Controversy about the UK's non-dom regime refuses to go away and the author of this article argues that ending the system, while superficially appealing to those fired up about issues of "fairness", would be neither fair nor sensible.

The status of non-domiciled persons in the UK continues to be a political debating point. The benefits of non-dom status have been squeezed by Labour, coalition and Conservative governments in recent years. Now the Labour Party, the principal opposition party in the UK, wants to get rid of the non-dom regime. Coupled with likely moves towards higher income and capital gains taxes, a wealth tax, and other imposts, life for high net worth individuals (and for those even quite a bit lower down the wealth spectrum) could take a decided turn for the worse if such ideas were ever to enter law. That, of course, is a big “if” given current public opinion polls. But whatever the shape of UK politics in the next few years, there appears to be a decidedly leftward, statist tilt to politics in several countries. 

To make sense of the non-dom situation, Mark Davies, managing director of Mark Davies & Associates, a London-based firm, considers the issues. The editors of this news service are pleased to share these views and invite readers to respond. The usual disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

“A non-dom, doctors, builders and some other friends walk into a bar…..”

This sounds like the start of a joke, I will explain shortly, but in the meantime I want to discuss Labour’s plans for a “fair taxation system”.  

In an interview with the Times newspaper last week and in his speech at the Labour party conference, the shadow chancellor John McDonnell said that non-dom status would be scrapped as it was offensive to “ordinary people”. 

A Labour spokesperson has subsequently confirmed that non-dom status would be abolished in the first budget of a Labour government saying, “UK residents should pay their tax to support our public services and infrastructure”.

I want to cover three things in this article. Firstly, I want to discuss why non-dom status is considered “offensive to ordinary people”. Secondly, I want to talk about the fallacy that non-doms do not pay tax to support our public services. Finally, I want to discuss whether our tax system is fair. 

Non-dom status is regularly mis-reported. In a nutshell, a legitimate child has a foreign domicile, in other words they are a “non-dom”, if their father has a foreign domicile. This rule applies to a person all their life unless they decide to abandon their original domicile and move somewhere else with the intention of staying there permanently. A non-dom can elect to pay tax on the “remittance basis” which means that they pay tax on UK sources of income and gains, but they do not pay tax on foreign sources of income and gains unless these sources are spent or enjoyed in the UK. 

It is this perceived unfairness, that a non-dom can claim the remittance basis but an ordinary person cannot, that might make it “offensive”. But most ordinary people do not have foreign income, in which case all other things being equal they pay no more or less if the law changed. 

A recent survey by Deloitte concluded that most of the UK does not understand our tax system. Only one in ten thought that the UK tax system was fair, but only one in ten knew what the top rate of income tax is. There are clearly grounds to demand better education in tax, rather than simply endorsing people’s misconceptions of fairness. 

Where a spokesperson says that “UK residents should pay their tax” as justification that non-doms ought to pay the same tax as everyone, it is inferred that non-doms do not pay their tax.  This simply is not true. HMRC’s statistics released this summer showed that in 2017-18 there were 78,300 persons claiming non-dom status and together they paid income tax and national insurance contributions of over £7.5 billion ($9.43 billion). 

A detailed breakdown of these figures was not available but in 2016-17 those non-doms who had been in the UK the longest paid tax of roughly £500,000 per annum each on average. This group is just 2,500 persons, but collectively they paid almost £1.3 billion in tax in a single year.

Certainly non-doms might pay more tax if they paid tax on their worldwide income like everyone else, but this presumes that non-doms stay in the UK, once one of the reasons for them being here is not available. These are highly mobile people with few ties to the UK and they can chose one of many jurisdictions that convey tax advantages to wealthy immigrant investors.   

Finally, I promised the reader an explanation of “a non-dom, doctors, builders and other friends walk into a bar” and my thoughts on whether the UK tax is fair. 

If we imagine an individual non-dom and another 768 friends walk into a bar, let us assume that the bar bill is £194 billion, which is an estimate of the total income tax payable in 2019-20. 

Of the friends, just under half (the unemployed, elderly and the young), pay nothing towards the bill. 

347 friends (roughly 45 per cent), are the basic rate taxpayers (builders etc.) pay roughly one third of the bill. 

49 friends (roughly 6 per cent), are higher rate taxpayers (professional people such as doctors etc.), would pay roughly one third of the bill. 

The final third of the bill is paid by the non-dom individual, and his five other high earning friends who pay tax at 45 per cent, who together represent less than 1 per cent of the population.  

Certainly, it is a matter of natural justice that those most able to pay should pay the most, but that two thirds of the country’s income tax bill is paid by the top 7 per cent of the population is worrying. It is worrying because the reaction of this segment to any tax changes has a disproportionate effect on the tax collected. Thousands of basic rate taxpayers could leave the country without much impact on the tax collected. But, a few hundred of the most wealthy leaving the country would have a large impact. 

In this example, the non-dom individually pays 1/25th of the total bill. I urge John McDonnell to refer to the former shadow chancellor Ed Balls in the 2015 election when he acknowledged that scrapping non-doms would end up costing Britain money.