Parties must agree on non-dom changes, say tax experts

More than 800 people registered to watch the online event hosted by the Chartered Association of Taxation and the Institute for Fiscal Studies, chaired by Helen Miller, Deputy Director & head of tax at the IFS.

The four speakers were:

• Emma Chamberlain, barrister at Pump Court Tax Chambers and joint chair of CIOT's Private Client (International) Committee
• Nimesh Shah, CEO of accounting firm Blick Rothenberg
• Arun Advani, associate professor at the University of Warwick
• Jane Page, a tax adviser at Kirk Rice accountants and former Treasury advisor

The situation now

Emma Chamberlain explained the distinction between the terms “residence” and “domicile”. Residence is where you are living right now (though it can potentially be more than one country simultaneously) whereas domicile is normally where your ‘permanent home’ is. Taxpayers can be residents of the UK but not domiciled here or domiciled in the UK without living here. Emma pointed guests to a CIOT explainer on the issue.

In the UK, the term “deemed tax domicile” was introduced by the Government in 2017 as a means of simplification, covering those who have been in the country 15 years or more. However, there are four different types depending on what tax is covered, with Emma adding: “maybe the concept isn’t entirely satisfactory.”

Nimesh Shah agreed the phrase “domicile” is “very archaic” and not understood by many, questioning why it is used as a basis for tax. He said the “spotlight” had recently been put on the issue following headlines on the tax status of the Prime Minister’s wife, Akshata Murty.

Arun Advani explored the numbers behind non-doms. He said while they make up only a small number, they are often highly paid. They frequently work in finance and professional services, most commonly in banks, while more than 10% are pensioners.

Jane Page discussed the generosity of the current scheme. She said it is “very useful” to people coming into the UK but “quickly gets very difficult” the longer these people stay in the country. “Certainly people who stay here a long time find that they end up having to deal with these very intricate rules, about what money is in which bank account and where they can spend money without creating a tax charge,” she added.

Drawbacks to the current system

Emma said the UK’s current non-dom system can actually act to discourage investment, as foreign income investment and gains are taxed if they are brought into the country. She added that the system benefits the wealthy with foreign investment income rather than those who come to work in the UK.

Arun agreed the current structure discourages people from investing in the UK, which he said is “not surprising” if you tax people for investment in the UK but not for investments made abroad. “That’s presumably not what we want from the perspective of UK policy,” he added.

Jane said the age of the regime means it “needs an update” but change is difficult because it requires estimates of how people will react to any changes and to “predict the future”.

She added that the reasons why people move in and out of the country are not just down to the non-dom regime, but other taxes – such as the top rate of tax, corporate tax rate and inheritance tax – as well as non-tax reasons such as visas.

“You design around who you want to attract,” she added.

Jane also said the UK can't hope to compete with every single country on tax, adding some countries have zero tax but “not everyone moves to live there”. She said the UK has a “wide range of attractions”, of which the non-dom regime, and tax in general, is just a small part.

Arun said the need to offer special tax breaks is not actually that high as the finance sector in London pays better than other major European cities including Paris. “I don’t think there’s a need for special encouragement,” he continued.

Looking to the future

Exploring the alternatives, Emma said if the idea of domicile is scrapped, we “clearly need other connecting factors” such as residence, citizenship or a combination to determine who pays tax in the UK. She highlighted examples including Canada, which “rebases” all assets at market value when someone enters the country, then implements an “exit charge” when they leave. Other ideas include “phasing in” taxes over a number of years or time-limited exemptions of five or 10 years.

Whatever the future of the non-dom regime, political consensus is vital, said Emma. “It would be good if all the parties could agree on what they want to do and who they want to encourage to come here.” She also advocated time-limited, simple exemptions over long and complicated reliefs, and phased approaches to taxes, increasing the longer someone lives in the UK.

Emma added it is worth considering encouraging mobile workers and that “almost every other country” in Europe offers exemptions in the first few years - though these are becoming less generous in some places.

Nimesh said “we’ve been here many times before” when it comes to non-dom reform and warned that the fast rate of “small but regular” change in recent years is not helpful, as advisers want to be able to plan ahead with certainty. He said: “We do need a form of regime which still encourages investment and the right wealth into the UK,” which he clarified meant avoiding “bad wealth” routed through the UK to take advantage of the limited reporting regime.

He said we need a “roadmap” for reform, which must be linked in with the corporate investment regime and with rules. He agreed that there should not be a cliff edge on inheritance tax, adding we should also simplify or “do away completely” with remittance rules.

Arun said while we “don’t know” the impact of abolishing the non-dom regime, previous reforms had led to the tax take increasing but also a higher rate of emigration.

He questioned whether residence or citizenship could be used as an alternative, noting that while most other countries use residence, the US and Eritrea have citizenship. He also questioned the overall motivations behind a change of policy – is the UK trying to encourage or “not discourage” migration, and if the former, what type? He added: “In fact, do we want a regime at all, apart from being neutral?”

Jane said any reforms should give consideration to whether they would lead to “decision makers” leaving the UK, or people not coming here who otherwise would have. “You might only lose 200 people, but within that 200 are a handful of really key people who might take their company headquarters with them,” she added.

She said she thinks it would be possible to improve the system for the “vast majority” and raise money, but she would recommend removing any reference to “domicile” and not taxing people on remittances. “It’s just a historical accident that we do things that way, it’s not how you’d design a tax policy today,” she said.

Asked when a prospective Labour government should introduce a reform, Emma said it would need to be “fairly quickly”. “Leaving it [longer] will only complicate the regime,” she added. However, Nimesh disagreed, saying it is “such a massive opportunity” for the UK to reset its regime that it is not worth rushing it. “The earliest that anyone should be making any legislative changes is 2027,” he said. Jane also called for comprehensive consultation, while Arun added that he hopes the Labour Party is “doing some groundwork” now ahead of next year’s election.

Watch the full debate.