Rachel Reeves, Labour’s shadow chancellor, took a small step in the right direction by promising to get rid of non-domiciled tax status. This announcement – ahead of local elections – had three prongs. First, it helps rally Labour’s traditional voters who see very rich people benefit while they struggle with tax rises and the cost of living crisis. Second, the pledge refocuses voters’ attention on Ms Reeves’ political opponents such as the chancellor, Rishi Sunak, whose wife avoided paying up to £20m in UK tax as a non-dom; and Sajid Javid, the health secretary, who held non-dom status for six years while a banker. Third, it provides evidence that Ms Reeves’ review of taxation might be more radical than previously imagined.
The worry is that there may be less to the plan than meets the eye. Britain should scrap the exemption, an archaic legacy of empire in which benefits are largely determined by paternal lineage. Non-doms don’t pay tax in Britain on income generated abroad. Yet Ms Reeves plans to replace this perk with a “temporary resident tax regime” similar to that in countries including France, Germany and Canada. Labour says that it would consult on its proposals but aims to offer tax advantages to such residents for five years, compared with up to 15 years under the current system. Such proposals are not new. As Labour leader, Ed Miliband proposed a similar exemption to avoid deterring talented foreigners.
The tax rule has for a decade been a symbol of privilege for the wealthy. In 2008, Gordon Brown introduced a £30,000 annual charge on non-doms. The Tories increased this in 2015 for longer-term residents. These sums won’t bother the very rich, who are much more likely to make use of non-dom status. Some wealthy people may leave if Ms Reeves makes good on her promises. But most non-doms don’t come to Britain for the tax breaks; the rule of law, private schooling and culture are bigger draws. Many choose to stay on in Britain after their non-dom status has ended. Most are workers: about 80% of non-doms sell their labour, rather than living off income from investments.
Ms Reeves should be braver. Inequality in Britain is inextricably linked to the rise of finance in the economy. A recent report by the London School of Economics and the University of Warwick found that one in five bankers had claimed non-dom status. Paul Johnson of the Institute for Fiscal Studies points out that the total wage income received by the top 0.1% in 2018-19 was £37bn, and 44% of these people worked in financial services. Nearly a third of the 0.1% were born abroad. The global nature of finance means that foreign bankers coming to London can substantially benefit via non-dom status.
But people who can afford to pay tax and enjoy the benefits that Britain provides ought to contribute. Letting the wealthy pay a tiny fraction of their earnings to avoid UK tax while ordinary people face a rising burden is unjust. Labour should end – rather than just limit – non-dom status, which permits one rule for rich and another for everyone else.
