8 April 2022

In defence of the non-doms

By

Reports on the Chancellor’s family finances have given fresh impetus to the debate on the fairness of the ‘non-dom’ system. Leaving aside the political ramifications for Rishi Sunak, the Government should consider all the implications for the British economy before making any knee-jerk decisions about reforming the system.

First, a brief history. Non-domiciled status is not some new tax wheeze. It has been around some 200 years, since it was used to protect colonial investments in in the days of the British Empire. It essentially means someone doesn’t have to pay tax on earnings they make outside the UK, unless those earnings are remitted to the UK, in which case they become subject to British taxes.

One of the most common arguments against the status is that the ‘loss’ of tax receipts from non-doms has to be covered by ordinary UK citizens. According to this line of reasoning non-doms – usually very rich and always international – are effectively being subsidised by ordinary taxpayers. There are two problems with that claim, however.

One is that non-dom status affords beneficial tax treatment within the UK. That is simply not the case. Non-dom status is explicitly about money made overseas, and everyone – regardless of their domicile – must pay appropriate UK taxes on money they make here. The moment someone brings money made in another country onto these shores, they become liable to UK taxes. Effectively, non-dom status just prevents someone being taxed twice, once by the country in which they are domiciled and again the country they reside in (we do also have double taxation treaties with some countries which serve the same purpose).

The second misunderstanding is about the incentive that non-dom status creates. By letting wealthy people move here without having to pay double taxes on their earnings from another country, Britain becomes a more attractive destination for high-net-worth individuals. That in turns brings some significant benefits.

Firstly, for the Treasury; where rich people go, their tax receipts follow. Even if their foreign income is taxed overseas, they are still liable for all of their UK-based activity, including any businesses based here. And given that non-dom status invariably applies to rich international business people, those tax receipts are significant.

HMRC estimates that non-doms are liable to pay £7,853 million in UK Income Tax, CGT and NICs in the tax year ending 2020. As the chart below suggests, since rules restricting the conditions for non-doms came in in 2017, both the number of non-doms and the amount of tax they pay have fallen. Some may have changed their status to be domiciled in the UK, but there is still scant evidence that other British taxpayers have been ‘subsidising’ them – if anything, it’s the other way round.

.

.

It’s not just about tax receipts though. Not only does the wider economy benefit from the significant amount of money non-doms spend, but also from the business acumen that international entrepreneurs bring to the UK, and the jobs that follow.

Of course, if the last decade of British politics has taught us anything, it’s that economics is not the be all and end all. Many object to non-dom status on the grounds of fairness, by asking what sort of country we want to be. Is it fair for a select few to benefit from these arrangements and avoid paying their fair share, leaving the bill to be picked up by the rest of us? Well, leaving aside that that argument falls down on the details (as discussed above), leaving these rules in place is about promoting a vision of a global, competitive and outward-looking economic player – one that doesn’t put up needless barriers to its own prosperity.

As ministers often say, we want to attract the best and brightest from around the world and the non-dom arrangements are a part of making Britain an attractive place for talent from around the world to come and bring their expertise, and spend their money, on these shores. Far from giving them unjust support, all the non-dom regulations do is ensure that they are not unfairly penalised for economic activity undertaken in other countries.

There may well be questions for the Chancellor to answer on exactly how he expected this to play out politically, as this website’s editor has pointed out. But when assessed in the round, our non-dom regime is a valuable part of the internationalist Britain we should all want to see.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.