Tax Haven UK – 1 – The domicile rule

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Alistair Darling has denied the UK is a tax haven. On any objective basis he's wrong. The UK is a tax haven. Over the next few weeks I will provide a lits of reasons why that is the case.

I guess it's obvious to start with the domicile rule. There are two reasons. Other tax havens say that this is what makes the UK a tax haven. That's pretty good reason. As I suggested very recently, a behavioural test of what is a tax haven is necessary to deal with this issue.

The second reason is that the UK maintains this rule deliberately to create a "ring fence" within its tax laws to benefit those who are only temporarily resident in the country (even if the definition of temporary in this case somewhat stretches normal usage of this term). Ring fences have been identified as harmful tax practices by the OECD. They were right to do so. In addition they've also been identified as harmful by a UK Treasury minister - Dawn Primarolo to be precise. She chaired the committee that gave rise to the EU Code of Conduct on Business Taxation. It said:

When assessing whether such measures are harmful account should be taken of, inter alia: ... (b) whether advantages are ring fenced from the domestic market so they do not affect that national tax base.

That's precisely what the domicile rules do. So it's clear that if this definition applied to personal tax as well as business tax, for which it was designed, the domicile rule would be considered a harmful tax practice by the EU. So it's just chance that the domicile rules survive as legal under EU rules. Or maybe it wasn't chance - I have been told that Primarolo was the main obstacle to extending these rules to the individual, behaviour also indicative of the UK's status as a tax haven state.

But on any objective basis the domicile rules are a tax haven abuse. And they're the most obvious reason why the UK has that status. So Alistair Darling is wrong.