factorfiction3 Closing the non dom black hole?

The claim
“We will raise the Inheritance Tax threshold to £1mn to help millions of people who aspire to pass something on to their children, and we will take 9 out of 10 first time buyers out of stamp duty by raising their threshold to £250,000. These will be paid for by a simple flat rate levy on all non-domiciled individuals in return for certainty over their future tax treatment.”
Conservatives: a new economic model

The background
Finally we have some new figures that may shed some light on what Labour calls a “black hole” in the Conservative’s inheritance tax proposals.

To recap: this is a war of numbers which has been going on since 2007, when Shadow Chancellor George Osborne announced plans to scrap inheritance tax for anyone worth less than £1mn, and abolish stamp duty for first-time buyers.

The tax-cutting plans are expected to cost £1.8bn a year. At a time when the public finances are mortgaged to the hilt, the pressure is on to show how any new policy will be paid for.

The answer, say the Conservatives, is a new, flat-rate levy on non-doms – wealthy individuals with links abroad who live in Britain but do not have to pay UK tax on their foreign earnings. (Think Lord Ashcroft.)

The controversy centres on whether this new tax would raise enough cash.

The Tories are adamant that it will foot the bill, but a recent parliamentary answer suggested it would only bring in a few hundred million quid a year – much less than the £1.8bn needed.

So who’s right?

The analysis
Surprisingly little is known for certain about how many wealthy non-doms there are, and how they would react (leave the country? Stay and pay up?) if hit with a new tax.

Under the Tories’ plans, all non-doms would be liable for an annual £25,000 fee, regardless of how long they have lived here.

The government brought in a new £30,000 non-dom tax of its own in April 2008. This only applies to non-doms who have lived in Britain for at least seven years.

In both cases, non-doms could avoid the tax simply by choosing to pay UK tax on their foreign income instead – the likely choice of those who aren’t actually rolling in offshore earnings.

We now know, from the 2008-9 tax returns which were submitted earlier this year, how many people paid the government’s new £30,000 non-dom charge. A grand total of 4,200 non-doms coughed up, according to HMRC figures released to FactCheck under the Freedom of Information act.

This figure may change if tax returns come in late, but so far it looks to be very close to the government’s estimate that 4,000 non-doms would cough up.

What does this tell us?

“The Treasury and the Tories have both been putting out a lot of numbers; this is the first vaguely verifiable number,” said Stuart Adam, a senior research economist at leading economic think tank the Institute for Fiscal Studies.

“The Tories are more optimistic than Labour on how much the non-dom charge will raise,” he said. “The first number we have suggests that the Treasury’s estimates are right. If they continue to be right, the Tories would have a black hole of around a billion pounds.”

But that’s still a big if. It doesn’t necessarily mean they will – there are still too many uncertainties about how the additional non-doms would behave when targeted by the Tories’ tax.

We put the new figure to the Conservatives. They saw things differently, saying the new data “shows that the government have under-estimated the revenues from their levy, and is entirely consistent with our plans”. They also point out that HMRC acknowledges the figures may be updated in the face of late tax returns.

“In addition to this, uncertainty remains over the number of non-doms who will choose to start paying normal tax on their worldwide income rather than pay the levy,” a spokesperson said. “The Treasury has produced no figures on the number of people who have chosen to pay normal tax on their worldwide income rather than pay the levy.”

The party also says the number of people eligible to pay the levy will increase over time, as the taxman is cracking down on residency rules, and the government’s policy is currently vulnerable to a number of loopholes.

So where does that leave us?

The verdict
The first figure that we have in a war of numbers over taxing non-doms corresponds to the government’s estimate.

According to independent tax-watchers the IFS, this puts Labour one-nil up, midway through the second half. But the game is far from over.

As FactCheck noted right back on the day the Tories’ policy was first announced, there are clouds of uncertainty about how much money a dom-tax would raise. We still can’t be certain the Tories are right. But we can’t be certain they’re wrong, either.

Read more:

Category: Conservatives
Tags: , , ,