Non-dom tax reforms in UK could lead to exodus to Italy: report

A report into the importance of non-doms to the UK economy has been released with results highlighting that any additional cash generated by the recent changes to allowances could ultimately lead to less tax being paid, with experts predicting a possible rush to the sunnier, more tax-friendly shores of Italy.

While an initial boost to the economy will be felt, last week’s changes to the tax rules for non-doms could actually reduce tax revenue if two-fifths of those affected decide to leave the UK, according to the report commissioned by Irwin Mitchell Private Wealth.

The report produced by the Centre for Economic and Business Research (CEBR) and is based on a freedom of information request to HMRC as well as official statistics.

The tax rules for non-doms changed last week with the CEBR report setting out possible scenarios if individuals who have been here for 15 of the past 20 years decide to leave the UK. The report found that growing numbers of UK residents have been claiming non-dom status in recent years, with an estimated 122,708 registered in 2016-17.

However, CEBR predicts the number will fall sharply (by 12% in 2017-18) following the implementation of new reforms.

The report also highlights that the 119,260 taxpayers who claimed non-dom status in 2014-15 paid income and capital gains tax of £6.9bn, accounting for roughly 4% of the total tax take from income and capital gains.

Non-dom importance to UK economy

Oliver Kolodseike, senior Economist at CEBR said: “The importance of non-doms to the UK economy is significant with one non-dom contributing as much as 18 average earners in terms of income and capital gains tax. A departure of some of the wealthiest UK individuals could therefore impact public finances and overall economic growth.

“While latest available figures from HMRC indicate that there are currently around 120,000 non-doms, this report highlights that only around 2,500 individuals will be directly affected by the reform. The analysis furthermore shows that if more than around two fifth of these individuals decide to leave the UK as a result of the new tax regime, the Treasury could face a shortfall of tax income.”

Kolodseike believes that an exodus away from the UK is likely but points that it is uncertain to what extent the tax reform will lead to an exodus of non-doms.

Exodus to Italy?

“On a purely financial basis it may make sense for some of the wealthiest non-doms to settle somewhere outside the UK, with Italy likely to become a more and more attractive destination given that it is implementing a new tax regime favouring the international elite,” he said. “However, the decision on whether or not to leave a country is influenced by many other factors such as economic and political stability, a functioning health system, education, national security and of course personal preference.”

The Office for Budget Responsibility (OBR) projected that the changes to non-dom taxation will generate an additional £995m over the next four years. However, if there are “significant departures of non-doms from the UK”, for the OBR’s target to be met, there will have to be a significant increase in arrivals of non-doms to the UK or individuals who lose their non-dom status, but remain UK resident. These will have to generate £2.6bn in tax revenues until the tax year 2020-21 – around £256,411 per individual per year, to meet the OBR figures.

Negative effect?

The Irwin Mitchell report calculates that if fewer than 38% of those individuals who currently use the remittance basis but will lose their non-dom status leave the UK, the net revenue impact of the changes will be positive. However, if more than 38% leave, the changes could have a negative effect.

Alex Ruffel, a tax partner at Irwin Mitchell Private Wealth said: “The report is clear that non-doms make a valuable contribution to the treasury’s income, some £6.9bn in 2014-15. It takes 2.1 million average UK earners to generate the same amount of tax as 119,260 non-doms.

“What the research shows is that there is a tipping point at which the UK economy will benefit from the changes: the OBR prediction is that they will increase tax revenue but there is an element of uncertainty – if they lead significant numbers of current or former non-doms to leave the UK or discourage others from coming, the net revenue impact will be negative. “

Gary Robinson
Head of Video and Ezines at Open Door Media Publishing. Deputy Editor, International Investment. An experienced journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as a fully qualified IFA, Gary works across both International Investment and InvestmentEurope titles. Previous video production credits include projects on BBC, C4 and SKY.

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