13 October 2022
Moving the Guns
By John Watson
Public outrage at the now cancelled proposal that the top rate of tax be reduced at a time when public borrowing is increasing has dominated politics since the mini-budget and quite right too. But behind the obvious point that when the public as a whole is tightening its belt, the better off should also be making a full contribution, there lurks a fundamental question. What, in the middle of a financial crisis, was the cut in rate going to achieve for UK plc? Would it make people work harder? Surely not. Those whose income topped the starting threshold of £150,000 a year presumably already commit their energies, or at least so much of those energies as they want to commit. Would it make the UK a more attractive place to do business? Hardly. Anyone whose decision on where to live depended on calculations of their after-tax income would surely reflect that the change was likely to be reversed after the next general election. Would not a promise to reduce the top rate when the current crisis had passed and the country can afford it have done as well?
Well, the moving finger has writ and the Government has received a bloody nose. It is a victory for those on the left who are advocates of higher taxation and will encourage them to look for new targets. Where will they strike next? The remittance basis for non-domiciliaries? That seems quite a likely one and there have already been calls for its abolition from members of the Labour Party. Perhaps then a little pre-emptive analysis is in order.
Many years ago I was sitting at a restaurant in Holland with a very distinguished Dutch tax lawyer. In those days the Netherlands was a major centre for treaty shopping, that is to say that income streams were routed to companies there before being passed on to the real owners elsewhere, use being made of the Netherlands’ comprehensive network of double taxation arrangements to avoid taxation in the source country. I was teasing him about Holland’s prosperity being based on its role in international tax avoidance. After a bit he stopped me and said that the Netherlands double tax treaties were certainly an asset but that he would swap the lot for the U.K.’s remittance basis for non-domiciliaries which meant that if you were foreign you only had to pay UK tax on overseas income and gains to the extent to which you brought them to the UK.
Imagine then that you were a wealthy foreigner with substantial overseas assets somewhere in the East where there is not very much tax. You would like to come and work in the UK. If the price for that was that you would pay UK tax on your overseas income you probably would not come but would base yourself overseas. Under the remittance basis, to use which you nowadays have to pay a flat annual fee of £30,000 once you have been here three years and £60,000 once you have been here for 12 years, you would be taxed on your UK income and gains but not on those from your overseas assets.
Does that regime benefit the UK commercially? For the very rich, for whom the annual fees are trivial, it means that they can come here without bothering about UK tax and that clearly makes us an attractive place to live. Here the choice from our perspective is a simple one. Would we rather they lived here or lived abroad, in Monaco or Switzerland, say, where a high living standard is combined with minimal tax? There are two sides to the question. Perhaps we would like to see more of the top British properties occupied by British people, more of the meals at the top London restaurants going down British throats, more of the smart cars on London Street occupied by the locals. Most of us, if we are honest, feel some sympathy with that; but then there is the other side. Britain’s role in the world hinges on services and technology. It is only by succeeding there that we can thrive as a nation (and I shall resist the creepy words “and fund our beloved NHS”). What happens to providers of services who turn away customers? What happens to technology in an environment which is hostile to those funding it? If we abolish the remittance basis they will be drinking champagne in Paris and Berlin. Perhaps that says it all.
To see what happens when a country drives away those who underpin its wealth you need only go and stand on the streets in Islington. Listen to the passers-by and ask what is different from what you would have heard 20 years ago. The answer will strike you at once. You hear much more French. Why is that? Have our Gallic friends decided that the croissants from La Belle Epoque in Upper Street are now better than those you can get in the Place de la Madeleine? Perhaps they have but it is not that which brings them across the Channel. They come because the French labour laws and restrictions make it difficult to run a financial services business in France. The politicians there have made certain forms of business unwelcome and business has voted with its feet. We should think twice before pushing rich foreigners and their businesses away from the UK.
It does not of course follow that the remittance basis as it stands is perfect. Such things need to be revisited from time to time and it may be that the fees should be adjusted or more thought needs to be given to what amounts to a remittance. Striking a balance here is complex work and would require a great deal of analysis. It is perfectly sensible for the government to consider such things and, indeed, how much protection the regime really gives to our economy. What would not be sensible would be for a nervous government to abolish the regime without full analysis in an attempt to boost its popularity. And here lies the worry. Once governments have lost their balance they can fall into the trap of making economic decisions for political reasons. Ms Truss needs to avoid that and if Sir Keir Starmer wins the next election he will need to avoid it too.