Is the sky falling in?

It is, sometimes, Parliament, a wonderful thing. Here’s Charles Walker (Broxbourne) (Con.), moments after describing himself as “a capitalist, red in tooth and claw”, talking in 2008 about the levy on non-doms:

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He’s tackling – head on – the one reason why we offer a tax sweetener to the wealthy with foreign connections to move to or stay in the UK. I’ve written elsewhere about the perverse effects flowing from the poor design of that sweetener. I’ve also asked some questions about whether HMRC are effectively policing it (and there is more to follow on that front). What I want to do today is look at the data: does it support the case that we need it to bring the wealthy into the UK – or keep them here?

But before I get to it, a few observations:

(1)  if you’re wealthy, thinking about moving, and comparing possible places to live you absolutely compare, amongst other factors, tax regimes. Our non-dom regime has something of a gravitational effect;

(2) the power of this gravitational effect is not constant. It might pull you here – but it doesn’t follow that you continue to need it to stay. Once you’ve found a comfortable social and cultural orbit – something London absolutely offers, at least to the wealthy – the removal of any tax sweetener that factored in your decision to move here will operate only weakly in your decision whether to stay;

(3)  cultural factors are important. The percentage of millionaires in New York (which doesn’t have a non-dom rule) is about a third higher than that in London (although it should be noted London does much ‘better’ when it comes to billionaires);

(4) the percentage of millionaires in both London and New York is a tiny fraction of that in the tax havens of Monaco, Zurich and Geneva. This should cause you to ask whether tax really is a major factor in London’s appeal to mobile individuals. Those motivated principally by tax have – and choose – ‘better’ alternatives; and

(5) I think it’s beyond sensible dispute that there are economic benefits for us all in attracting the wealthy to the UK. Many of the arguments to the contrary are, as I have argued elsewhere, confused.

Anyway. Those observations aside, the data.

What follows is a table garnered from various ‘official’ sources (to avoid clogging up the post, the sources for all of the data are given in a ‘comment’). The table shows the number of non-doms registered with HMRC over time. Do the Chicken Little arguments of those law firms who advise non-doms – that the effect of the introduction of the non-dom levy has been cataclysmic – stand up?

The non-dom levy was introduced in the tax year 2008-09. The number registered as Non Dom then in the country was 123,000. The number registered as Non Dom for the last available year (2011-12) is… 123,000.

The apparent peak was 140,000 in 2007-08. I say ‘apparent’ because there are very good reasons to be sceptical. It can only be right if there was a huge jump from 2005-06, followed by a matching huge fall to 2008-08 and all against a consistent pattern of gentle increase.

What does this mean? The only argument for tax sweeteners is that we need them to attract or retain the mobile wealthy. If – as the data shows – reducing those sweeteners hasn’t materially affected our ability to attract or retain them, it’s entirely proper to ask whether removing them would.

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Note: I have not found figures for 1997-98, 1998-1999, 1999-00, 2006-07. The table, therefore, assumes a steady progression between the ‘known’ numbers on either side of the missing years.

Why are HMRC not challenging non-dom status?

There’s a surprising dearth of data on non-doms in the UK. In one sense this isn’t a surprise. The overwhelming majority of the perhaps 4.9 million non-doms in the country won’t have substantial assets or income abroad. Their domicile status won’t be of interest to them – and it won’t be of interest to HMRC.

But even in relation to those for whom the status is financially meaningful, data is not routinely published. About 114,000 were registered non-doms 2005-06 (before the introduction of the ‘remittance basis charge’). And about 118,000 were registered in 2009-10 (after its introduction): the latest year for which I have been able to find data. Of those 118,000, the charge was paid by 5,100 people (4.3%). Many of the remainder are likely to be ‘newer’ non-doms: the charge is only payable if you have been resident in the UK for seven out of the preceding nine years. (Putting the matter another way, you can be a resident non-dom for six years and claim the remittance basis without incurring liability to the charge.)

So the figures we have are out of date. But the more important data deficit – for those attempting to understand the tax consequences of our decision to maintain non-dom status – is our ignorance of the amount of tax we forego. As Ed Balls explained back in 2007, information is not held on overseas income and gains that do not give rise to a tax liability in the UK.

The numbers will be substantial, though. Iain Tait, who heads the Private Investment Office of London & Capital, described the £50,000 remittance charge as “largely symbolic.” However you carve it, there will be many billions at stake.

One of the odd things about non-dom status – and there are many (see this piece I wrote last Friday) – is that your possession of it at any given time is a matter of your then present intention as to your future status. I was brought up in New Zealand: do I now intend to return there at some stage in the future? That might not be such an easy thing for HMRC to assess. But judges are well used to such questions. State of mind is a critical element of pretty much every criminal offence. It’s also worth remembering that the burden of proving possession of non-dom status rests on s/he who claims it.

Against that background – vast amounts of tax at stake and so every reason for both sides to fight, a Revenue authority which may not be best placed to assess status, and judges trained to do exactly that – you might expect to find a slew of cases in which HMRC have sought to test entitlement to domicile in the courts. I know I did. But I was wrong.

In the last ten years (which is as far back as I checked), there’s only been one concluded challenge to domicile, nine years ago. There’s also a single indication of a challenge to come.

Many of us in the profession are surprised at HMRC’s seemingly ready acceptance of assertions of UK non-dom status. This morning’s Guardian account of Stuart Gulliver is a good example: it reports he went to University in Oxford, lives in the UK and is married to an Australian. The FT adds that he grew up in Plymouth, and chooses to be based in London. The Independent says he was born in Derby. But he is nevertheless, apparently, accepted to be domiciled in Hong Kong. Now, I’m not saying that conclusion is wrong – but it does raise questions.

What does all of this evidence? A reluctance on the part of HMRC to take on the richest and best-lawyered? A policy decision not to alienate the most mobile? Or merely that us tax professionals are wrong to be surprised. Whatever the answer, it’s a pretty striking state of affairs.

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A bribe for the wealthy to move to, or remain in, the UK

Late February. How’s your New Year’s Resolution going? Not so well? Congratulations, you possess a necessary (but happily for George, not sufficient) qualification to be the next Chancellor of the Exchequer.

In its first Budget, 22 June 2010, this is what the Coalition said:

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But am I making some party political point? I am not. This is what Labour said in its Pre-Budget report 2002:

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And these are but the last two in a long line of failed resolutions: changes were considered in 1994, 1988 and…

There have been some reforms: Labour introduced a levy for non-doms: a £30,000 annual membership fee to belong to the best tax mitigation club there is. And the Tories have changed the fee structure to reflect the (perfectly sensible) notion that the less deserving you are of club membership, the more you should have to pay to continue to belong. Come April, if you’ve been resident in the UK for 17 of the last 20 years, it will cost you £90,000.

But proper reform? It’s the fiscal equivalent of getting a little more exercise. You know it’s a good thing but it’s just… so… well… Gosh, is that the time? There’s an election coming!

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What most proper (by which I mean non-tax haven) countries say is: if you live here we’ll charge you to tax on all your income and gains around the world. In the UK, we’ve carved out an exception to that rule: if you are not ‘domiciled’ here we’ll charge you tax only on the income or gains you bring in (or ‘remit’ – hence the remittance basis) to the UK. Your assets and income outside the UK won’t be charged to tax here – and, if you arrange your affairs carefully, might not be charged to tax anywhere. And your country of “domicile”? That’s your ‘home’ country.

I could write tens of thousands of words delineating the operation of these two key concepts: ‘domicile’ and ‘remittance’ basis. But to focus on how they work rather than what they accomplish is to miss the point. And the point is that the remittance basis is a fiscal sweetener – a bribe, if you like – payable to the wealthy with foreign connections to cause them to move to or remain in the United Kingdom.

It’s only having called it by name that we can turn to look at whether we should be paying it and, if we should, what it should look like.

Proponents of the non-dom rule say that it encourages wealthy foreigners to move to (they don’t say but do mean) London and spend their money in (also) London – and that brings benefits including additional tax receipts to the economy. They’re right.

Detractors say, looked at globally, the rule signals our enthusiastic participation in a race to the fiscal bottom which makes winners of the fantastically wealthy and losers of everyone else. They’re also right. Some detractors – a good recent example being the BBC’s recent The Super Rich and Us – also point to the fact that the arrival of wealthy foreigners hasn’t spelled the end for inequality in the UK. Someone, somewhere, possibly in Norfolk, will be flexing his blackboard ruler, but that seems to me a little like arguing that, because I’ve turned on my two-bar electric heater and I’m still cold, it follows that heaters don’t make you warmer.

But just stand back and accept the logic of the (good) points for a second. There are all sorts of ways in which we might entice wealthy foreigners to come and live here. Stable government, a civil service free of corruption, our cultural richness, excellent public infrastructure (someone stop me, please, before I get completely carried away). Do we need a fiscal inducement too? And if we do need a fiscal inducement is this the one?

To answer that question we’d need to model how many would leave, how many would fail to come, and what the loss would be to the economy. Many will tell you they can, or have, performed this exercise. For myself, I like to recall what the Institute of Fiscal Studies, which so often (and often accurately) tilts at fiscal forecasting had to say, back in 2007, about the effects of  rival political proposals for a non-dom levy:

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This is the link for that pleasing flash of intellectual clarity.

But let’s press on, whilst recognising that to do so we’ll need to assume that sensible modelling is possible. Let’s also assume (controversially, but for the sake of argument) that we’d like to continue paying a sweetener.

The question then is, what should that sweetener look like? To answer that, you need to go back to my two key concepts: remittance and domicile.

The concept of domicile has many problems. The question whether X is domiciled in the UK often fails to admit of a clear answer: it is to borrow an attractive phrase (from Ian Jack) “a peculiar mixture of fact and intent”. Perhaps in consequence, legal challenges to domicile status are relatively rare (such that questions might sensibly be asked about whether all of those claiming the status actually have it). But most importantly of all, the line in the sand that the legal test draws is a pretty crappy way of separating out those we might want to give a sweetener to and those we might not. You might think that, after someone has put down roots, they might no longer need (or deserve) an incentive to come or remain here? But the domicile rule all but ignores that critical fact.

As to the remittance basis of taxation, it’s enormously complex to apply. That’s a thing modestly undesirable (to all but tax advisers). But its real failing is that it disincentivises the very thing we want to incentivise. The reason we give a sweetener to get wealthy foreigners to come here is not because we like their company (although often we do). The reason is that we want them to bring their money here and spend it here. Taxing them on the income and gains that they bring into the country discourages them from doing the very thing that the sweetener is designed to encourage them to do.

I don’t want to suggest policy on the hoof (he said, with the inevitable air of a man about to do so anyway). But it doesn’t take much imagination to think of mechanisms that might consistently promote the policy objective of offering a sweetener. If we are to have a tax mitigation club, what about a different one, with equally high annual subs, but that gave you a reduced rate of income tax or capital gains tax for the first, say, five or ten years of residence here? Not desperately politically palatable perhaps, but no less so than the present system properly understood, and likely to deliver far better economic results.

More modest reform might look like a domicile equivalent of the statutory residence test in the Finance Act 2013 – to create bright line tests between resident and non-resident status – coupled with a deemed domicile provision (akin to that in the Inheritance Tax Act 1984) by which you would be deemed to be a UK domiciliary after a number of years residing here.

But I’d love to hear your suggestions – and responses to the above – too.

What we can learn from today’s crackdown in Switzerland

Two events in sequence.

One: international consortium of journalists splashes on successive days on their investigation into tax evasion (many years ago) by clients of Bank X in Switzerland.

Two: a week later, the Swiss authorities raid the offices of Bank X.

Somewhere someone will contend the timing is mere coincidence. But it isn’t.

What can we learn from this sequence?

This: tax havens care about reputational issues.

I wrote in more detail about what business tax havens are really in here. They compete to attract foreigners’ money. If a UK depositor starts to ask himself questions about how HMRC will view his ownership of a Swiss bank account – will it be a red flag? – he will wonder whether to move his money elsewhere. And it’s to avoid that happening – to give the appearance of Switzerland being a respectable player in the global fiscal community – that the Swiss clamp down. And, whatever the reasons for it, that clamp down improves local compliance.

If you want to reduce tax evasion, or money laundering, you need to find ways to bring pressure to bear on how tax havens operate. You need to recognise that they are so often in the business of disrupting sightlines between the money and those who own it. Improve those sightlines and you can meaningfully threaten sanctions. Meaningfully threaten sanctions and you reduce tax evasion and money laundering. Sightlines and sanctions.

What we can learn from today’s crackdown in Switzerland is that reputational issues are an effective lever.

So, well done – in the UK – the Guardian and Panorama. Well done for shining a torch into Swiss vaults. And now, let’s have a little more please.

Hey Politicians! The public are less stupid than you think

Here’s Iain Duncan Smith, on paying tradesmen in cash, speaking yesterday:

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But hang on a second, here’s the Daily Mail responding to observations on the same subject made by the present Financial Secretary to the Treasury, David Gauke, in 2012:

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Those bloody Tories, eh? But wait, wait, wait, wait up. Here’s Ed Miliband speaking on tax avoidance on Saturday:

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And here he is speaking on tax avoidance in 2012:

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What are we to take from all of this? Nothing attractive, although it’s reassuring that the public sees through it. This is YouGov, polled on 12-13 February:

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Credit to the Mail, source of all four of the quotes set out above.

Surely HMRC wouldn’t let you off the hook?

There’s no denying it’s hard to bring successful criminal prosecutions against tax evaders. The complexity of the tax system makes it tough to get a lay jury over the ‘beyond reasonable doubt’ line. And it’s not easy to get the evidence together. Tax havens don’t want to develop a reputation for making enthusiastic disclosures of the affairs of their banks’ clients because, well, those clients might choose to move their money elsewhere.

But having achieved a decent evidential foothold, you’d hope HMRC would take advantage? Wouldn’t you?

Yesterday Richard Murphy, the well known tax campaigner, pointed to one instance of apparent failure of this principle: you have a tax amnesty to encourage people you might not otherwise find out about to come forward voluntarily and put their tax affairs in order. But why would you offer an amnesty to those you already knew about? In her evidence before the Public Accounts Committee, Lin Homer said that HMRC had “encouraged” 500 taxpayers – whose affairs had been made known to HMRC through information on the Falciani disk – to take advantage of an amnesty (called the “Liechtenstein Disclosure Facility”) offering very low penalties on unpaid tax and immunity from criminal prosecution. These were 500 taxpayers whose affairs were non-compliant, which non-compliance we knew about, and we were offering them an amnesty. Seems odd to me.

But there’s a further puzzle. Forget the Falciani disclosures for a second. Back in 2012 we signed an agreement with Switzerland which presented a satisfying dilemma to non-compliant UK resident taxpayers with accounts there: either (1) agree with the Swiss that you would make a full disclosure of your affairs to HMRC and take your chances with swingeing penalties and/or criminal prosecutions or (2) preserve your anonymity and suffer an initial tax charge of 21-41% of your capital, together with further on-going tax charges and the threat of criminal prosecution in the future. (Although, for reasons unclear to me, if you took option (2) and kept your affairs secret, we promised the Swiss that criminal prosecutions would be “highly unlikely”.)

(Side note: a somewhat unappreciated aspect of the #SwissLeaks disclosures is that, as the Guardian reported, HSBC then set about selling to its individual clients a mechanic involving the interposition of a ‘special purpose vehicle’ between the clients and their accounts which gave to their clients a third option: do nothing.)

So, leaving aside those lucky HSBC clients, HMRC had you where they wanted you: (1) high initial tax charge, future tax charges and continuing risk (albeit for reasons unclear small) of criminal prosecution or (2) face the music at home.

And then? HMRC seem to have let everyone off the hook. They encouraged taxpayers to take advantage of the benefit of the Liechtenstein Disclosure Facility amnesty. This is what HMRC’s own Swiss-UK Tax Co-operation Agreement Factsheet says:

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Here’s how Grant Thornton quite fairly sum up the choice offered to tax non-compliant UK residents with Swiss accounts:

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Good enough from HMRC?

HMRC is responsible for collecting around £500,000,000,000 of taxes a year. So we’re entitled to be interested in how it operates.

And this week has been pretty disastrous for public confidence in HMRC. There has been a growing suspicion of one rule for wealthy tax evaders who benefit both from amnesties and a policy decision to avoid prosecutions and another rule for the rest of us. These suspicions have stemmed from the disclosure that, to date, of the 3,500 or so cases investigated by HMRC arising from the Falciani disclosures of misconduct at HSBC, only three cases have been passed to the CPS and only one prosecution has been brought.

Today HMRC responded with a lengthy statement defending their record “on Tax Evasion and the HSBC Suisse Data Leak”. You can read it here.

I’m not going to go through that statement line by line. On the subject of criminal prosecutions, what it does say is:

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But it doesn’t tell you what those convictions are for. Offshore tax evasion, presumably. But let’s check.

If you click on the link you get this graphic: CaptureIf you add those convictions together you get 2005. Perhaps the other 600 (of the 2,650 referred to) are Jan to Apr 2010 and Apr to Dec 2014. But the real question is whether those are convictions relating to offshore tax evasion or for all offences. Because we’re not told.

But what we do know from other documents released by HMRC (in particular this one) is that in 2013 HMRC achieved 690 successful convictions – broadly consistent with the figures set out above. What’s interesting about the document linked to earlier in this paragraph is that is tells you what the convictions were for. And this is what it tells you:

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Stand back from all the detail for a second.

What we know is that in a document designed to defend its record of achieving criminal convictions in tax evasion and the HSBC Suisse tax leaks – that being its title – HMRC is relying on convictions it has achieved in benefit fraud cases: cases like this:

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It’s possible – we don’t know – that they haven’t achieved even one conviction for offshore tax evasion.

That would be pretty alarming. As is the suggestion that HMRC haven’t been entirely frank with us.