One contemptuous feature of
Britain's finances is a tax break for individuals called "non-domiciled
status." The more than 200 years old tax break was designed to attract
wealthy foreign investors to Britain by allowing them to keep any money they
earn out of reach of the British Taxman. We are the only nation in the world to
have such a system and HMRC has long suspected that some “non-doms” have been
using the status to avoid tax on money made in Britain.
The tax break is available to any
individual normally residing in Britain who either was not born in Britain, one
of their parents was not born in Britain, or they are British and have spent an
extended period of time abroad. Anyone apply for non-dom status must also prove
a connection with family or a business abroad and declare it is their intention
to eventually leave Britain. HMRC declare there are 114,000 non-doms currently
living in Britain.
One of the ways in which the status
is known to have been abused is when a non-dom, who owns a British company
transfers the company to an offshore tax haven and sets up a trust that is
declared as owner of the business. Profits generated by the business are
legally foreign income and therefore not subject to UK corporation tax. If and
when the company is sold, gains are again legally foreign income and therefore
not subject to UK capital gains tax.
However the rule was never intended to
shelter British assets, yet all attempts to change or abolish non-dom status
have been met with strong criticism, including when former leader of the labour
party Ed Milliband announced the parties intention to scrap the rule during the
recent general election campaign. In an attempt to crack down on abuse the then
labour government introduced an annual charge for claiming non-dom status of
£30,000 and this has subsequently been increased to up to £90,000 depending on
how long the individual has been resident in Britain.
Prominent tax lawyer Jolyon
Maugham once said that generally speaking “there is no rational basis for a
system that transfers ownership of this UK income abroad.” But even when
non-dom status is used as intended, it is controversial, as all other British
residents pay tax on worldwide income, regardless of where they make it. Staunch
opponents of the favourable treatment include captains of British industry and
establishment newspapers such as the Financial Times, who say non-doms get an
unfair way to avoid taxes. The system's backers include employers' group the
Institute of Directors and free-market think tanks, say the non-dom status
attracts foreign talent and money at no cost to the taxpayer.
One high-profile businessman who
is known to be a non-dom is business guru James Caan. Having been born in
Pakistan entitles Mr Caan to non-dom status. In 1985 he set up a recruitment
consultancy called Alexander Mann in London Mayfair and built it into one of
Britain’s biggest talent acquisition and management services groups. In 1998
Caan transferred ownership of the company to a Jersey based family trust
of which he was a legal beneficiary. The trust sold the company to private
equity firm Advent International in 1999 for £130million. As the company was
foreign owned and Mr Caan has non-dom status, he was able to legally avoid
paying any capital gains tax on the sale that might otherwise have been due.
Former racing star Jackie Stewart
is an example of how non-dom status lets’ even Britons send profits earned in
Britain offshore. Stewart moved to Switzerland in 1968 but in the 1990s,
returned to live in Britain so he could establish a Grand Prix team. His
company, Stewart Grand Prix, was based in Britain but was owned via a Jersey
trust for the benefit of Stewart's family. In 1999 the team was sold to Ford
for £76million. As the team was held by an offshore trust and Stewart was a
non-dom the windfall was not subject to UK capital gains tax.
For 25 years Harrods Egyptian born
Mohamed Al Fayed who is a non-dom owned department store. In the 1990’s Inland
Revenue alleged that enormous dividends from Harrods were being sent offshore.
This lead to an agreement between the two parties whereby Al Fayed would pay
around £200,000 in tax annually regardless of how much he earned between 1985
and 2003. When he sold Harrods to Qatar Holdings in 2010 for a reported
£1.5billion, it was registered to a family trust in Bermuda and given his
non-dom status, Mr Al Fayed was required to pay no capital gains tax on the
proceeds of the sale.
Foreign national footballers
playing in the English & Scottish leagues are also known to abuse the
non-dom tax status. As they are not British born and will in all probability
leave Britain at some point in the future, they too qualify for the tax
benefit. Earning huge sums of money they are able to avoid income tax by
legally having their salary paid into an offshore bank account, often in their
home country. These are then legally classed as foreign earnings and provided
they are not brought back into Britain, will never be subject to any UK tax.
The players then sign lucrative sponsorship deals, which are subject to UK
taxes to cover living expenses.
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