‘And if a stranger sojourn with thee in your land, ye shall not vex him …’

Home Comment ‘And if a stranger sojourn with thee in your land, ye shall not vex him …’

The Chancellor announced in his Budget Speech that the Government will abolish the tax advantages which the UK has offered to non-UK domiciliaries  since the beginning of the 20th century.  Over the next weeks and months we, and many other advisers, shall assess in detail the Government’s legislative proposals to abolish these reliefs and replace them with much more limited reliefs for short term and recent residents, to determine what action might be taken to protect our clients.  In the immediate aftermath of the Budget, however, it is instructive to reflect on the Office of Budget Responsibility’s (the ‘OBR’s’) role in respect of the decision to make this change. 

The Government claims that this reform will raise ‘£2.7 billion per year by 2028/29, which is in addition to the current £8.5 billion which non-doms [we shall adopt this inelegant but popular abbreviation in this blog point] pay in UK tax each year’.  One presumes that this claim is based on a calculation accepted by the OBR.  In the lead up to the Budget Speech, the Government’s ceding of control over forecasting to the OBR and the OBR’s failure to take proper account of the behavioural effects of fiscal changes has been widely criticised, in the newspapers and in leading political journals, for introducing into the Budget process an unrealistically static view of the economy and a resulting bias towards high taxation.

The UK has not given, for so many years, tax advantages to non-doms becoming resident here out of a soft-hearted sense of pity for the hardships faced by the ultra-rich.  It has done so because successive Governments, Labour as well as Conservative, have been convinced that the net financial results of doing so are beneficial to the UK as a whole.  That is because it was recognised for decades by almost all informed commentators that the effect of the reliefs is to attract very wealthy individuals to the UK whose contribution to the UK through the taxes they pay, the stimulus their spending gives to trade and industry, the improvements they make to UK land and property, the businesses they create and the expertise which they bring to existing businesses, charities and institutions far outweighs the contribution which would be made by that smaller number of non-doms who would live in the country even if no tax advantages were offered to them.  That was a hard-headed assessment made by successive Governments for the benefit of the general population.

In what way have the priorities and circumstances of wealthy foreigners changed to alter that assessment?  On what basis has the Government arrived at its figure for the annual fiscal benefit of the abolition of £2.7 billion?  The Budget papers do not say.  The Red Book, however, does contain some revealing information to those who look closely. 

The effect on Government revenues and spending on the various changes in the Budget, including the abolition of tax reliefs for non-doms, have been estimated up to the fiscal year 2028/29.  The current fiscal regime applying to non-doms, however, will only be abolished with effect from the fiscal year 2025/26 and thereafter.  So it appears that the Government has only forecast the effects of its abolition of the reliefs for non-doms for four fiscal years, 2025/26 – 2028/29, in which the changes will actually be operative.  In the first two of these years, transitional provisions will apply.  Only two of the years for which forecasts have been made could, therefore, be said to be representative of the normal operation of the proposed new provisions.

The ‘receipt’ forecast for 2026/27 is £2.8 billion.  This increases to £3.67 billion in 2027/28 but reduces to £2.7 billion in 2028/29, the last year for which estimates are made. 

There is a good reason why the net ‘receipts’ from the abolition, if indeed there are any, are likely to reduce and turn into net losses after an initial period.  People do not make major decisions to change the country in which they live lightly.  It is likely that those non-doms who have been resident here will take some time to decide to leave.  Those who are considering taking up residence here for the first time are more likely to take the decision not to come here at all but to settle in another, more competitive, jurisdiction.  It will take time for the abolition to lead to presently UK-resident non-doms leaving the UK and for the discouragement of their replacement by others to have a significant fiscal effect. The deleterious effects of the abolition are, therefore, only likely to show themselves fully after the end of the Government’s four year planning horizon.

A person who changes the country in which he bases himself for fiscal purposes once, however, is much less likely to do so again.    Once non-UK domiciled individuals have chosen to become resident in a more accommodating country than the UK the benefits they bring, or might have brought, to this country are likely to be lost forever.

So even if we accept that the abolition will result, in the short term, in a net increase in fiscal receipts that short term increase is likely to reverse in later years. 

But is there any reason to think that the Government’s figures are credible in forecasting an increase in net direct fiscal receipts even in the short term contradicting as it does the common understanding of decades?  Do the forecasts properly account for behavioural changes rather than simply assuming that the foreign income and gains of non-doms who are currently resident here will be brought into charge to tax automatically by the abolition rather than the UK income and gains of those non-doms, which are currently taxed, being taken out of the scope of UK taxation because their recipients have moved elsewhere and moved their investments accordingly?  The Budget papers do not reveal the answer to these questions but anecdotal evidence suggests that, although some account has been taken by HMRC in advising the Government of behavioural changes, it has done so only to a very modest extent, in respect only of direct fiscal receipts from non-doms and on the basis of inadequate research and of a remarkably static view of the relationship between fiscal change and economic behaviour.  As to the wider economic benefits of attracting wealthy foreign individuals to the country the Government’s figures plainly take no account of them nor is there any indication that the Government has taken into account the positive effect on its fiscal revenues of these wider economic benefits.   

As the Telegraph pointed out on the day after Budget Day, the OBR’s forecasts have proved to be remarkably inaccurate.  For example, the average OBR error in forecasting what the national debt will be in five years’ time has been £415 billion. The OBR was an early creation of the Lib/Con Government which was formed in 2010. Like many ‘reforms’ which seem a good idea at the time but which turn out to have unforeseen adverse consequences, the creation of the OBR has hamstrung Government decision-making ever since. National fiscal decisions are now made in a strange penumbral world in which insufficient account is taken of economic and fiscal reality and attention is concentrated only on those effects which the OBR, applying an unrealistically static view of the effects of fiscal changes on economic behaviour, is willing to recognise.

However unconvincing the estimates justifying the abolition of relief for non-doms may be, the independence of the OBR allows the Government to claim that its estimates are independently verified, to take account of net receipts from the change which are unlikely ever to materialise and to ignore the long-term losses which are likely to result from its proposals. 

A future Chancellor who does not blindly accept a static view of our economic and fiscal system will need to be able to show to the public the financial results which he expects from the changes he makes and to justify them through discussion and argument.  The oversight of the OBR obstructs and obscures that process.  Our present Government has accepted that obstruction and, as Patrick O’Flynn expressed it writing in The Spectator on 6th March, unwisely acquiesced in the transfer of power over fiscal policy to ‘unelected bureaucrats immune from the pressures of electoral politics’

Published in
8 March 2024
Last Updated
12 March 2024