Thursday, October 04, 2007

Non-Doms Towel Time


The truth is out there somewhere

WARNING: the following post contains explicit and disturbing number crunches: those of a sensitive disposition may wish to look away.


I've tried to wrap that wet towel round my head again in an attempt to unravel the numbers behind George's £25 grand pa non-doms levy- ie his new additional* flat rate levy on Roman Abramovich, Lakshmi Mittal, Didier Drogba, and all those other high rolling non-voting foreigners who might have registered for non-domicile tax status.

George reckons it will raise £3.5bn pa, based on his estimate of 150,000 non-doms (ie £25K times 150,000 less a bit for fleeing golden geese). But others reckon the number will be significantly lower.

On the face of it, the others look right. George's estimate looks too optimistic (see Fraser Nelson's analysis here).

Facts?

The Treasury has now disclosed that in 2005-06 there were only 114,000 non-doms - rather fewer than the previous year, and only 8,000 up over five years.

Against that, 150,000 looks high.

If we instead assume an unchanged 114,000, then the maximum possible revenue take is £2.85bn (ie 114,000 times £25 grand).

And in reality, the revenue take is likely to be even less than that.

For one thing, according to the Treasury, only 15,000 non-doms currently declare they have no UK taxable income. They probably really are those fabled footloose global mega-rich, temporarily perched in London to buy Belgravia mansions and our Premier League football clubs. And even assuming they all stayed perched dutifully paying the new levy, they would still only generate £375m pa revenue (£25K times 15,000).

The bulk of the extra revenue would have to come from the 100,000 non-doms who are already paying some UK tax on their UK source income and the foreign source income they remit to the UK. For them, the new levy would still bite, but it would only apply to their foreign source income they don't currently remit to the UK.

And the question is how much of that unremitted foreign source income do they have?

The short answer is we have no idea: like the man said, we don't know what we don't know.

The Treasury guesstimates that it averages out at only £10 grand pa each.

And if that's right, they would clearly not pay George's £25 grand levy (because the levy would actually exceed their unremitted foreign source income). Instead, they'd stop claiming non-dom exemption altogether and opt to pay normal UK tax. But on £10 grand apiece, that would only raise about £300m pa (£10K times assumed 30% average tax rate times 100,000).

Hmm.

To even get close to George's sums, we'd need to assume these guys currently have far more than £10 grand pa unremitted foreign income. In fact, to make the sums even roughly balance, they'd need more like £6o grand pa, at which level they would opt to pay the flat rate levy rather than normal tax (specifically, the £25 grand pa flat rate levy is equivalent to a 40% tax rate on £62,500 pa of foreign income).

Is that possible?

Well, yes it is. £60 grand pa of income could easily be generated by £1-1.5m of cash assets held overseas.

True, that's a fortune to your Eastern European field hand. But the money they earn in Lincolnshire's potato fields is UK sourced income and should already be taxed here. Potato pickers really shouldn't be registered as non-doms for tax purposes (assuming, that is, HMRC hasn't dropped another gawdalmighty clanger...).

Much more likely is that non-doms with some UK taxed income include a goodly number of those itinerant private equity/hedge fund guys. They work in Canary Wharf or St James's, they already pay some tax on some UK income, and they have their mega-stash squirrelled away out of harm's way in Cayman.

For guys like that, a mill is small change. What's more, another £25 grand a year would not be the difference between staying in London - with all its support systems and worldly distractions - and relocation to Curacao.

Conclusion?

George's estimate of £3.5bn revenue is almost certainly an overestimate. But the £500m quoted by the Treasury is way under.

There's clearly much uncertainty, but the best guess is that George is much closer than HMT- call it £2-2.5bn.


*Footnote- The details of George's levy are still hazy. In particular, we don't actually know if it is an addition to the existing UK taxes paid by non-doms, or an alternative. The numbers say it has to be an addition, because according to HMT, there are a staggering 4.9m people in the UK who are entitled to claim non-dom status. If they were all offered the alternative of a £25 grand pa flat levy in place of their existing tax payments, many would undoubtedly take it, substantially cutting existing tax revenue.

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