Non-doms deserting the UK

Since the financial crisis, there have been cries from many quarters that wealthy people should be required to pay more tax.  Morally it is hard to argue that the rich should not share some of the burden of fixing the fiscal deficit through higher taxes, but the difficulty is that if you tax the wealthy too much they often have an option open to them which is simply not available to many of those of far more modest means – and that is simply to relocate to a lower tax jurisdiction.  Those in favour of higher taxes on the rich tend to dismiss this possibility as scare-mongering, saying that the wealthy choose to live in the UK for many more important reasons than tax, whilst those who make their living representing the affairs of the well-heeled sound dire warnings every time a tax increase is proposed.  It was therefore with interest that I read the results of a recent study by law firm Pinsent Masons (“PM”), to try and get a factual perspective on whether higher taxes do indeed cause the wealthy to leave.

And it seems that they do. According to the PM report, the number of UK registered non-domiciled individuals fell by 2,000 in 2012, and by 24,000 since an annual £30,000 non-dom levy was introduced by the UK government in 2008.  This represents a 17% drop in the number of non-doms in the UK since 2008 – a significant fall by any standards.

The introduction of the £30,000 levy (which rises to £50,000 for those who have been in the UK for 12 or more years) is one of a range of measures which have been introduced which are unpalatable to many non-doms, including a 50p top rate of income tax (albeit that this is to reduce to 45p this year), increases in CGT, increases in stamp duty on residential properties (and a clamp down on structures designed to reduce the stamp duty), and frequent public debate about the possibility of a “mansion tax”.

According to PM, together these represent an “increasingly hostile tax code” for high net worth individuals, which is undermining the Government’s efforts to attract more non-dom investment in UK businesses.

Jason Collins, Head of Tax at PM added: “Non-doms are more important to the UK economy now than ever before. They have huge spending power, invest in businesses and create jobs. They can’t do this if they aren’t here – and there are plenty of other countries competing to welcome them to their shores.”

Of course, the fact that 24,000 non-doms have departed UK shores may not be a bad thing if the various measures introduced to raise more tax from this grouping have lead to a balancing influx of tax receipts.  Trying to compute this is immensely complex, but PM point out that the non-dom levy has actually only been paid by less than 5% of non-domiciles in each year since it was introduced and last year generated a relatively paltry £168 million for the Treasury.  I suspect that the direct and indirect contributions to the Exchequer by the 24,000 non-doms who have departed since 2008 would be significantly greater than £168 million.

“The threat of the levy is driving high net worths away, but to make matters worse it is not even a significant revenue generator to make up for this,” said Collins.

And this sums up the problem with the current debate around taxation.  The UK government is increasingly taking decisions which are designed to appease an angry public who feel that the wealthy should contribute more in times of hardship.  But whilst the spin-doctors may love it, it is a pyrrhic victory if the net result is a further decline in tax receipts.