The FT on domicile

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The FT has a first rate article on domicile this morning by Vanessa Houlder, recently voted tax journalist of the year. She rehearses a lot of familiar ground, but it's important that she does: the straightforward injustice of the domicile rule remains shocking however many times it's told. She notes:

Caroline Garnham, a partner at law firm LG, argues that scrapping the remittance rules is the key to resolving the controversy over domicile. The government could increase taxes from non-domiciliaries without provoking a mass exodus by imposing tax - at the full income tax rate - on any money brought into the UK, whether capital or income. Exceptions could be made for inward investment.

This idea would reduce the incentive to claim non-domiciled status for less wealthy individuals and those intending to stay in Britain in the long term. Those earning significant sums in the UK would hardly be affected, while those living off their investments - who currently often pay no direct tax - would face significant, but not punitive, tax bills.

This pragmatic reform might be easier to introduce than other ideas being advanced by critics of the current regime. Some advocate a minimum tax for non-domiciliaries, possibly based on property values. Others suggest a cut-off point - two numbers suggested being 10 and 17 years - beyond which non-domicile status could not be claimed, although tax advisers say this would almost certainly drive away some people who benefit the economy.

The fear of damaging the UK's prosperity by driving out high spenders and earners has given the Treasury a strong reason to tread carefully. But there are risks in doing nothing. Many individuals are only willing to comply with the tax system if it is perceived to be fair.

Jane Kennedy, a junior minister, last month told parliament that any changes would require a careful balance of "ensuring fairness and of promoting the UK's international competitiveness". Closing the loopholes on capital gains and remittances could go some way towards achieving this.

Actually, just getting rid of the rule would be even easier. All other economies (bar Ireland) survive without such rules. Which proves they're unnecessary.

The reality is that they're also unworkable because they cannot be adapted in any fair way. Arguing that money should be taxed when brought in to the UK at income tax rates is clearly unreasonable: we don't tax capital here at that rate, and this money may have already been taxed elsewhere: double tax treaties would require credit be given in that case. The logic from LG (who should understand complexity) is flawed in this respect. As are all the other attempts at modification.

So, these rules must go. Indeed, as Vanessa noted:

Nor does everyone accept the conventional wisdom that British people benefit from the influx of international talent. Richard Murphy of the Tax Justice Network, a group that campaigns against tax havens, argues that the domicile rules amount to "state aid" that helps employers to recruit foreigners in place of British workers by lowering their payroll cost. One explanation for the poor performance of the national football team is that the recruitment of foreign stars by clubs makes it harder for English footballers to get experience of playing at the highest level.

I did indeed say that. If tax relief is a way of spending taxpayer's money (and it is) then the domicile rule is a massive waste of that money. It's also an unjust waste. And what is more, not one of those people who argues people will leave or that we'll lose tax can prove their point because there is no data with which to do so. Idle threats should not be the basis of either justice or economic policy. I think the FT agrees. All but the lawyers, accountants and tax abusers who know they win from the domicile rule now know the time has come for reform. We can no longer tolerate two tax laws in the UK, one for a wealthy and powerful elite and another for the rest of us. But that's what we've got.