Plans to end tax loopholes allowing individuals to claim non-domiciled status are “reckless” and “misguided”, according to economics experts.
Labour announced plans to stop individuals claiming non-dom status this morning, and Labour leader Ed Miliband has said the plans will raise “hundreds of millions” in tax revenue.
However, the Centre for Economics and Business Research has warned a bar would cost the UK in the long-term.
CEBR associate director Scott Corfe says: “The policy is a bit misguided. From an economics perspective the key issue is that it wont raise money in the medium-term and actually it will probably lose money.
“It takes time for people to relocate, and you might get a bit more in the short-term, but these individuals can relocate themselves to other more favourable tax regimes. So a lot of these people will relocate and you will lose revenue because of that.”
Individuals with non-domiciled status can avoid paying tax on overseas income, but must pay a remittance charge of up to £90,000 per year. Labour’s plans would allow “genuine” non-doms staying in the UK for a short time to retain the tax status.
Institute of Directors director general Simon Walker describes the economics of the plan as “unconvincing”.
He says: “It’s very unclear what additional revenue would be raised, but the UK’s international reputation would be put at risk. This country has benefited enormously from attracting some of the most successful businesses and entrepreneurs in the world, with the previous Labour government recognising the benefits of an internationally competitive tax system.
“While there may be little public sympathy for those who stand to be affected by reforms to non-dom status, the truth is that these things matter. There is a serious risk that large numbers of the international financial community, who have headquartered themselves in London at least in part because of our tax regime, will now exit the country. Politicians at the height of an election campaign may consider this a price worth paying, but we do not.”
However, the move has been hailed by others, including union-backed think-tank the Centre for Labour and Social Studies, which describes it as a step forward for the UK’s tax system.
The think-tank also disputes the claim that it would directly lead to the departure of all those targeted under the new system,
A spokesman says: “There is no credible evidence that changes in residence rules and higher tax rates results in a mass exodus of business leaders. The abolition of the non-dom rule can only be good news for working people and the British economy as a whole.”
The Liberal Democrats have responded to the move by promising they will go further by continuing to increase remittance charges for non-domiciled individuals and ending the ability to inherit the status.
The Lib Dems estimate they would boost tax revenue by more than £500m by 2020.
Liberal Democrat chief secretary to the Treasury Danny Alexander says: “It’s clear that non-dom status cannot go on as it is, which is why Liberal Democrats in government have ensured those with the broadest shoulders make a fair contribution to Britain.”