Jerome de Lavenere Lussan argues that the UK's new laws on non-doms will lead to a reduction in the inflow of wealth and an erosion of the country's financial knowledge base
Concerns have been raised about the way the UK Labour Government's new laws on non-domiciled persons have been introduced so suddenly and how they will impact the British economy, and notably financial businesses based in London, such as hedge funds. Many are worried about the potential damage of an exodus of wealthy foreigners; others applaud the bold move and consider it is only fair.
We do not believe the proposed change in the law is fair to middle Britain as it neither resolves the unfair taxation regime that benefits foreigners, nor will it bring in more money for the Government to pay for schools, transport or education, as there will actually be a reduced inflow of wealth and related tax receipts. Either way Britain is losing out.
It is inconceivable that something so important should not be more clearly debated and discussed. By way of analogy, imagine a world where super footballers were brought to one country, in part due to resources but in part attracted by a tax advantage that made them want to come and work in the country. Call that country England, look at the football teams and you have the perfect example!
Wait a few decades; the teams dominate European football and the players get filthy rich. Punters are apparently still happy! There is seldom popular resentment towards successful, rich footballers. However, take away the tax advantage, tell the players at the last minute and start investigating their tax affairs, sending them inquisitive letters, making them unduly worried (since most are in the hands of capable accountants and few practice wilful tax evasion).
Imagine the impact on the players? They tell their friends that they are in a country where the law can change overnight, without warning, and that it is really difficult to do business there. They slowly stop coming and next thing you know you are no longer top of the league. It need not take long, perhaps 10 years ... perhaps 20 years ... but think about what that can do to an economy? This smacks of short-sightedness at all levels.
Hedge fund industry trimmed
According to recent studies by the Society of Trust and Estate Practitioners (Step), the value of non-domiciled investment in the UK is between £75bn and £125bn. By way of contrast, in 2007, the Government's education budget was £77bn. The Step survey found that "one-third of UK resident non-domiciled ... are prepared to leave the UK or sell UK investments".
The non-domiciled already pay income tax, VAT and stamp duty like any British citizen. The £800m (and £500m next year) the Chancellor foresees Britain earning from the proposed changes does not appear to be enough to justify the measures nor make up for the potential financial consequences.
Our view, and that of other surveys, is that many hedge fund managers are thinking of leaving Britain. The hedge fund industry is particularly mobile today thanks to technology. However, the Revenue hopes this will not happen.
The institutionalisation of the hedge fund industry has made London, with FSA regulation, an attractive choice for hedge fund operations. London also offered an existing talent pool as banks had already attracted some of the best students from Europe over the last 20 years. This has made London the centre of the European hedge fund industry. Many forget that a hedge fund is simply an offshore company linked to an asset management company. All if not most of the fees received for servicing the hedge fund are brought back to Britain and subjected to corporate tax. With Britain offering a great legal system, reliable government and a steady regulatory environment, nothing could stop it from becoming the financial centre it is today.
However, in the last few years hedge funds have been targeted as tax evaders either because of the non-dom rules, dual employment contracts or transfer pricing issues linked to their non-British operations. Expertise in dealing with such investigations is without question necessary but unfortunately costly. From our experience clients have found HM Revenue & Customs' approach overly time-consuming and stressful. What has been most surprising is that the Revenue chose to target relatively small funds with less than $200m of assets, which could be construed as picking an easy target, attacking the funds with fewer resources, as they are more prone to mistakes.
Regardless, the scene has been set and the message is clear. The Revenue is no longer pro-business. The new rules announced show an anti-business approach and are arguably driven by HMRC rather than the Treasury.
Assessing the options
Most of our clients are looking for alternatives, if only to benefit from less government red tape or from Asian expansion. They will not move yet, but they talk about it. Most of our new clients who are foreign want to know about options other than London. We have been dealing with new set-ups in Switzerland, Luxembourg and even France, as well as providing research on the benefits and disadvantages of Dubai and Singapore. Currently London has the upper hand, but complacency would be reckless.
We are led to believe that the new laws will be fair as they target the super-rich; we can imagine that the Government would like us to picture the odd Russian oligarch or rich Middle Easterners profiting from oil price gains. The truth is probably much more mundane: most of the non-doms will be lower to middle-class working in restaurants or in financial services. The new tax penalises those who are not part of the elite super-rich; they may not be poor but will be seriously impacted by the £30,000 annual levy. Many will probably eventually go back to their countries of origin or try another country. Britain will lose its status as a European tax haven, which is great for the rest of Europe but not good for the British. This unique selling point enabled Britain to develop a serious financial services business but also a shipping industry, not to mention the pharmaceutical sector. The new laws will affect people at all levels of wealth, employees of foreign-owned businesses, not to mention ultimately Government tax receipts.
We do not believe there will be a mass exodus, but we certainly foresee continuous erosion. The United States boosted Britain's financial industry by increasing taxes through 'interest equalisation'. Perhaps it is time for Britain to pass on its status as a leading financial centre to Switzerland or Singapore? The saddest thing for all Brits is to lose entrepreneurial foreign residents whose innovation drives the economy. The new rules, combined with rules on capital gains tax, are sure to affect the mid-sized business world.
Britain has been renowned for its stable legal system and its welcoming approach to entrepreneurs of all ilks. The new rules appear ill-thought-out and will affect this highly regarded reputation. Targeting foreigners deemed rich could be viewed as an easy vote grabber. We just hope that voters are given the chance to monitor these decisions and their true economic costs, and that the tax laws will be amended to benefit everyone. Politicians cannot exactly claim to have reduced the gap between rich and poor - it is no solution to make everyone poorer.
Most of the banking talent comes from abroad, and London needs to maintain its talented pool of workers to hold on to its status as a leading financial centre. Britain has previously been able to enjoy the 'brain drain' from other EU nations and has attracted many workers with prestigious qualifications. It would be regrettable that this be thrown out on a whim.
- Jerome de Lavenere Lussan is managing partner at Laven Partners.
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