The non-dom conundrum.

In recent weeks Akshata Murthy, the wife of Britain’s current chancellor Rishi Sunak, has been in the headlines due to her “non-dom” tax status being brought to light. Murthy qualified for her non-dom status as her father is Indian and because she was born in India and grew up there. Murthy earned £11.6 million in annual dividends last year from the £700m of shares she has in her father’s IT business, Infosys, based in India. Her non-dom status means that she does not have to pay UK taxes on these earnings, which would otherwise amount to £5 million in income tax and £250,000 in national insurance contribution. The only income she currently pays tax on is her UK income.

“Non-dom”, short for “non-domiciled individual”, describes a UK resident whose permanent home or domicile is outside of the UK. The status applies only to one’s tax status but it can be influenced by factors such as nationality, citizenship or resident status. A non-dom only pays UK tax on money earned in the UK but does not have to pay any tax to the UK on money made elsewhere in the world, unless that money is paid into a UK bank account. This system was introduced in 1799 by UK prime minister William Pitt the Younger (a Tory, unsurprisingly) and becomes a talking point whenever there are debates about the legal tax affairs of the wealthy. Its controversy stems from the fact it allows wealthy individuals to pay less tax on their worldwide income, perfectly legally, by choosing a lower-tax country for their domicile. Several members of the House of Lords possess non-dom status, depriving the UK of vast amounts of tax revenue. In total, there are 75,700 people claiming non-dom status in the UK, as of 2020, according to HM Revenue and Customs, down from 113,000 people in the 2012/13 tax year.

The system generally allows “wealthy foreign immigrants to enjoy all the benefits of living in the UK, while paying very little in UK taxes because they make the bulk, if not all, of their income abroad”. As a result, some immigrants or British citizens avoiding paying any tax at all. The British government’s dedication to free-market economics relies on deregulation of our financial system which creates tax loopholes that attract some of the wealthiest families to our shores, contributing little or not tax in return. This is just one aspect of how Britain plays “Butler to the World”, as author Oliver Bullough puts it in his new book, by welcoming oligarchs and tax dodgers. The common defence for this is that the wealthy usually contribute indirectly by providing jobs for servants and workers, who pay income tax themselves. These rich non-doms also pay VAT on the expensive goods and services they receive in the UK, but these taxes combined fall far short of the amount that the wealthy should be paying when they reside within the UK.

Although non-dom status is commonly associated with wealthy foreigners who move to the UK, it is worth noting that it is possible to be born, educated, and work in the UK and still choose to be a non-dom. For example, former chief executive of HSBC, Stuart Gulliver, is a non-dom “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 UK”. As he previously worked in Hong Kong and now considers that country his home, he qualifies for non-dom status and chooses to maintain that status.

A recent study conducted by Warwick University produced a number of significant points about the non-dom system, three of which, I believe, characterise the primary use or abuse of the non-dom system. Firstly, the study found that the number of people claiming non-dom status rises rapidly with income, meaning that the status is used almost exclusively by “the 1%”, i.e., the wealthy who want to utilise any loopholes to protect and increase their wealth. This explains the second finding, that more than one in five top earning bankers is, or has been, a non-dom, which explains the third finding, that most non-doms reside in the most expensive districts in and around London.

The non-dom system was somewhat reformed in 2015 and the status now expires after 15 years, helping to decrease the number of people claiming non-dom status. In 2017, the rules were updated further so that those who choose not to pay tax in the UK on their overseas earnings must pay a substantial annual charge; £30,000 if you’ve lived in the UK for seven out of the previous nine tax years, rising to £60,000 if you’ve been here for 12 out of the previous 14 years. The status is unavailable to those who have been a UK resident for 15 out of the 20 previous years. This results in many of the wealthiest moving out of the UK after 15 years, for five years, then returning and claim a further 15 years of non-dom status. For those earning millions each year, these fees are pocket change and inconsequential compared to the amount of tax they would be required to pay otherwise.

Maintaining one’s non-dom status is both a financial and moral choice, but deciding to save money on taxes rather than contributing to the country in which her and her family currently resides raises difficult questions around her and her husband’s dedication to this country. It also adds fuel to the common view that it’s one rule for the wealthy and another for the rest of us. Sunak’s argument that she kept her status with the intention of eventually returning to India to care for her parents is a weak argument at best and emotional blackmail at worst. Murthy has since adjusted her tax arrangements and will voluntarily pay UK tax on all of her worldwide income, including dividends and capital gains. This will be applied to the tax year just finished, but some MPs are calling for the Sunak family to go further by backdating the taxes in full. Although her tax arrangements were perfectly legal and she technically did nothing wrong, it reflects badly on the chancellor at a time when he is hiking taxes on the general public in the middle of a cost of living crisis

I don’t see this being a resigning matter for the chancellor and I’m more inclined to question the existence of the non-dom status in the first place. The archaic system may have been updated and refined since its creation, but the costs and time limits are insignificant to the wealthy who can afford to pay the fees and relocate to another of their homes around the world every 15 years. Notably, The Labour Party’s 2019 manifesto pledged to scrap the status altogether, calling it a “colonial hangover…to shelter British colonialists with foreign property from tax.” The potential consequences of the system’s entire removal are unclear, to me anyway, but there will undoubtedly be more frequent calls for its abolishment in the near future. But while there is a Conservative government at the wheel it is unlikely that the non-dom system will be tightened in the slightest. Quite the opposite, in fact.

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