Tax avoidance has been in the news this campaign because of Ed Miliband’s announcement that a Labour government would abolish the 200 year-old non-dom rule. This rule has allowed some wealthy people to avoid paying tax like the rest of us in the UK just because those people have been able to claim that their natural home is outside the UK and that they will be moving back to that natural home at some unspecified time in future. Often this claim has been based on nothing more than the fact that their father was born outside the UK.
The ending of the non-dom rule is right in principle. It is ridiculous that an accident of birth or some pretty artificial ruses, like buying a burial plot in another country, can be used to avoid paying tax in the UK. Tax justice demands that the wealthy should play by the same rules as the rest of us. But it is also right for the public finances. I believe that this move will raise hundreds of millions – if not billions – of pounds in tax revenue, which is desperately needed.
The Conservative Party’s reaction to this announcement has been telling, though. They claim that they will raise £5bn a year from tackling tax avoidance, but have refused to endorse Labour’s move on this most objectionable of tax loopholes. In that case that claim must be doubted, and the explanation for that may not be hard to find. As has also been made clear this week Lynton Crosby, the Conservative Party’s election chief, is himself involved with two companies thought to be based in the tax haven of Malta (Crosby denies all allegations of wrongdoing). At first sight the two issues might not appear to be linked but appearances can be deceiving.
It is widely known within the tax profession, and is widely advertised on in the internet, that the use of two companies under common ownership in Malta can create a mechanism for the wealthy to manage their money in a “tax efficient” way. That is because Malta provides what is, in effect, a special low tax rate of just 5 per cent when a Maltese operating company pays dividends to a Maltese holding company. This is a widely advertised way for those able to take advantage of the situation to reduce their overall tax rate on their global income and gains. Such a structure can also be used as a conduit for funds to be brought into the UK with minimal tax through the use of complex loans structures.
One of the groups who can make use of such structures at present are the UK’s non-doms. Non-doms are, by definition, tax resident in the UK, some of them living here for many years. Some are even born, brought up and work in the UK but can still claim to be non-doms because their fathers were born outside the UK (mothers do not count in this anachronistic system). Despite the fact that these non-doms are resident here in the UK they can direct their worldwide income and gains into these Maltese companies structure in a way UK domiciled people are unlikely to be able to do. The result is that that income diverted to these Maltese companies owned by non-doms is then outside the scope of UK tax because non-doms are only taxed on income and gains that they actually bring into this country. And, because of the tax haven structure that Malta supplies very little tax is paid in that island, but the funds are also not treated as being from a tax haven source because Malta is in the EU.
No doubt many of the non-dom donors to the Conservative Party will be familiar with this, but so to it seems is Lynton Crosby – a spokesman confirmed his non-dom status in 2013 when the Maltese connection of his business was first reported by the Guardian. There’s no shame in that – he is just taking advantage of the current rules which allow him to live in London and not pay tax on worldwide income and gains. But the fact that Lynton Crosby is linked to two Maltese companies that appear to be managed by tax mitigation specialists based in that country does raise questions about why he does that, how much tax he might save as a result and what commitment that indicates that he and the party he serves have to tackling tax avoidance. His use of such arrangements might also explain why the Tories have defended the non-dom rules so vigorously when it is an issue so close to home.
Of course, nothing illegal happens when a non-dom uses a Maltese company structure. If they avoid tax as a result they have done nothing wrong according to UK law. But that’s not the point here. The Conservatives have said they will crack down on tax avoidance. But how can anyone really believe that when someone at the heart of their campaign appears to be making use of some of the structures they would have to crack down if they are to raise the £5bn they claim they can raise? It’s a question only they can answer.