RESIDENCE AND DOMICILE
62. The consultative document on residence and
domicile gave the following as the rationale for the changes[17]:
"Maintaining the UK's competitiveness by
ensuring that the UK remains an attractive place for workers with
key skills was at the heart of the recently concluded review of
the residence and domicile tax rules. Equally important was the
principle that the rules applying to people from abroad should
operate fairly.
It is only fair that people who have chosen to
make the UK their home (and who enjoy favourable tax treatment
over the long term, and even pass this on to their children) should
make a reasonable tax contribution to the modern public services
which support our society".
The Budget documentation stated that, overall[18]
"The package of changes to the rules on residence and domicile
announced in the 2007 Pre-Budget Report was intended to strike
the right balance between fairness and competitiveness".
63. There was a widely-held view amongst our
private sector witnesses that the Government may have failed to
achieve its objective of maintaining the UK's competitiveness.
STEP wrote[19] "After
a leisurely consultation process the speed and intensity with
which the Government introduced measures targeted at non-doms
and their investments has left this important part of this country's
business community feeling uncertain and unwanted".
64. In their written evidence the City of London
wrote[20] "Individuals
have already based their decisions to spend significant parts
of their careers in the UK on the fiscal status quo. The proposal
to impose a levy of £30,000, with no explicit guarantee that
it will not be raised in future years and with inadequate time
to prepare for the new circumstances, has clearly alarmed many".
And then later in that memorandum they concluded[21]
"In conclusion, it is relatively clear from the City's view
that even in their amended form the proposals have the potential
of damaging the competitive position of the UK, especially in
the area of financial and related business services—a sector
on which the national economy is heavily reliant".
65. Echoing this concern, John Cridland (CBI)
said "I think the damage which has been done is now done
and it will be very difficult to unravel that damage. It has damaged
sentiment I think more than anything, my Lord Chairman. It is
only a year ago, or less, that we prided ourselves that the City
of London had through its own good efforts established a significant
competitive advantage over a number of other world financial capitals
and we have managed to knock ourselves down a pitch" (Q 184).
66. The LSS saw it in these terms[22]
"There appears to be a perception that the changes amount
to a political attack on non-domiciled individuals". The
LSEW was equally gloomy about the effect of these proposals[23]
"Many of those affected by these new rules have lost confidence
in the UK as a jurisdiction that welcomes foreign investment.
Some took immediate action to reduce their links with the UK.
Others await the outcome of the deliberations to see if the reputation
of the UK can be salvaged".
67. The IoD wrote[24]
"There is a very good chance that the Treasury has scored
an own goal here, harming the British economy and decreasing total
tax revenues". John Whiting (CIOT) thought it hard to see
how these proposals would raise significant amounts of money (Q 64).
In response to the question "Has anybody gained from this?",
Richard Stratton (LSEW) replied "I do not think so …
The deeply upsetting thing about this is probably that there is
not much gained by these changes. There is just a lot of irritation
for people" (Q 230). The BVCA wrote in their evidence[25]
"The BVCA believes the changes to the residence and domicile
regime have had a negative impact on the UK's position as a competitive
place to do business". And in his evidence before us, Simon
Walker (BVCA) said that they were "concerned about the situation
that has been created and I do regard it as having this effect
on the welcome mat, that it at least is looking pretty shabby"
(Q 300).
68. Others focussed on the need for a published
economic impact analysis to explain the Treasury's thinking and
gauge the effect of the changes. Frank Haskew (ICAEW) was less
sure that there would be a net loss to revenue, but said that
"our main concern is that in previous consultations on this
we have said if you are going to make changes you need to do a
proper economic analysis of what the result of it is going to
be to see whether there is a net benefit to the UK … the
fact is we have not had any figures to justify what is a fundamental
change in policy" (Q 116).
69. In his evidence, Mark Neale (HMT) stated
that "The Treasury always looks at the economic impact of
tax changes because economic efficiency is one of our objectives
for the tax system … In this case we do not expect there
to be any material, economic impact as a result of the changes
in the taxation of non-domiciles. We expect only a very small
number of people to cease to be resident as a result of the changes.
We expect that those will [be] people who have the least economic
attachment to the UK and the fact that they cease to be residents
does not by any means mean that they will cease to spend time
in the UK and undertake economic activity here" (Q 347).
70. We are very concerned by the weight of
evidence coming from our private sector witnesses that these proposals
seem likely to have a negative effect on the UK's competitiveness.
We think it vital that everything that can be done is done to
retrieve the position.
71. It is clear to us that the Government
has failed to communicate successfully the message that these
changes are not intended to discourage non-domiciles from coming
to the UK and that non-domiciles are important to the health of
the UK economy. We therefore recommend that the Government does
all it can to communicate this message and to maintain the UK's
competitiveness by ensuring that the UK remains an attractive
place for workers with key skills.
72. We also think it important that those
outside Government have the opportunity to see HMT's assessment
of the economic impact of these changes so that they might form
their own judgment.
73. We therefore recommend that HMT should
publish its economic impact analysis of these changes to residence
and domicile so that everyone can share their thinking on this
matter. We also recommend that HMT should update this analysis
in 12 months' time in the light of events.
74. More generally, we recommend that, in
future, economic impact analyses should be published at the same
time as any significant tax changes are announced; such analyses
are clearly a vital element in the decision on whether any tax
changes should go ahead.
ENCOURAGING ENTERPRISE
75. The venture capital reliefs aim to encourage
access to capital for small companies carrying on higher risk
activities. Issues of international competitiveness are likely
to be less to the fore.
76. Simon Walker (BVCA) however gave us an interesting
comparison when he reviewed the position as he saw it of the British
venture capital scene:
"I think there is a fundamental problem
about a lack of British investment in venture capital in this
country. We do not invest nearly enough by comparison with countries
like the United States … So with some venture capital firms
90 per cent of their capital will come from outside the UK and
we would like to see much more encouragement of British companies
to participate, and we do feel that actually we are not doing
that well; there is not enough money flowing into the small end
of the whole private equity arena. There is plenty of money coming
into the large end to buy-outs which either fix or otherwise change
larger companies but really not enough coming in at the smaller
end" (Q 276).
77. This perceived shortage of finance for smaller
companies is relevant to chapter 5 on encouraging enterprise,
where we consider the effectiveness and targeting of venture capital
schemes.
1 Memorandum of Evidence by the CBI (Volume II p 89) Back
2
Memorandum of Evidence by the CIOT (Volume II p16) Back
3
Memorandum of Evidence by STEP (Volume II p 22) Back
4
Memorandum of Evidence by the IoD (Volume II p 92) Back
5
Memorandum of Evidence by the LSS (Volume II p 113) Back
6
Memorandum of Evidence by the BBA (Volume II p 70) Back
7
Memorandum of Supplementary Evidence by the ICAEW (Volume II p
62) Back
8
Memorandum of Supplementary Evidence by the ICAS (Volume II p
67) Back
9
Memorandum of Supplementary Evidence by the ACCA (Volume II p
61) Back
10
Memorandum of Supplementary Evidence by the ACCA (Volume II p
62) Back
11
Economic and Fiscal Strategy Report paragraph 3.13 Back
12
Economic and Fiscal Strategy Report paragraph 3.14 Back
13
Economic and Fiscal Strategy Report paragraph 3.20 Back
14
2007 Pre-Budget Report and Comprehensive Spending Review Paragraph
5.79 Back
15
Hansard, 28 April 2008, cols 63 & 65. Back
16
Memorandum of Evidence by the BVCA (Volume II, p 132) Back
17
Paying a fairer share: a consultation on residence and domicile
HM Treasury December 2007 Back
18
Economic and Fiscal Strategy Report Budget 2008 Box 4.3 Back
19
Memorandum of Evidence by STEP (Volume II p 19) Back
20
Memorandum of Evidence by the City of London (Volume II p 75) Back
21
Memorandum of Evidence by the City of London (Volume II p 76) Back
22
Memorandum of Evidence by the LSS (Volume II p 114) Back
23
Memorandum of Evidence by the LSEW (Volume II p 103) Back
24
Memorandum of Evidence by the IoD (Volume II p 91) Back
25
Memorandum of Evidence by the BVCA (Volume II p 133) Back
