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Rise In UK Tax Non-Doms Blamed On Offshore Crackdown

by Robert Lee,, London

11 July 2007

The number of people claiming non-domicile tax status in the United Kingdom is expected to soar this year as the government proceeds with its crackdown against those thought to be hiding income in offshore bank accounts, it has been claimed.

According to a report in the Observer newspaper, HM Revenue and Customs said that some 112,000 claimed 'non-dom' status in the UK during the 2004/5 tax year, 74% more than in 2002. However, the report predicted that these numbers are set to soar to 200,000 by the self-assessment deadline for the 2006/7 tax year.

The paper claimed that the upsurge in non-dom claims is being fuelled by the government's ever-harder line on tax avoidance, particularly of the offshore variety, as evidenced by the recent offshore tax amnesty. The registration date for those wishing to avail of the amnesty terms passed last month, and those who failed to take HMRC's carrot now face the possibility of investigations and penalties of up to 100% of tax due.

"People are telling the Revenue that they meant to sign non-dom forms - that not filling them in was an oversight. The amnesty is pushing people further offshore," one tax expert told the Observer.

By claiming non-dom tax status, expats living in the UK are excused tax on their foreign earnings, including interest in overseas bank accounts.

It is also thought that the booming London property market is helping to drive the surge in non-dom claims, since the status allows them to remain exempt from capital gains tax and stamp duty.

The issue of non-domiciled tax status is a delicate one for the government, which has had to fend off criticism that the rules benefit a relatively minor number of very wealthy individuals doing business in the UK. While the Treasury has in the past hinted that it may change the rules surrounding non-dom tax status, it is also very conscious of upsetting the City and appearing to be hostile towards those creating wealth for the UK.

In 2004, the then 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”. Then, in 2005, it was reported that a large number of City financial firms were threatening to pull out of London as the Treasury looked into the whole area of non-dom taxation and 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.

The review, which is ongoing, has yet to lead to any changes in the rules, and one fund manager, speaking to the Observer, summarised just why the government may be reluctant to tinker with the system, despite the fact that making rich non-doms pay more tax would be popular with most of the electorate. "It's seen as one reason why London has continued to be successful as a venue for high-value employees who can be located anywhere in the world," the manager observed. "I think it's why a lot of businesses like to be based in London; there's a strong sense that if it was to be removed an element of the [City's] attractiveness would lessen."

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