Unwise hostility

  • Author : Andrew Rodger
  • Date : June 2010
ABOUT THE AUTHOR: Andrew Rodger is Executive Director of Stonehage

Stonehage recently commissioned a survey of leading private client advisors to assess the impact of the Finance Act 2008 (FA 2008) on Britain’s resident non-domiciled population (RNDs). The FA 2008 imposed a GBP30,000 charge on RNDs resident in the UK for at least seven years and wishing to remain taxed on the remittance basis and also made significant changes to the tax rules applied to offshore trusts and to personal allowances for RNDs. This followed a review in December 2007, the stated intention of which was to: be fair, support the competitiveness of the UK and be clear and easy to operate.

Stonehage’s report, like that previously commissioned in 20071, aims to provide a balanced view of the contribution made to the UK by RNDs and identify the main effects of the FA 2008 on any decision to choose or reject the UK as a jurisdiction in which to live and work.

Both reports aim to collate the data necessary to properly understand the dynamics of the relationship between RNDs and the UK. It is hoped that this can form a basis for an informed debate and ultimately an effective policy.

RND tax contributions and spending patterns

Data obtained from HM Treasury (HMT) suggests that Britain’s RND taxpaying population has grown steadily over the last ten years at an annual rate of around 4 per cent a year. The latest figures from HMT for the year to April 2008 put the RND population at 140,000.

Stonehage analysis of HMT and HM Revenue & Customs (HMRC) data indicates that the total annual income tax paid by RNDs in 2006 was approximately GBP3.9 billion, and the total spend by RNDs was over GBP16 billion.

HMRC and HMT no longer provide detailed information on the RND population. However, the limited material available points to an income tax total of GBP4.5 billion for 2008, implying a total spend of GBP19.4 billion.

This indicates a sharp increase on the results of the previous research, reflecting the growth in the RND population. The total tax, including stamp duty and VAT, paid by RNDs was calculated at GBP8.3 billion in 2008.2 The largest component was the GBP4.5 billion raised in income tax, with GBP3.4 billion in VAT and GBP350 million in stamp duty.

The increased complexity and uncertainty of the rules was seen by more than half of advisors as the most important reason behind the decision of their RND clients to change their residency
FA 2008 – the impact

A large majority (81 per cent) of those professionals surveyed said that up to 25 per cent of their RND clients had already decided not to be UK tax resident over the medium-term.

When advisors were questioned further about the actual percentage that had ceased to be UK tax resident already, the percentage was ‘up to 5 per cent.’ The bigger firms reported the highest percentage of people changing their residency since November 2007. An average figure for RNDs who had already changed their status was in the 1 per cent to 2 per cent range.

Unsurprisingly, given the relative newness of the rules, there was a marked increase in the percentage of RNDs who had consulted their advisor about moving their residency elsewhere. Around 13 per cent of the advisors questioned said that more than half their RND client base had sought advice about moving and a further 13 per cent said that more than a quarter of their client base had sought advice about changing their residency, with nearly two thirds of advisors reporting that up to a quarter of their RND clients were enquiring into moving.

Reasons for RND concern

The reasons given for leaving were almost totally unrelated to the cost of the GBP30,000 charge per se. A vast majority of those surveyed, more than 80 per cent, said that the cost of the charge was not important in the decision of RNDs to leave.

The increased complexity and uncertainty of the rules was seen by more than half of advisors as the most important reason behind the decision of their RND clients to change their residency. Increased tax on remittance was seen as quite important in RNDs’ decision to leave, as were increased professional fees. Nearly half, 47 per cent, said that the feeling that RNDs were no longer welcome in this country was a ‘very important’ factor in their decision to leave.

What if the FA 2008 had never happened?

Assuming that the numbers of RNDs continued to grow at 4 per cent and inflation were 2 per cent, the government might have expected to collect an additional GBP6 billion a year by 2018, bringing the total anticipated tax raised to GBP14.9 billion in 2018. Figure 1 (p.53) sets out the projected total tax revenues, assuming the changes in the FA 2008 had not occurred, with various population growth assumptions.

Figure 1: Total Tax revenue (per annum) from RNDs (2009 – 2018) at a different growth rate projections

Figure 1 above is based on the initial GBP8.3 billion for the total tax contribution (VAT, income tax and stamp duty) from RNDs using 2007-2008 data. The analysis demonstrates how tax revenue from this group would be expected to grow in the normal course of events over the next ten years. Any slowdown in the net growth rate of RNDs would have a substantial impact on any anticipated increase in tax.

The government estimated that changes to the FA 2008 would raise an estimated GBP650 million annually from the GP30,000 charge, the changes to personal allowances and the changes to remittances from offshore trusts. See Figure 2 below.

Figure 2: Additional tax revenue per annum from FA 2008 – assuming initial population loss and reduced growth rate of population

Figure 2 above the net gain from the new tax regime at varying rates of long-term loss of trend growth3 of RND population numbers. Two points are immediately obvious as a result of the changes. That a loss of growth from the reduced population would equate to a potential revenue loss if the growth rate diminished. The timescale of this effect could be as soon as over the next five to ten years.4

An initial migration from the UK of 2 per cent, evidence of which is clearly supported by the data from Stonehage’s survey, would produce an initial GBP166 million loss of potential revenue. It would take only a low level of migration to erase any gains from increased revenues from the GBP30,000 charge and the other changes.

If, as expected and as evidenced in the survey, the annual growth in the number of RNDs slows from 4 per cent to 3 per cent, it would take only five years for the government to take less tax than it does today from RNDs, despite the additional revenue raised by the FA 2008.

Worryingly, these estimates are based on the UK competing with a static competitive arena of other centres. It is more likely that the UK will be facing an increasingly competitive taxation environment.

Reform – a real opportunity

The fairness of the current UK system is a matter of great debate. However, the remaining objectives of the December 2007 review do not appear on the evidence available to have been met.

The research demonstrates that there is a clear opportunity to reform the RND tax regime in a way that not only enhances the attractiveness of the UK as a place in which to live and work, but also increases tax take and spending in the UK.

Not one issue

The issue is not, in this instance, specific tax rates or even the GBP30,000 charge. RND contribution to the UK is not limited to tax take and spending. There is clear evidence that RNDs bring entrepreneurial talent and business networks, investment and employment to the UK too. It has not been possible to enumerate this benefit. However, there is no doubt that it is very significant indeed.

The effects of the 2008 changes could be mitigated by a system that results in:

  • terms fixed for several years,
  • terms that are straightforward to comprehend and implement,
  • no need to incur large legal and professional fees, and
  • no obligation to provide extensive information about non-UK assets, beyond that required to dispel any reasonable and specific suspicions about the source of funds brought into the UK.

Above all, any government must act to calm fears that the UK is simply hostile to RNDs. As the economic narrative unfolds, the debate over the contribution made by wealthy families will intensify. It is clear that other jurisdictions around the world are making serious efforts to attract wealthy entrepreneurs. In the face of economic pressure, the competition to attract the world’s wealthiest families is intensifying.

It may be that the political benefit of being seen to squeeze the rich will at some point be deemed an unaffordable luxury. How long it will take for this process to unfold is anyone’s guess. In the meantime, the RNDs are making plans.

‘Non-Doms and the UK Economy’, Stonehage, October 2007 (The 2007 Report).
Methodology based on the 2007 Report.
4% real and 6% nominal.
Assuming a 0.5%-1% reduction in trend

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