David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
Wednesday, 8 April 2015 was the day the Conservatives’ general election campaign could have gone horribly wrong.
Up until then, Labour had said very little on the subject of non-doms. The concept of non-doms – people who are resident in the UK but ultimately intend to return to their place of domicile and who could elect to pay UK income tax only on their income arising in the UK but not from elsewhere – was a well-established part of the tax system. Now Labour planned to abolish the status.
Their announcement had taken us by surprise. We could be painted as being on the side of the wealthy and although we could explain the reasons for the existence of non-dom status, during a General Election campaign it is generally the case that when you are explaining you are losing.
The Conservatives had a record for tightening the rules on non-doms. George Osborne announced in 2007 that a Conservative Government would introduce a fee for non-doms not paying tax on their worldwide income. The Labour Government unashamedly copied the idea and introduced such a fee. In the Autumn Statement of 2014, George Osborne had increased the fees.
I was the tax minister at the time and, rather than spend the tax campaigning in Watford, I was soon summoned into CCHQ. It was whilst travelling into London that – to our relief – a recording had emerged of someone pithily explaining three months earlier why it might be a bad idea to abolish non-dom status altogether. “If you abolish the whole status it will end up costing Britain money because some people will leave the country.” Thank goodness for Ed Balls, I thought to myself for the first time in my life.
Labour’s announcement caused us some difficulties but it did not result in the transformative moment that we feared. After returning to office, we further tightened the non-dom regime ensuring that those who have been resident here for 17 out of 19 years can no longer claim the status.
Almost exactly seven years after Labour’s announcement, non-doms returned to the front pages after it emerged that Rishi Sunak’s wife, Akshata Murty, was a non-dom.
It is a policy area about which I know a little so will set out a few thoughts. Before doing so, I should declare an interest. Since leaving politics, I have returned to my previous City law firm which has a strong private client practice. This has not changed my views on the appropriate policy towards non-doms but these things are, ahem, best declared.
On the substance of the policy, there are conflicting objectives. We should seek to raise revenue from the wealthiest in society and we should have a tax system that is seen as being fair. We also, in my view, want to offer a competitive tax environment to ensure that talent and capital comes to the UK, recognising that there are plenty of other options available. The uncertainty here is that no one can be completely sure what the behavioural response to changes in the tax regime will be.
Some non-doms contribute a lot of tax to the UK and if they decide to move elsewhere this may more than outweigh any additional revenue from taxing the worldwide income of those non-doms who stay. Back in January 2015, Ed Balls was raising a fair concern.
I would also add that the non-dom regime makes the UK an attractive location for many successful people in the financial services sector and has contributed to the City of London being the international success that it is. At a time when we are making life more difficult than we need to for the City because of Brexit, I would tread carefully here.
Broadly – subject to new evidence emerging – I think the reforms announced in 2015 mean we have the balance about right.
We should also acknowledge that the non-dom regime is a policy choice – one that successive governments have made. Making use of the regime does not automatically constitute “tax avoidance”, any more than investing in an ISA or a pension constitutes tax avoidance. To constitute tax avoidance, I would argue, involves acting in a way which is contrary to Parliament’s intentions.
I have never met Ms Murty but the current scrutiny of her financial affairs must be grim for someone who has not herself entered public life. On the evidence in the public domain, her behaviour does not appear to be contrary to Parliament’s intentions and, therefore, does not appear to constitute tax avoidance.
As for her husband, I do not know Rishi Sunak particularly well but he has always struck me as decent, intelligent, thoughtful and well-intentioned. I certainly do not always agree with him (my previous column here criticised his spring statement) but, were he to become Prime Minister, I would be more sympathetic to the Government than is currently the case. If, as has been suggested, he gives up politics, I think that would be a significant loss to the Government, the Conservative Party and British public life as a whole.
So, in summary, I think it is sensible that we have a non-dom regime; using it does not automatically constitute tax avoidance and it is not clear that it does here; I like Rishi Sunak and feel sympathy for his wife.
Given that Ms Murty has announced that she will now pay UK tax on her worldwide income, does this mean that Sunak’s problems are behind him? I am afraid the answer is no.
In addition to the broad question about the Chancellor’s political judgement, I think the Sunaks face three specific problems.
First, in order to be domiciled in India, Ms Murty must have the intention of returning there. This means that either the Sunaks are going to be resident in two different countries or Sunak – after holding high office in the UK – plans to emigrate. The former is unconventional and the latter raises the question of how committed Sunak is to the UK.
Second, Ms Murty has told us she will remain a non-dom. This means that inheritance tax will not be charged on the whole of her estate as the law currently stands. Again, I do not think this is tax avoidance. When we reformed non-dom status in 2015, we were conscious that imposing inheritance tax on the entirety of a non-dom’s estate (including on assets that had nothing to do with the UK) would have a significant behavioural impact resulting in many non-doms ceasing to be resident here. But this particular policy issue will now become contentious (Labour will see to that).
One would hope and expect that the point at which the taxation of Ms Murty’s estate becomes a real time issue is many years hence (at least a dozen Chancellors are likely to have the chance to change the law in the interim) but Sunak will be under immediate pressure to close a so-called “loophole”.
Third, many of the arguments in favour of him and the non-dom regime – we should be an open economy attracting wealthy people here, we want the City to thrive, this is all part of the “global race” – sound rather unfashionable in the country as a whole and the Conservative Party in particular. To use David Goodhart’s distinction, the country can be divided into the “somewheres” – those rooted in a particular place – and the “anywheres” – those who have “portable” identities. As the last week has revealed, Sunak is the “anywhere” Chancellor in a Government appealing to “somewheres”.
It is an uncomfortable position.