Pressure Mounts On Labour To Scrap UK Non-Domicile Tax Status

by Robert Lee, Tax-News.com, London

16 July 2007

A cross-party committee of MPs is, according to one member, "certain" to look into the issue of wealthy foreigners claiming non-domicile tax status in the UK, but the government appears to remain reluctant to change the rules, for fear of being seen as hostile towards wealthy investors.

Jim Cousins, a Labour MP and a member of the Commons Treasury Select Committee, told lawmakers last week that “It’s absolutely certain the committee will look at tax domicile."

"We can’t run the tax economy of this country as a large-scale version of the Chelsea Football Club," he went on to remark, according to a report in The Times.

Cousins's comments were made as the Treasury revealed how much tax was paid by the 110,000 individuals claiming non-domicile tax status in the UK. According to Jane Kennedy, a Treasury Minister, this group earned GBP9.8 billion and paid GBP3 billion in tax in 2004/5. She was however, unable to tell the Commons how much tax might be being lost to the Treasury as a result of the scheme, which excuses claimants from UK income tax on foreign earnings.

While the Treasury has been reviewing non-domicile tax status since 2002, it has yet to propose any changes to the system, and Kennedy has reportedly indicated that the government would be reluctant to alter the status quo because this could harm the status of London as Europe's pre-eminent financial centre.

"The government is mindful that any changes to the current system would need to balance carefully the rules of ensuring fairness and of promoting the UK's international competitiveness," she told the Commons, according to Bloomberg.

However, the Labour government could come under increasing pressure from within its own ranks in the run up to the next pre-Budget announcement to iron out perceived loopholes in the tax system, which seem to benefit only the wealthy, with non-domicile tax status and the taxation of carried interest earned by private equity fund partners topping the current agenda.

According to a recent report in the Observer newspaper, the number claiming non-dom status in the UK has risen dramatically since 2002 and could hit 200,000 in 2006/7. The paper claimed that the upsurge in non-dom claims is being fuelled by the government's ever-harder line on offshore tax avoidance.

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