Perhaps the greatest anamoly of the UK tax system is the non-domicile rule under which typically wealthy individuals can avoid paying tax on their overseas earnings – even if they are permanently resident in the country. The scandal, dating back to King George III in 1799, was partially mitigated when the last government introduced an annual charge of £30,000 for those who have lived here for seven of the last nine years, while those who have lived here for 17 of the last 20 now pay £90,000. But Britain remains exceptional in its refusal to remove non-dom status from permanent residents; no other country does so. For most of the 116,000 individuals who take advantage of the loophole, the annual charge is small change.
With all this in mind, Ed Miliband will pledge in a speech tomorrow to abolish the non-dom system if Labour wins power – one of his most radical promises to date. He will say at Warwick University: “There are people who live here in Britain like you and me, work here in Britain like you and me, are permanently settled here in Britain, like you and me, but aren’t required to pay taxes like you and me because they take advantage of what has become an increasingly arcane 200-year-old loophole. There are now 116,000 non-doms, costing hundreds of millions of pounds to our country, it can no longer be justified, and it makes Britain an offshore tax haven for a few.”
Miliband will rightly ridicule the eligibility tests for non-dom status, such as “whether you own property abroad, whether you own a burial plot abroad, whether you subscribe to an overseas newspaper.
“You can qualify even if you’ve lived here all your life on the grounds that your father was born abroad. So old-fashioned are these rules they don’t think it’s even relevant where your mother was born. I want to be clear: I don’t blame people for taking advantage of non-dom status. I blame governments for fostering a system that can be taken advantaged of.”
He will frame this measure as an essential component of responsible capitalism: “There is a moral reason for it too. We all use the same roads, we are all protected by our police and armed forces, even those who go private sometimes rely on the NHS. It is the common good. We use these same services therefore we all owe obligations to help fund them according to our ability to do so. Just as we rightly demand responsibility for those who can work that they should do so, so responsibility should go right to the top. It is what makes our country strong. It is what allows a country to succeed.” He will also say that while all permanent residents would be taxed in the same way under Labour (as they in are other countries), “real temporary residents, here for a limited period, will only have to pay tax on what they earn here because they will be paying their taxes in their place of permanent residence”. Labour would consult on the length of time for which the new rules for temporary residents should apply and the transition period over which existing non-doms will come within them.
Pre-empting those who will argue that individuals will be deterred from the UK and that the economy will be damaged, Miliband will note how similarly progressive policies have defied such predictions. “Now, some people will say that if we change the rules people will leave the country, just like they used to say that we can’t act on bank regulation because the banks will leave the country. They say we can’t act on energy companies, because the Big Six won’t stand it. Some of them are the same people who said back in 1997, that we shouldn’t introduce a minimum wage because it would cost millions of jobs or a windfall tax on privatised utilities. Some threatened to leave the country then too. And guess what? They’re still here.”
The policy is both good economics (it will raise hundreds of millions of pounds, which Labour has pledged to use for deficit reduction) and good politics: the enduring ability of wealthy individuals to avoid paying their fair share is one of the biggest grievances among voters. The question now is how the Tories respond. Will they denounce the move as anti-business? (Though the FT recently advocated it in an editorial.) Or will they embrace it? In other words, as Conservative strategists like to say, will they “kill or steal”? Whatever the answer, as in the past (phone-hacking, bank bonuses, energy prices), Miliband has succeeded in seizing the initiative again.