City Law Firm Warns Against Domicile Tax Changes

by Jason Gorringe, Tax-News.com, London

26 March 2002

A leading city law firm has added its voice to the chorus of those lobbying Chancellor Gordon Brown not to close a 'loophole' which allows many wealthy citizens to live in the United Kingdom but maintain tax domicile elsewhere.

In the wake of the 'Steelgate' scandal, during which it was revealed that Indian steel magnate Lakshmi Mittal pays very little in UK taxes despite long-term residence in the United Kingdom, Mr Brown announced his intention to act on the issue, proposing the introduction of a two-tier system whereby those who have been resident in the country for over four years are obliged to pay UK taxes on overseas earnings.

The announcement provoked an outcry last month, and tax experts predicted that such a move could lead to a loss of international competitiveness in London's financial centre, with financial experts and consultants decamping in their hundreds to countries with more favourable tax regimes.

Speaking to the Butterworths Lexis Nexis Direct news service on Monday, John Rhodes, head of the private client department of city law firm, Macfarlanes, supported this conclusion, and argued that the United Kingdom would stand to lose more than it gains by introducing such a law:

'Changing the rules is unlikely to result in any significant increase in tax revenues. While some RNDs [Resident but non-UK domiciled taxpayers] may choose to stay, we predict that most really wealthy families will simply reorganise their timetables and drop the amount of time and money spent here.'

He continued by arguing that: 'It has to be remembered that, in most of these cases, the wealth has been generated outside the UK and falls outside the UK tax net because of longstanding rules defining what should and what should not be taxed here. This is not, as the press have made out, a 'loophole'. It is the law.'

Mr Rhodes told the news service that it was unlikely that the Chancellor would announce any measures with immediate effect in his budget speech, suggesting that it is more likely that a period of consultation will be announced. However, he warned that without concentrated lobbying on the part of the financial services sector and overseas businesses over the next few weeks, change is almost inevitable.

'If the change does go ahead, Switzerland is likely to be the main beneficiary as the next most favourable European base for such families,' he warned. 'Is this really what Gordon Brown and the other EU countries want to achieve?'

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