
this mad dog under control.
After all the evidence submitted to the Treasury in the past few months by
foreign chambers of commerce, City institutions and multinational companies
based in Britain, it is unlikely that Mr Darling still believes the official
forecasts of only a few thousand foreigners leaving Britain.
For example, according to a survey of fund managers and hedge funds published
last week by Phoros, which specialises in tax planning for financial
institutions in London, “75 per cent of key non-domiciled investment
management talent now intend to leave Britain” and “at least 50 per cent” of
new hedge funds that would have been launched in Britain will now be set up
overseas. As a result of such surveys, Treasury economists appear to have
realised that they are likely to lose far more revenue from an exodus than
their non-dom levy could possibly raise.
Therefore, a tactical retreat is likely, but what can Mr Darling do without
performing a humiliating U-turn? Four possible reforms could undo much of
the damage done by Mr Brown's pre-election panic last autumn. The first
would be an official announcement that non-doms paying the £30,000 levy
would be exempted from inquiries into their international assets. The second
would be a public promise not to increase the £30,000 annual levy for five
years. The third would be a reversal of the ludicrous travel restrictions
that would damage London's position even as a conference centre and transit
point. The fourth would be a one-year delay in the implementation of all the
non-dom reforms to allow more time for the people and companies affected to
prepare for the new regime.
If the Government had any sense, all four changes would be announced in the
Budget. But common sense has been notable by its absence in the Brown
Government, so far. Will Mr Darling change this on Wednesday?
Non-doms are just leeches on society.
The IR has estimated (under FoI request) that it cost £47billion lost in tax. The US has no such tax nicety. Having lots of money and forced to remain on a Caribbean island is boring - nobody admires your Ferrari. The exodus scare stories are run by non-doms
david, Bristol,
Question: The financial, investment, private equity and hedge fund companies that presently employ, what 320,000, people in "The City, are they not mostly foreign companies? Goldman Sachs, Prudential, Citibank, and all of the Arab Investment companies, do you not think they will all relocate to a tax-friendlier country? And do not forget, NYC will probably re-evaluate what is needed to regain their edge, they may be a bit bruised at the moment, but they are still contenders to regain the financial crown.
I hope this non-dom tax thing is not a case of biting your nose of to spite your face...
hoffmfel, birmingham, Non-Dom from USA
I oppose the tax and the tinkering that goes with it.
As it happens i think these people pay enough tax on their spending. the tax environment that has atracted them here in the first place creates a wealtheir and more vibrant city that will all benefit from.
That aside, even if i objected to them and thought lets go for it and tax them in this fashion - i would still be concerned that the net result is the goverment coffers will be worse off. For all those who stay and pay the amount that brings in will be eclipsed by the loss of the ones that leave. The economy and just the plain old fun of the cty does not need this right now - i was enjoying living in the number 1 city in the world why make a pigs ear of things.
Andy in London, London,
Of course the non-doms don't want to pay tax. Why should they? They don't care about this country (and probably not about any country) - they're not British, they car only for the tax advantages.
Such is the life of the modern money-obsessed non-dom classes. Why should we care about them? Our problem is that the UK thought that the service industry would replace manufacturing and other industries as cheaper countries would prove more desirable. Only it doesn't quite work like that as the world's largest exporter, Germany, shows.
Fact is that the non-doms railing against this change got to where they are by being good at business dealings, read haggling and bartering. A lot of their comments are possible threats, all art of the game of trying to get the best deal available. If they have a problem with paying £30,000 (equivalent to normal UK tax on £100,000) then why not a scaled value starting from a lower value?
John, Knutsford, UK
Can someone somewhere point to a study which actually shows that financial market elites - bond traders, investment bankers, big city lawyers, actually generate wealth?
It seems quite obvious that these people are kept afloat by the problems of agency-that most of the savings sloshing around the global financial system (and into their pockets) are of pension fund savers and others, who aren't actually paying these bills directly.
If there actually was a free market in finances, with ordinary investors actually requiring services to be performed, I'd love to see these elites earnings then.
Reggie, horsham,
How about we level the playing field and ALL stop paying tax
90% of it is wasted anyway
And change to consumption tax. That way those who have the surplus money to purchase things pay taxes. Those who hovenot don't
Also it stops GB / AD messing about with the ecconomy
Let us mirror ecconomies like Switzerland or the other "tax havens" and become one of the most desireable places to live in the world.
By allass these communicst idiots have no clue about how to make a business let alone a country wealthy.
The whole concept of wealth distribution is wrong wrong wrong and is the bigest annomally of all.
When people spend other peoples earned wealth they forget that someone elsees wealth is being compromised.
As a another consequence all the scroungers would have to start earning a living or get seriously hungry. No to mention the influx of soft touch immigrants.
This governemtn has created 90% of this countires wealth problems and now the effects are being s
paul wilcox, newbury, UK
W Butler, London, SW1
You don't want to tell the government but you are willing to tell an internet forum and post your name and location. Obviously a wind-up post. By the way Putney is not SW1.
Edward, London,
I pray one day we shoot down the mythology that what is good for the city is good for the UK. Most of the UK is no wealthier than any other regions in Europe. Dublin is more wealthy than any British provincial city. Tax breaks to the super rich may help London but this does not and has never trickled down. Thousands of UK pensioners die every year from hypothermia, this does not happen in Finland - no square mile in Helsinki. The international bankers are tax evading parasites the private equity firms are even worse - I hope we tax them till they bleed, maybe then we can turn to industry and technology instead of usury on a grand scale.
Mark, Epping, Essex
We have the most ineffective administration in charge at a time when we need some real talent. The constant u turns and the constant tripping of the ...'laws of unintended consequences...' show an administration that is not only incompetent, but could fairly be described as 'juvenile' as they could not forsee the consequences of their actions......
David Nammory, Liverpool,
I'm a non dom and I hope the government abandons these proposals.
I work in Finance, where I earn about 500 k per year. 60 % of this is paid gross offshore through the use of a dual contract, so I have no tax liability on that 300 k, as long as I don't remit it to the UK. I use most of that to pay the mortgage from my Swiss bank on the £1.5 million pounds I borrowed to buy a fairly modest 5 bedroom home in Putney several years ago - the rest is invested in various hedge funds.
I obviously don't use your local schools, services or the NHS and will never call on any of your benefits.
I even contribute to the economy by employing 2 people to manage my household and take care of my children.
And now you expect me to pay a £30,000 charge and potentially reveal my offshore investments. I find this absolutely outrageous and will consider leaving the UK.
There is no possibility that I would ever be prepared to pay the same level of taxation as those who were born here - and why should I
W Butler, London, SW1,
I think the huge fuss being made by the City about the non-dom tax is pathetic. The arguments against are painfully and almost hilariously thin.
Why should rich people have the right to avoid tax - and surely the "Greek shipping industry" is not going to up sticks over, what to many involved, will be a paltry sum?
All the moaning and so called surveys are from special interests who want to try and stop the policy. Alistair Darling should hold firm and face them down.
Richard, Plymouth,
I met with a very well respected tax expert last week - he has published several books and was an advisor to the treasury. He told me of a meeting he had with a very senior government figure last December. The Tax experts comments were that it was " terrifying how clueless" this official was. No account has been taken of what is spent in the UK. Many of these Non Doms pay more on VAT than the HMRC will collect. Who cares if there is a U turn. Saving face is far less important than the damage that will occur to the UK economy if the the Non Doms are hit. In fact it would be very refreshing to hear the Chancellor say that he has listened. Now that would be a first for a politician. There would a storm of criticism but people would forget and the Conservatives would have very little to crow about - they started the whole Non Dom issue with their proposal for a £25K charge.
Michael Smith, London,
We are competing with rest of the world. Our task is to weigh up the pro's and con's and come up with an economic solution. But this is the long term solution and for the short term, any major tinkering with present arrangements is a recipe for disaster.
Marek, Hindhead, UK
And just how much is being syphoned off and sent abroad in one form or another?
Mike, Birmingham, UK
Two points:
1. Most of these people seem to be in London. If they go, it will ease the London property market and lead to lower interest rates, benefiting the whole country. The influence of the London property market on interest rates is a long standing problem with the British economy.
2. Why can Brits not do the jobs these people are doing? I thought we had a very high level of skills in finance.
Jim , Glasgow, Scotland
I think the moral indignation to the very rich being able to avoid the levels of taxation endured by ordinary people is very justified.
But I think the government must take the primacy of pragmatism over lofty idealism. The contributions made to the wider economy by these people are very significant indeed - the 17.5% VAT (significantly greater than US sales tax) on every overpriced trinket or car they buy, the stamp duty they pay on their fabulous houses, the PAYE and NI they pay on their employees paycheques, the fuel tax they pay in their massive cars not to mention the non-tax benefit felt in the economy by the volumes of liquidity they splash around.
And I know that we all pay these too, but the simple fact is they don't have to. They will leave and it will hardly matter a jot to them. And then we will have to pay more tax or have worse schools and hospitals and public transport, which is a very great price to pay for equality, however noble the notion
George, London,
Let me see:
London -- most expensive city in world, poor service culture, expensive real estate (corporate and residential), overpriced legal services, crumbling infrastructure, horrible trains, high income taxes, high national insurance and a poor health service, high VAT, high petrol tax, high council taxes, growing crime, racism and other bigotries, and now extra taxes for non-doms.
Dubai -- plenty of modern buildings, brand new infrastructure, great services, low taxes, great weather and massive amounts of capital to invest.
Soon we will stop talking about "the City" and in matters of finance will be talking about "the Creek". It is only a flight away...
Big mistake this non-dom thing. The loss of a few individuals will not matter but the heavy hitters will be taking with them their companies... their demand for services (legal, printing, computer/It, real estate), the jobs of many locals, and yes the tax base they support.
John S., Tower Hamlets, uk
right on Anatole
it is time for people to let this lot in power know what the man on the wage trail thinks
enough is too much
old people dont figure in the UK economy either.
trevor swistchew, edinburgh, scotland
'The first would be an official announcement that non-doms paying the £30,000 levy would be exempted from inquiries into their international assets'. So it's a state run protection racket.
I think small businesses, pensioners and most of Britain could benefit from the certainties suggested so why single out the non doms. Lucky for them they are wealthy enough to have someone speaking on their behalf
Richard, Huntingdon, Cambs
"One law for the rich and one for the poor. "
"Only poor people pay taxes" do you remember that remark by Conrad Black's wife, he now in jail.
Non doms are rich, because they are rich they also able to be transient thanks to modern communications. The nation state is unable to enforce its tax gathering from these people for the practical reason that they are able move outside its jurisdiction and continue their economic activities to remain rich.
Therefore they should be excused from paying the taxes on the same scale that the UK government requires those less rich and therefore less transient to pay. This is the argument advanced by Mr. Kaletsky.
Pragmatically the argument is sound. For the tax gatherer, presumably some revenue is better than none.
The idea that the richer you are the less tax you pay is of course not new. It has led to revolution and bloodshed.
One view of taxation is that it is paid by the rich to protect themselves from the mob; remind the non doms!
Jon lucas, Malaga, Spain
"Clueless about what will happen this coming year" - they are clueless about what occurred last year.
Ripsnorter (a very happy ex-pat), Malaga, Spain
Amid the screeds published on the plight of non-doms and the danger to the UK economy from an admittedly poorly executed tax, not a word about the treasury's proposed "income shifting" tax contained in the same budget. This is potentially equally damaging to the UK economy, since it targets the small family companies and partnerships which are our economy's bedrock with a tax which will mean great worry, uncertainy and red tape for them. But then small businesses don't have expensive accountants to lobby for them and don't attend parties where government ministers hang out in pursuit of donations, do they.
Anne Murphy, London,
I think that Mr. Kaletsky's comments should be read with great respect. To me, his analysis is spot on. What I find very disturbing is the total stupidity and lack of depth ingrained in this so called governmen. As for the revenue dept., advising a raise in taxation for foreign domiciles and companies, knowing full well they will pull out, it makes me wonder - are there forces at work, emanating from a country which has despised us for centuries, that has taken control of us politically, and is in the process of buying us with our own money, en joying the emasculation of a country that was once the major force in Europe? Something should be done PDQ before we face a bill that just cannot be paid.
John Haydn Perks, Westcliff on sea, Essex England
Richard Lambert was right. We need new taxes like a dog needs more fleas.
Frank Upton, Solihull,
Alastair Darling should be fired (and obviously not get a bonus)
Ann, London,
Alistair Darling should resign.
Max, London, UK
I support both but would add that the Whole Government should follow suit!
M. Cawdery, Portadown, UK ( if it still exists)
Why not remove the two capital taxes on gains and inheritance, and replace them with an annual charge on the genuinely rich of £30k? The test for rich might be £5m of assets other than qualifying business assets. The charge could replace the non dom charge proposed.
This should be simple to collect and might yield more than taxes it replaces. As an earlier writer proposed, this would put middle England on much the same footing as non doms now for capital taxes, though leave non doms with the advantage on their offshore income.
PSM, Tenbury Wells, Worcestershire
"The Treasury is as clueless as anybody else about what will happen to the global economic and financial system in the year ahead"
No so - There are many commentators who provide clear and reasoned analysis of the causes and possible futires courses of failures in the global enonomic and financial system.
Try these: William Bonner, Jim Puplava, Michael Shedlock, Mr Practical, Doug Casey and many others.
Stephen, Cambrdge,
Why does London need to rely on tax-haven status to attract jobs and investment? It is the capital of a G8 country, after all. Creating tax incentives is an ideal way for small countries to attract the wealthy and their investment funds but why should a country with an economy as large as the UK's need to rely on these tactics? Luxembourg has thrived on creating an open environment and good regulation that attracts investment funds to locate their business there but Luxembourg is a tiny country with few natural resources and limited geographical reach.
The British economy should be big and strong enough to survive without some cheap gimmicks to attract money to London. If cheap tax gimmicks is all the UK economy is built on, that is surely a sign of serious weakness and desperation.
MB, Edinburgh,
A flat tax for all based on earnings in the UK ignoring overseas earnings would solve the problems. Besides the well-known advantages of flat taxes it would have the additonal benefit of making HMRC just a collection agency.
R Mason, London, UK
I'd say the same applies to economists and 'experts' - most are also pretty clueless about what will happen to the global economic and financial system in the year...
CWW, Suffolk, UK,
Extend Non-Dom status to the middle class then they won't to physically move but could be physically present for everyone but HMRC.
This would revitalise the economy and create hundreds of new jobs.
Currently the middle class is paying all the bills and even buying privately from post-tax income services their taxes are supposed to provide.
So yes - extend the Non-Dom dynamism to the backbone of the nation
CCTV, Bristol, England
Alastair Darling should be fired (and obviously not get a bonus)
Ann, London,
Alistair Darling should resign.
Max, London, UK
"The Treasury is clueless about what will happen to the global economic and financial system in the year aheadclose quote mark"
What a great quote. This is coming from a columnist that only wrote (finally) of economic woes to beset us in October of last year (Black clouds loom on horizon after years of plenty - 22 Oct 2007). When it was plain for all to see in August that we were in for a "rough ride".
Strikes me they have the same understanding of global economics as your good self Mr Kaletsky. Or should that be the same vested interest to hush up such catastrophic failings?
charles, Cirencester, Great Britain