UK Chancellor Alistair Darling used his first Budget speech to press ahead with plans to introduce a £30,000 flat tax on foreigners working in the country.
The UK private equity industry fears the change could prompt private equity firms to leave London for more tax-friendly jurisdictions.
Confirming plans to charge a £30,000 annual levy on people registered as non-domiciled workers – known as ‘non-doms’ – who have been in the UK for seven years or more, Darling said it was only “right and fair” people pay a “reasonable charge” for enjoying special tax privileges.
More than 112,000 people currently claim non-domicile status in the UK by declaring another country as their real home. As a result they pay no UK tax on their earnings or capital gains outside Britain.
However the government, from April 6, will demand adults who have been resident in the UK for more than seven out of the last ten years to pay a £30,000 annual fee to maintain this privilege or force them to pay UK tax on their worldwide earnings.
“For those non-domiciled individuals or families who have chosen to make Britain their home, I believe that it is right and fair that they should, after seven years, pay a reasonable charge to maintain the right to be taxed differently from other UK residents,” the Chancellor said.
Private equity firms had warned ministers not to introduce the annual tax amid fears it could affect the UK’s competitiveness as a base of operations for global private equity firms. Some worry the tax change could encourage private equity firms to relocate to other tax havens.
However Darling did back down on some issues promising not to revisit the issue until at least autumn 2009.
The Treasury also confirm that only adults would be affected by the ruling; that non-doms would not be required to make any additional disclosures about their foreign earnings; that they would not be subject to retrospective capital gains tax; that non-doms bringing in £30,000 to pay the new charge would not have to pay tax on that sum; and that works of art brought into the country for display would not be subject to tax. It had been feared the scheme would force foreigners to declare their worldwide financial affairs to the government.
Among other measures confirmed in the Budget were changes to the UK residency test following the introduction of a new “midnight rule”. Any person who spends midnight in the UK will, from the summer, find it counts towards establishing UK residency. Previously days of travel into and out of the UK had been exempt.
The Chancellor also introduced a flat rate of capital gains tax of 18 percent. Private equity executives had previously enjoyed so-called “taper relief” on their carried interest, which allowed them to pay 10 percent tax on these capital gains. These plans were unchanged from January, when he provided an entrepreneurs relief for capital gains below £1 million to soften the reforms.
Simon Walker, chief executive of the British Private Equity and Venture Capital Association, which has consistently opposed both changes, said he was disappointed the government had not done more to help venture capital-backed companies but welcomed the promise not to revisit the non-dom issue for the remainder of this Parliament and the next.
“While we don’t like the changes that have already been announced to the non-dom regime, we are glad [the Chancellor] has promised that there will be no further change for at least two Parliaments.”
Unions argued the changes did not go far enough. Brendan Barber, general secretary of the trade union TUC, said in a statement: “While the Chancellor has stuck to his non-dom guns, he was wrong to rule out further changes when the threatened talent exodus fails to materialise. The richest non-doms will hardly be troubled by this £30,000 poll tax.”
Additonal reporting by Zoe Hughes.