City Banks Threaten Pull Out Over Non-Dom Tax Review

by Robert Lee, Tax-News.com, London

16 August 2005

A number of large financial firms based in the City of London are threatening to scale down their operations in the capital's financial district over an ongoing row with the Treasury regarding the taxation of non-domiciled foreign executives, or 'non-doms', the Independent newspaper has reported.

The Treasury is currently reviewing the whole area of non-dom taxation, as well as considering new rules that could outlaw dual contracts, which benefit the employees of UK-based foreign firms who are resident in Britain, but who spend a large part of their working life overseas. Such contracts allow the employee to be paid in the UK, so paying UK taxes, and also to be paid offshore for work carried out overseas, on which the worker pays little or no tax.

"The Government is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform," the Treasury announced in March of this year.

However, it would seem that the government is keen to somehow close these 'loopholes'.

Last year the Inland Revenue set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It also sent out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled”.

According to the Independent, City investment banks, responding through their trade body, the London Investment Banking Association (Liba), are said to be reacting angrily to the Treasury's actions, and are making it clear to the government that a change in the non-dom tax rules could make it less economical to employ staff in London.

"The banks have been threatening to shut down parts of their operations," a leading tax lawyer told the paper. "Morgan Stanley has been particularly vociferous."

A Treasury paper published in the April 2003 budget revealed that the Inland Revenue has 16,000 individuals on its database who declared a total income of £800 million which stayed out of the Revenue’s clutches by being remitted overseas. In reality, the accounting profession believes the figure is much higher. Some estimates have put the annual tax loss to the Treasury from the current tax rules at £5 billion.

The most likely reform, according to experts, would be to impose a limit on the number of years that an individual could remain resident in the United Kingdom but not domiciled there for tax purposes. After the expiry of that period, they would be obliged to pay tax in the UK on their overseas income.

Many organisations are supporting the prospect of reform in this area of tax law, in the hope that new legislation will make the domicile rules simpler. Also, by taking a proactive approach to the reforms, they are hoping to stave off more radical proposals that Chancellor of the Exchequer, Gordon Brown may be considering.

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