Rachel Reeves is rethinking parts of Labour’s crackdown on non-dom tax status over concerns that the plans will not raise any money.
The chancellor is reassessing the government’s manifesto promise to close loopholes in the non-domiciled tax regime.
The Guardian revealed this week that Treasury officials feared the spending watchdog was due to conclude the policy would fail to raise any money, because of the impact of super-rich non-domiciles leaving the UK.
Reeves is now reconsidering the plans, according to reports. A government official told the Financial Times: “We are looking at the details of our proposals. We will be pragmatic, not ideological. We won’t press on regardless, but we are not going to abandon this completely.”
After the Conservatives unexpectedly announced plans to phase out the non-dom regime, Labour said it hoped to raise a further £2.6bn over the course of a parliament by clamping down on loopholes.
The party later predicted that closing these loopholes could raise an initial £1bn in the first year, which would be put towards funding universal school breakfast clubs and more hospital and dental appointments.
However, there are concerns inside the Treasury that the Office for Budget Responsibility (OBR) may conclude the plans will raise no money at all and could prompt wealthy foreigners to leave the UK.
Andy Haldane, a former chief economist at the Bank of England, said earlier this week that there should be “cause for pause” on the government’s plan.
The OBR originally forecast that scrapping the tax break for wealthy foreigners could raise about £3.2bn a year – though this was deemed to be “highly uncertain” as wealthy people could either leave Britain or find ways to avoid the tightening of tax rules.
A Treasury spokesperson said: “These reports are speculation, not government policy. The independent Office for Budget Responsibility will certify the costings of all measures announced at the budget in the usual way.
“We are committed to addressing unfairness in the tax system so we can raise the revenue to rebuild our public services. That is why we are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residence-based regime focused on attracting the best talent and investment to the UK.”
Ahead of the budget on 30 October, Reeves is also considering a change in how the government’s fiscal rules are calculated to allow billions of pounds more in capital spending.
The chancellor told Labour’s annual conference in Liverpool that she believed the Treasury undervalued public investment and wanted to change the way public spending was seen at the top of government.
The system has long been criticised by economists for disincentivising governments from making long-term investments that could promote economic growth.
The Times reported that Reeves would free up as much as £50bn to spend on infrastructure projects under plans to change the rules that are being drawn up by officials.
Officials are looking at changing the way the government measures debt, which could allow the government to offset “assets” – such as the £236bn owed in student loans – against the wider national debt, government sources told the paper. This would free up more money for investment in projects such as roads, housing and energy but not for day-to-day spending.
