Week in Business: Non-dom tax U-turn makes sense but what about the rest of us?
I was at Royal Ascot earlier this week, losing money in the sunshine, and as I watched the horses thunder down the straight, it occurred to me that Rachel Reeves is trying to close the stable doors after the thoroughbreds have bolted.
I refer to the non-doms, the mega rich taxpayers who have packed up and left – leaving the Chancellor scrambling to water down her non-dom tax changes. Too little, too little? And more to the point, what about the rest of us?
The fact is, most of us will go our whole lives without ever encountering one of these near-mythical non-doms – ultra wealthy individuals who, until recently, benefited from special tax rules that protected their overseas income from the clutches of the UK Treasury.
By definition, they move in different circles, live on different streets, lead different lives from the rest of us, but as a nation, there’s one way in particular where their contribution has been felt – the taxes they do pay, or have paid, here in the UK.
Before the government clamped down on the rules, ending an arrangement that had worked for decades, there were around 70,000 people claiming non-dom – or non UK domiciled – status, and they paid an average of £120,000 a year in direct UK taxes. Some paid less than that, others paid a lot more – some paying millions of pounds on their UK activity while their foreign wealth was treated as just that – foreign, not our business.
The last government started to fiddle with the rules and the Labour government went even further, announcing that the non-dom status will be abolished and that foreign wealth will fall under UK inheritance tax rules.
In April, worldwide assets of all those enjoying UK residency became liable for UK inheritance tax at 40 per cent.
An entirely predictable exodus
Unsurprisingly, indeed entirely predictably, a lot of non-doms simply said ‘nope, not having that’ – and they left the UK for more favourable regimes. Countries such as Italy have welcomed them with open arms.
Now it seems that faced with the reality that the non-doms reforms won’t raise anything like the amount claimed – and could in fact be a net loss to the Treasury – Rachel Reeves is said to be reviewing the inheritance tax rules in a bid to ensure that the UK remains attractive and competitive.
The government wants foreign investment – it needs it – and it seems the Chancellor has finally woken up to the fact that people – including the mega rich, in fact particularly the mega rich – are sensitive to punitive tax raids.
The thing is, the damage has been done – the UK is still attractive – for lots of reasons – but it is no longer seen as a welcoming and logical jurisdiction for the globally mobile ultra wealthy.
A panicked U-turn from the Treasury might stem the losses, but it won’t repair the damage caused by the government’s illogical and ideological tax hikes.
But here’s the thing, if Reeves has looked at the numbers and conceded that she might have gone too far – and that is what the numbers show – why reserve a policy correction for the mega rich?
What about the rest of the country?
The imposition of VAT on private school fees has backfired – schools have closed and thousands of pupils have moved into the crowded state sector – many thousands more than the government said would be the case. The policy will not raise the money that ministers claimed and the state sector will pay the price.
Like the non-dom crackdown, it was an ideological decision – something that served Labour well in the campaign but now, in real life, is backfiring. They should apologise, and scrap it.
The hike in National Insurance contributions for employers is chilling the jobs market – making it impossible for many businesses to hire. They should apologise, and scrap it.
That tax hike on jobs has also led directly to a disastrous crunch in business investment – with the CBI saying this week that it’s seen businesses’ investment plans slump to the worst level in five years, leading the business group to slash its forecasts for UK economic growth. That’s what happens when you increase taxes on jobs. The government should apologise, and scrap it.
The cruel decision to extend inheritance tax to farms and family businesses will have – is having – a terrible effect on the finances and future plans for people all across the country. The government should apologise, and scrap it.
Doom-loop of low growth and high tax
You take my point. And of course, I don’t expect the government to U-turn on any of these headline tax changes. Indeed, as you know, I fully expect them to raise taxes yet again in the Autumn Budget as we enter a doom-loop where tax hikes cause low growth so the government hikes taxes to fill the black hole.
A tweak to the non-dom rules is sensible, it’s necessary – but not sufficient. The damage caused by this government’s £40bn tax raid on UK employers, businesses, farmers and founders is having an entirely predictable effect.
The Chancellor may have woken up to the damage caused by a small part of that agenda, but I’m afraid she’s still asleep at the wheel when it comes to the rest of us.