Ed Miliband: Labour will scrap non-dom tax status

Ed Miliband will promise to end a colonial-era symbol of inequity in the tax system by announcing that, if he wins the election, he will abolish the non-domicile rule that allows many of Britain’s richest permanent residents to avoid paying tax in the UK on their worldwide income.

Labour will say the rule, introduced by William Pitt the Younger in the late 18th century, has been wide open to abuse and offends the moral basis of taxation. Everyone who has made the UK their permanent home should pay full UK tax on all their income and gains, he will argue.

In a speech at the University of Warwick on Wednesday, Miliband is expected to say the non-dom rule, believed to be used by more than 110,000 wealthy people in a system unique to the UK, is born of a discredited belief that “anything goes for those at the top and that what is good for the rich is always good for Britain”.

Non-doms pay UK income tax and capital gains tax on their UK sources of income and gains, and whatever income generated overseas they choose to remit to the UK. By contrast, UK domiciles have to pay tax on all of their income and gains, wherever in the world they are made – Britain or overseas.

George Osborne has tinkered with the non-dom system by increasing the annual fees on those who are granted non-dom status, but Labour claims the rules are shot through with anomalies. Labour says those who have lived abroad and return to the UK can claim non-dom status simply on the basis of nothing more than a burial plot, a foreign bank account, or a father born abroad – and even an overseas newspaper subscription.

The anomaly was recently highlighted by the case of HSBC’s chief executive Stuart Gulliver – first reported in the Guardian – who is able to claim non-dom status because he previously worked in Hong Kong, even though he was born and raised in Britain, has worked in the UK for past 12 years and sends his children to school in the country.

Labour said the change would raise hundreds of millions of pounds, but was careful not to give a precise figure, partly because the numbers taking advantage of the rule, and the value to them, is a matter of dispute.

Critics will claim that abolition of non-dom status, taken with Labour’s plans for a mansion tax and a 50p top rate of tax, will spark an exodus of the super rich from London to other European capitals, Switzerland or the Far East. It is argued non-doms still pay huge sums to the Treasury, even as much as £132,000 per person per year on average, and abolition will simply lead to a long-term fall in revenue.

But Miliband will insist that the long-standing non-dom rule has become a symbol of the scandal of tax avoidance, and he would abolish it from April 2016.

He will say: “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.”

Anger at the non-dom rule has spread to other parties including the Liberal Democrat business secretary Vince Cable, a long-term advocate of its abolition.

There has also been some opposition in Conservative circles, with hostility from Richard Bacon, the senior Conservative on the Commons spending watchdog, the public accounts committee.

Bacon, at a hearing of the committee last month, complained abut the non-dom system to the head of Her Majesty’s Revenue and and Customs, Edward Troup, saying under both Tory and Labour governments “you can easily spend 80% to 100% of your time in the UK because you are resident here, and be a non-dom for tax purposes.

“No wonder people are pissed off. It’s extraordinary, frankly, in all honesty. You are surprised that people think there is one set of rules for rich people and another set of rules for other people, when you have just told us exactly that is what there is.”

Labour will stress that foreigners in the UK for a genuine temporary short period will be able to retain non-dom status. The party intends to consult on the length of that period if it wins the election.

Richard Murphy, the left-of-centre tax expert, has suggested that the grace period could amount to five years, arguing that, without such a time frame, foreigners could be subject to being taxed in two jurisdictions, including their permanent place of residence overseas.

In effect, Miliband is criticising the previous Labour government that allowed the number of non-doms to swell until it introduced a rule in 2008 requiring non-doms to pay an annual fee. The Labour leader, aware that some of his donors are non-doms, will also add: “I don’t blame people for taking advantage of non-dom status. I blame governments for fostering a system that can be taken advantage of.”

Someone who is a non-dom and lives in the UK for less than seven years can currently use the special non-dom rules free of any charge. They then have to pay charges ranging from £30,000 a year for people who have been UK resident for seven out of the past nine years, to £90,000 a year for those who have been UK resident for 17 of the past 20 years.

Michael Gove attacked Labour’s plans, telling Newsnight: “My understanding is that when Labour have been questioned about this, they have been incapable of saying how much money this tax would raise. Indeed, there are some suggestions this could lead to a flight of talent and a flight of cash from this country and the exchequer could be worse off.”

Miliband will dismiss the criticism that the rule change will lead to entrepreneurs leaving the country, arguing the same objections have been raised about bank regulation, regulating the energy companies or the 1997 windfall tax on utilities.

“The correct belief in enterprise and wealth creation,” Miliband is expected to argue, “has become distorted into an idea that wealth only flows from a few at the top – and they are so important that they should be allowed to operate under different rules. It is an idea that says anything goes for those at the top, that what is good for the very rich is always good for Britain.”

The Labour leader will argue there is a moral reason for taxpayers to pay tax in the same way. “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.”