Tax Research UK

The following parliamentary question and answer were reported on 3 March in the House of Lords:

Question

Asked by Lord Oakeshott of Seagrove Bay

To ask Her Majesty’s Government how many taxpayers who are registered with HM Revenue and Customs as non-domiciled are (a) resident, and (b) non-resident, in the United Kingdom. [HL1128]

Answer

The Financial Services Secretary to the Treasury (Lord Myners): Reliable information is not available, as individuals are not required to report their UK domicile status or residence status to HM Revenue and Customs (HMRC) unless either is relevant to their liability to UK tax within that year.

Individuals who are resident but not domiciled within the UK (non-domiciles) do not need to inform HMRC of their non-domicile status unless it is relevant to their tax affairs in that tax year.

In the majority of cases an individual’s domicile status will make no difference to the direct tax they must pay in the UK. This is because an individual’s domicile status is mainly relevant for income and capital gains tax purposes when an individual has foreign income or foreign gains, for example from overseas investment or employment. Where this is the case, UK residents may need to complete supplementary pages to the main self-assessment tax return. Many such residents pay tax on these income and gains on the arising basis so their domicile status is not relevant to their tax affairs. However UK resident individuals who are either not ordinarily resident or are not domiciled within the UK may use the remittance basis in respect of their foreign income or gains instead.

Following the changes introduced in Finance Act 2008, many of these individuals will now have to complete a self-assessment tax return to use the remittance basis (with some minor exceptions for lower-income or migrant workers).

Prior to the Finance Act 2008 it was not always necessary for individuals using the remittance basis to complete a self-assessment tax return. Similarly those individuals who did complete a self-assessment tax return did not always need to say whether they were using the remittance basis because they were non-domiciled in the UK or because they are not ordinarily resident in the UK. In 2006-07, 86,000 individuals filed a self-assessment tax return on the basis that they were non-domiciled in the UK. This is the latest year for which data are available.

UK residents who are non-domiciled may also make lifetime transfers into trusts with inheritance tax due at 20 per cent. To do so, they must inform HMRC of their domicile status. This information is not centrally collated by HMRC’s systems.

With some minor exceptions non-UK residents do not generally pay UK capital gains tax. They pay UK tax on their UK source income, although this may be relieved under a double taxation treaty. There is generally no need for such individuals to inform HMRC about their domicile status; the remittance basis is only relevant to UK residents.

Some non-resident individuals will complete the non-residence pages of a self-assessment tax return and declare their non-resident status. There is usually no need for such individuals to declare their domicile status too, although on occasion some do choose to tick the non-domicile box. In 2006-07 30,000 taxpayers chose to declare themselves as non-resident and non-domiciled in the UK.

These individuals will broadly fall into five groups: those who are not resident in the UK but have investments here on which UK tax must be paid; those who have returned abroad from a UK employment assignment and have to file to pay tax on their final year salary; those with UK-source self-employment income from business trips (particularly if they come from a country with which we do not have a double taxation agreement); those performing in the UK as non-resident artistes or sportspersons; and those who making claims under double taxation treaties.

I find it incomprehensible that we do not have data from tax returns on this issue after 2006-07.

It is incomprehensible that we have no idea how many people have paid the £30,000 flat rate charge to continue using the remittance basis of tax available to non-doms.

And it is an indictment of the appalling state of published data available from HMRC that this question even has to be asked. The information they put into the public domain is abysmally limited in scope, and in many cases they ceased publishing data in 2005, when HM Revenue & Customs was formed.

How can we have an informed debate on tax without data?

HMRC really do need to get their act together.

Richard Murphy Domicile, HMRC

Johann Hari has an article in the Independent this morning on the above issues. As he notes:

Contrary to the claims of their apologists, there is nothing inevitable about tax exiles. The Tax Justice Network and the brilliant financial expert Richard Murphy have laid out a clear road-map for how to end them.

Well, that’s a new description of me, and one I’m not sure about, but the real issue is what he notes, based on a conversation we had,  in part:

Within Britain, there are two types of tax avoider, and they need to be dealt with differently. First, there are the British citizens who claim to be only semi-resident here, and therefore say they should pay little or nothing. There is a simple way to shut this down – and it is already put into practice every day in that socialist utopia, the USA. If you are an American citizen, you pay taxes to the US exchequer, wherever you live in the world. You are allowed to earn up to $50,000 abroad tax-free, and after that, you pay American taxes. You can’t be a tax exile. It’s impossible. You want to be part of the American club, you have to pay the membership dues. If you don’t want to contribute, you have to renounce your citizenship – a wrenching move that only 500 deeply odd and unpatriotic rich people choose every year. Britain could do the same with a click of our legislative fingers. It would abolish overnight the concept of a tax exile.

The second group are non-British citizens who come here and refuse to pay taxes on their global fortunes. Under New Labour, this group has been so cravenly courted that the IMF actually classified the British Isles as a tax haven for foreigners until 2008. Now, they pay a paltry £30,000 a year to count as a non-dom – and then nothing. For people so rich, it’s the equivalent of handing us the small change down the back of their settees. They drive up prices for us all: we have to compete with people for (say) property in London who pay no tax. They can be dealt with just as easily. People who come for short stays – to be a student, or on secondment – shouldn’t have to reorganise their entire tax affairs when they come; that would discourage visitors. But if you stay here for three years or more, you are plainly relying on British public services – so you should have to pay full taxes on your global fortune to us, or go.

And for the tiny number of the super-rich who would still leave and choose eternal boredom in Monaco or the Cayman Islands? They’d be no great loss, but we should still chase them by leading a global crusade to shut down the tiny number of places that allow them to warehouse their fortunes tax-free. It’s not hard when there is the political will: after 9/11, even the most shadowy tax haven shut down al-Qa’ida-linked bank accounts within a week. When Monaco refused to co-operate with France on tax laws, Charles De Gaulle surrounded it with troops and cut off the water supply.

We are constantly being told by a chorus of conservatives that the financial crisis caused by their market fundamentalism can only be solved by slashing back spending. But this is unnecessary if only the overclass start to pay their taxes. Look at the country we are told is the exemplar of over-spending, Greece. In fact, it suffers the worst tax collection rate in the democratic world. According to a study by Professor Friedrich Schneider, some 25 per cent of taxes are not paid, making up $20.5bn a year. If Greece ended this culture, its financial situation would look very different. Why don’t we hear this story, instead of the nonsense that they pay their teachers and nurses too much?

So why aren’t elected governments opting for this sensible, simple solution, supported by 78 per cent in a recent poll? The tiny number of super-rich talk louder than the rest of the population. Their money warps our politics: Labour has non-dom donors too. So the scandal isn’t just that Michael Ashcroft has captured the Conservative Party. It’s that his repulsive tax tango has been legal under Labour as well – and we all have to go on paying for this parasitism.

Quite so: this is an issue where Labour too has been wrong, time and again.

But surely – never again? That’s what I hope.

Richard Murphy Domicile

I have an article on Comment is Free today:

Lord Ashcroft’s disclosures about his non-dom status are a story of the moment, and rightly so. That should not disguise the fact that the abuse facilitated by the domicile rule when applied to taxation in the UK is long-standing and ongoing and will not be resolved even if Lord Ashcroft does become domiciled in the UK after the next election. Nor was it resolved by the very partial reform to the domicile rule introduced in 2008, after which a person could only use the rule cost-free for seven years, whereafter they have to pay £30,000 a year to continue to take advantage of it.

It’s important to stress what a person’s domicile is: it’s their place of natural allegiance; the place they consider to be their real home. It’s not about ethnicity, race or nationality. It can fairly be said to be about national origin. Let’s leave aside for the moment the fact that discrimination on the grounds of national origin has been illegal in the UK since 2003, and that the domicile rule might afford an illegal advantageto those claiming it under that legislation, and instead concentrate on what this means.

The domicile rule does, in effect, mean that through paternal inheritance (this rule is also decidedly sexist), a child acquires their parents’ domicile or place of national origin and keeps it for life, unless they declare otherwise or HM Revenue and Customs choose to challenge their claim, and proves otherwise. As we all know, challenging a state of mind is nigh on impossible, especially when the assumption is granted by law that such a state of mind involves national origin being elsewhere. Unsurprisingly, the number of challenges to domiciled status are few, the rate of success unknown but probably limited, which in turn reduces the number of challenges and so the system self-perpetuates, granting an unfair and unmerited advantage to some in society at expense to others.

There is neither logic, nor natural justice, nor human rights and maybe even law (as previously noted) that can justify perpetuation of this situation, whose survival has been largely necessitated by the chaotic, undocumented and non-statutory basis for determining the unrelated, but equally important, status of tax residence in the UK. It is important to stress we note the difference. It is equally important to stress that the way in which the UK tax system works is that the tax affairs of many temporary residents in the UK are subject to "blind-eye" treatment by HM Revenue and Customs on the grounds that the domicile rules will in most cases allow them to ignore that person’s income arising outside the UK, which they presume (in most cases quite reasonably, no doubt) is not remitted here.

We argue that it is ludicrous that the weaknesses in the UK’s tax residence laws have to be covered by the maintenance of a discriminatory law based on unprovable claims as to a person’s national origin. The consequence is a state of uncertainty that is exploited by many with wealth, but which leaves the vast majority who come to the UK to work uncertain as to their obligations to pay tax and leaves many of those who do so with lower tax liabilities on similar earnings to those who have been resident and domiciled here throughout their lives. Uncertainty in tax systems is widely condemned, not least by all in the tax profession. Unfair competitive advantages distort markets. This is a situation that has top end, whatever the outcome of the Ashcroft affair.

Our solutions are simple. We need a new statutory law for determining who is, and who is not, resident in the UK. This should provide temporary residents who are not citizens of the UK a period of grace during which they should not be subject to full UK tax on their worldwide income: a period of no more than four years should provide the necessary period in which they can either leave again (as many will) or reorganise their affairs to comply with UK requirements. At the same time, UK residents should have a duty to pay UK tax unless they can show they are paying equivalent taxes elsewhere in the world.

If this were to happen, the remaining implicit administrative justification for the domicile rule would disappear: the residence rules could cover the need. In that case, subject to a four-year period of notice being given all those still using the domicile rule to avoid declaration any part of their income or gains in the UK. That rule should disappear from our tax law, sweeping away in the process an anachronism based on prejudice and discrimination from a bygone age that is long overdue for elimination in the 21st century. And, as I have previously argued, the net gain to the UK exchequer might be some £3bn a year, revenue the country is badly in need of.

Surely we can do it now?

Richard Murphy Domicile

Inspired by the Times, today.

Richard Murphy Domicile

The Mole: Ashcroft non-dom admission piles pressure on Tory party | News & Politics | News & Comment | The First Post.

Let’s be clear: Lord Ashcroft has broken no tax laws, I’m sure.

But this column explains rather well why this is a crisis for the Tories. People don’t like offshore. And they don’t like obfuscation.

That’s what this is about: politics and the ethics of the Tory leadership, but not tax.  As the First Post notes:

When the Best Quotes of the 2010 Election come to be compiled on May 7 or whenever, this will surely make the top three: “While I value my privacy, I do not want my affairs to distract from the general election campaign.”

The Ashcroft revelation is not going to impress that growing band of sceptics one little bit. And neither is Cameron’s response to media pressure following Ashcroft’s statement.

“I have always taken the view that someone’s tax status is a matter between them and the Revenue,” said Cameron. “I think that now we can get on with the election.”

Only a few weeks ago, this general election was the Tories’ to lose and Labour’s to win. Much more of this, and it’s going to be the other way round. Unbelievable.

Quite so.

And if you ever wanted an argument for tax compliance this is it. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. I’m not convinced claiming domicile status is tax compliant by anyone. Personalities need not come into this.

Richard Murphy Conservatives, Domicile

Lord Ashcroft has confirmed he is not domiciled in the UK. His status has been in dispute since he became a life peer in 200.

Since that time he makes clear he has been UK tax resident, but as a non-domiciled person this means that he would have only been obliged to pay tax in the UK on his UK source income and gains and his overseas income and gains remitted here.

He seeks to deflect attention from the issue by noting that at least one Labour peer has been in the same position. The difference is that the peer in question admitted it.

The issue for the Tories is threefold. First, there remains an open enquiry into the legitimacy of contributions made to the Tories by companies widely reported to be Under Lord Ashcroft’s control. The matter is unresolved: there is little more to say on it.

Second, there is the question of the obfuscation that other Tories have undertaken on this issue. Questions about their judgement in doing so have to be raised.

Third, questions must now be asked about whether when, as Lord Ashcroft and I presume Lord Paul, become domiciled in the UK after the next election those offshore tax avoidance structures they may have set up before becoming domiciled will be allowed to stand, affording them continued favour when compared with UK people who have been domiciled throughout their lives. I can see no way in which a level playing field is created unless such arrangements, if they exist, are laid aside. Only full disclosure can ensure that this happens. We have a long way to go before I can imagine that happening.

Richard Murphy Domicile

Sometimes it’s worth mentioning what I’ve been reading. I always intend to do this more than I do. It’s not I don’t read – I just run out of time to mention it.

A recent read has been Londongrad: From Russia With Cash by Mark Hollingsworth and Stewart Lansley, published by Fourth Estate, 2009

The book is topical and touches themes addressed here often. It is no coincidence that the return of the era of ever deepening recessions has coincided with the emergence of a domestic and global mega-rich class, a group with minimal national ties who move their multi-billion fortunes around the globe in search of the best short-term returns. As the book argues, there is perhaps no more dramatic example of this breed and the ‘exuberant` behaviour of the world’s newly enriched than the Russian oligarchs who built vast personal fortunes out of the ashes of Soviet communism, not by creating new wealth from scratch, but by seizing a good deal of Russia’s historic wealth that had been built up over decades.

Londongrad tells the story of the wealthiest London-based oligarchs and how they manipulated the chaos of the Yeltsin years to engineer one of the most blatant transfers of national wealth in recent times.

There is a good deal of detail on how their newly acquired wealth was, as the book describes, ‘secreted abroad in a labyrinth of offshore accounts in an array of tax havens in the world’s most secretive tax havens. Stashed away it has been almost impossible to trace.’ This was, of course, one of the appeals of the book to me, but so was the fact that it was London that proved the final destination for much of this money.

As the authors explain, successive British governments along with the City turned a blind eye to the provenance of the wealth while bending the rules on tax, visas and corporate governance to ensure the money came here rather than elsewhere. In turn, the avalanche of money acted like an economic shock on the British economy. It made many individual Britons – playing the role of the ‘financial bag-carriers of the world` - rich themselves, while also creating destabilising grey markets and contributing to the mass flow of international money into the City that fuelled the bubble that preceded the inevitable crash.

This book provides a real life case study of the rise of the world’s multi-billionaires, Britain’s remarkable compliance in Russia’s capital flight and of the impact of the transfer on London where most of it landed. It mixes analysis with the narrative of a thriller – the twist being that it relates to real people.

Richard Murphy Domicile, Tax avoidance, Tax evasion

Polly Toynbee and the Guardian have followed up on my Comment is Free on the non-doms yesterday with more comment today. Polly said:

The revelation that Zac Goldsmith is a non-dom comes as no surprise. .. To David Cameron’s acute embarrassment here is yet another duck-island reminder.

Once Labour and the Lib Dems get this message across in next year’s election campaign, Cameron’s tax plans will look increasingly toxic – and politically inept.

Labour will draw its red lines in the pre-budget report next week. Darling needs to match the Liberal Democrats’ radical measures: taking the 4 million lowest paid people out of tax which is paid with a charge on the wealthiest properties is a not-too-subtle reminder of Gordon Brown’s hit on the low paid when he abolished the 10p tax band.

Labour has much to atone for in the tax system. After 13 years of wooing the City and enriching the rich, Labour finds the nerve to raise the top income tax rate only a month before it may leave office. Less noticed restrictions on top pension relief will yield even more – but all this is riskily late for Labour to reap the rewards.

A radical pre-budget report would catch Cameron on the back foot, his own tax plans leaving him damagingly vulnerable to charges of rewarding his friends and donors. Escaping his tax cut pledges will be as hard as spelling out how he can pay down the deficit faster than Labour’s already eye-wateringly foolish plan. Suddenly being Dave doesn’t look as much fun as it was.

The editorial hits different theme – of accountability:

[A]t the weekend it emerged that the man who must be the richest would-be Tory MP, Zac Goldsmith, is non-domiciled in the UK for tax purposes. This is not, as the Conservatives say, a minor and private matter. It exposes an obvious hypocrisy: that while the party preaches austerity, in practice that may mean austerity for everyone other than the rich. In his defence, Mr Goldsmith says he intends to change his status next year, and that he does pay tax in this country on his UK income. But that is not sufficient. Voters have the right to expect every Conservative candidate to meet their obligations as citizens.

For the Conservatives, just as for Mr Goldsmith personally, political morality comes as a whole; any retreat from consistency casts a shadow. A party that led the rhetorical charge against non-doms in Britain should not put a non-dom forward for election. A party that says the budget deficit is the priority should not be planning to cut inheritance tax. And a party that has spoken out against corporate excess should not, as the Tory treasurer did in a Financial Times interview yesterday, also promise to "cherish the City" and cut corporation tax.

Then there is the opaque tax status of Lord Ashcroft, the Victoria Cross-purchasing billionaire Tory deputy chairman. He promised to take up permanent residence in the UK when he took his peerage in 1999, but it remains unclear whether he pays tax in this country – and if so, how much. Senior Conservatives look uncomfortable when asked about his position and activities and that in itself is telling.

In a speech last Friday, the shadow chief secretary, Philip Hammond, said that Conservatives need to show "honesty and a clarity, with ourselves and with the electorate". He is right about that. Perhaps he should have a word with Mr Goldsmith, and Lord Ashcroft.

Both are on target and show that in addition to the outright discrimination on which I focussed there is much more to this issue.

Now it is time for people to see just what the new Tories are. Unfit for office is one description.

Richard Murphy Conservatives, Domicile, Ethics

I have the following article on the Guardian’s ‘Comment is free’ section today under the heading “The non-dom rule is racist”:

Zac Goldsmith’s embarrassment about his non-domiciled tax status is more important than it seems. It cannot be dismissed as simply being an effective blow landed by the Lib Dems in their campaign to retain a key seat; underpinning that blow are a much wider range of issues that relate to fundamental injustice and even illegality within the UK tax system.

The concept of domicile, like so much in UK tax law, has no legal definition. Your domicile is, in effect, your natural home. It is not your place of citizenship, or your ethnicity, or even where you live: it is the place to which you owe your long-term affiliation. To put it another way, your domicile is the place you consider to be your place of national origin.

The concept as used in UK law is, at its core, racist. It was of considerable value in the colonial era. When there were no passports and a quarter of the world was pink on the map, domicile made clear who you were; part of "Blighty", or not, as the case may be.

And, in a very real sense, that remains the case – except the tables have turned. Because domicile is a concept quite separate from tax residence (itself a concept in need of radical reform), the trick now is to be tax resident in the UK, but non-domiciled. That way, you get all the advantages of living here, but don’t have to pay all your taxes for doing so. Only your UK-source income and gains, and those income and gains you bring to the UK from abroad are subject to UK tax if you’re non-domiciled.

This is, of course, only of benefit if you have non-UK-source income and gains. For the vast majority of those temporarily resident in the UK – for example, the 3.8 million current non-UK-born UK employees representing 12.9% of the UK workforce – the domicile rule will be irrelevant. Their only earnings will arise in the UK, and if they are involved in remittances, they will be sent from the UK, not to it. But for a small minority of about 100,000 people, the rule provides something quite different: a unique advantage to structure their affairs so that they can pay very little or no tax in the UK, bar an annual membership fee for joining the non-dom club of £30,000 per annum, introduced in 2008.

Whether Goldsmith is exploiting this situation is not the real question. The real questions are fourfold. First, why do we let an elite who are as resident in the UK as anyone else pay less tax than others who are also resident here? Second, why do we allow non-domiciled status to be claimed by people who are born here, have lived here much of their lives and are so integrated into UK society that they are even MPs and peers here? Surely, better policing is needed when the loss to the UK from this rule is, in my current estimate, about £3bn a year? Third, why do we allow the UK to continue to operate as a tax haven in this way, at considerable cost to our international credibility and at cost to the credibility of the anti-tax haven campaign the UK is spearheading? And finally, and most importantly, why do we tolerate a tax law that is illegal?

As I have argued for some time, the terms of the Race Relations Act 1976 and the Race Relations Act (Amendment) Regulations 2003 make clear that unlawful indirect race discrimination takes place in the UK if a public authority provides a service that affords a person of one national origin a social advantage over a person of another national origin, unless there is a legitimate and proportionate objective that justifies that different treatment. The granting of non-domicile status is the provision of a service by a UK public authority and it does confer considerable advantage on those who are granted it without there appearing to be any legitimate and proportionate reason for doing so.

Those who lose are, of course, UK-domiciled people who cannot enjoy the tax advantage that non-doms have and which society could most certainly not afford to grant to all of us. The fact that it is the majority who are being discriminated against does not stop this being an abuse of the law, as it has been since national origin become a grounds for discrimination in 2003.

As Richard Wilkinson and Kate Pickett have shown, the more unequal a society is, the less successful it is. The UK domicile is about creating inequality on the basis of national origin – itself an illegal act. What better reason to get rid of it as an economically and ethically unjustifiable anachronism from a bygone age, exploited now only by the richest in our society so that they can get richer at cost to all the rest of us?

And knowing that this is the case is, no doubt, the cause of Goldsmith’s rightful embarrassment. We should save him his blushes: let’s abolish the rule, now.

What’s the reaction? That I’ve pushed the envelope too far: that the term racist cannot be applied here.

I’d ask, why not? Is discrimination on the grounds of national origin not racist when defined as such by our Race Relations Act? If it isn’t, what else is it?

I stand by my argument: I am convinced its right. The more the libertarians who like to comment on Comment is Free think otherwise the more I am convinced of it.

Richard Murphy Domicile

The Guardian reports:

Zac Goldsmith, the prominent environmental campaigner and Tory parliamentary candidate, was tonight forced to deny opposition claims that he had "dodged" paying taxes in Britain.

As it notes:

Goldsmith, who is standing in the key marginal seat of Richmond Park, west London, confirmed that he retained the non-domiciled tax status inherited from his billionaire father, Sir James Goldsmith. He said he had derived "very few" benefits from being a non-dom and had already decided to give it up.

British citizens with interests abroad can register for non-domiciled status, meaning they do not pay tax on earnings made outside the UK.

Although his father was Anglo-French, Goldsmith grew up in Britain. The bulk of his inheritance remains in a Cayman Islands-based family trust which bought his UK homes, in Richmond and Devon, where he farms organically. In his statement, Goldsmith said he paid UK income tax on UK-generated income.

After consulting his accountants, PricewaterhouseCoopers, Goldsmith, 34, said: "My annual tax returns are all signed off by the Inland Revenue and there are no outstanding matters between us … despite having been non-domiciled because of my father’s tax status, I have always chosen to be tax-resident in the UK."

There are three things to say. First, you basically can’t claim non-domiciled status unless you have tax reason to do, so he is bound to get benefit. Second, if the trust from which he benefits is discretionary (and I have little doubt it is) then his statement is true and completely misleading at the same time: he gets no benefit from his non-dom status but the fund from which he benefits is clearly abusive. And third, there is no way in which Goldsmith can be an MP and be non-domiciled. How can anyone say the UK is not his natural home, his allegiance is elsewhere, and use that to avoid tax, and then want to be an MP supposedly upholding our tax system and holding our executive to account?

One of the essential reforms that are long overdue with regard to our tax system is the abolition of the domicile rule, something for which I have long campaigned. Another long over due change is that all MPs and Lords should be deemed domiciled and fully tax resident in the UK.

I’d suggest Darling puts it in the pre-Budget report. it’s a vote winner.

Richard Murphy Conservatives, Domicile, Ethics