The UK government has gone too far in levying taxes on non doms, says Professor Michael Mainelli of of Z/Yen.
In an unfair and over-taxed world, the UK's decision to recognise only income generated in the UK for the purposes of taxation had a certain appeal.
It was clear, it signalled a commitment to small government, and it attracted swathes of non-doms to our shores.
'Non-dom' is shorthand for people who are not domiciled in the UK for tax purposes. Unlike 'ordinary' UK residents they currently enjoy the advantage of being excused from paying tax here on income earned overseas - a multimillionaire hedge fund manager who earns the unlikely sum of 10k a year in the UK and 10m in the Cayman Islands will pay just 782 on his UK income.
The cry has gone up that this is unfair for UK nationals! Perhaps, but mutual tax misery is hardly a sophisticated argument. The non-dom arrangements do not 'excuse' the rich from paying UK taxes, as they aren't our rich: they are being enticed to immigrate.
Another simplistic argument - grab whatever we can in the UK because we are desperate and skint - is counterproductive if added-value workers choose to go elsewhere. Even the notion of charging 30k for non-dom status is other-worldly. Perhaps non-doms should purchase a red flag with 'audit me' emblazoned on it?
When start-ups and large companies are deciding where to be based, personal tax considerations typically trump considerations of corporate taxation. If Mega-Global-Financial asks someone to head a new Asian office, the new head will decide based on a lot of personal factors, such as schools, parks, airlines, restaurants, visas and ... tax.
Non-dom status helps London as a financial centre. Financial services is the biggest single employer of non-doms; of the total estimated 110,000 to 150,000, about a third, i.e. around 45,000, probably work in the City of London. With 325,000 people, many foreign, in the City of London generating well over 20bn of service surplus, the problem is how to get the rest of the country to add value, not to tax the City harder.
All large cities can be improved and London is no exception. Financial services non-doms come to London, not the UK, for a complex set of reasons, and tax is high on the list. An economy built solely on tax advantages is pathetic indeed. Quality of people, regulation, the business environment, infrastructure and market access all matter, but since the annual non-dom charade between the political parties resulted in proposed changes last September, I've seen real people move activities elsewhere and many, many others discuss change. We do need a national discussion on taxation, including why we need so much, but non-dom taxation relief is part of a wider tax competition for business, and it has been working.
My fear? For the sake of some cheap political points we will wake up to find non-doms gone. We will have forgotten that in 2007 and 2008 our silly, pointless, point-scoring, political discussions took away senior and middle managers' personal interest in locating their firms' businesses in the UK. We have time to change our minds. The faster, more certainly and discreetly we do so, the better.
Professor Michael Mainelli FCCA FSI is chairman of Z/Yen, which produces the Global Financial Centres Index. Z/Yen is a commercial think-tank in the City of London. Z/Yen's humorous risk/reward management novel, Clean Business Cuisine: Now and Z/Yen, was published in 2000.