Darling's tax rethink as non-doms threaten to go

Alistair Darling: Rethinking his tax proposals

The Chancellor watered down plans to tax rich foreigners living in Britain today in an attempt to head off a City revolt.

The Treasury made clear it has ditched moves to crack down on "non-doms" by forcing them to reveal details of their offshore funds.

Non-doms are people with links abroad who declare another country as their home or "domicile" and as a result pay no UK tax on their earnings or capital gains outside Britain.

With less than four weeks to go before the Budget, the move by Alistair Darling is sure to be seen by the Tories as a U-turn.

It came hours after a string of wealthy businessmen warned that they would quit Britain if the plans went ahead.

A letter from Dave Hartnett, acting chairman of HM Revenue and Customs, to industry chiefs announced a "clarification" of previous proposals to compel foreigners to publicise details of their offshore trusts. The change will be seen as a blow to the Chancellor, although No 10 sources stressed there was no question of him being sacked or moved.

The Treasury is still sticking to its plans to persuade more people to declare their income from overseas sources and to impose a £30,000 annual levy on those "non domiciled" for UK tax.

But the concession on offshore cash was ordered by the Treasury to quell City fears that it would go on a "fishing expedition" to snoop through the private tax affairs of the wealthy.

A Treasury source told the Standard that it was important to act because the impression had been given that rich businessmen would be subjected to a UK tax witch-hunt that would expose them to further taxes in their home countries.

Britain has tax treaties with other countries which would mean that any details unearthed by HMRC would have to be handed over to other jurisdictions.

Whitehall sources said: "The problem has been that, say you are a Russian oligarch living in London and you are a non-dom. They worried that if we asked the source of their offshore funds we would then have to tell the Russian authorities and that would open them to more taxes."

Treasury sources insisted that it had "never been our intention" to expose the source of offshore funds but simply to subject them to UK taxes once they were brought into the country.

Mr Hartnett's letter states that as long as foreigners "declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source". It adds that tax offshore trusts will not be taxed retrospectively.

Mr Darling is already under huge pressure over his handling of the Northern Rock crisis and his plans to increase capital gains tax rates from 10 per cent to 18 per cent.

Shadow chancellor George Osborne told the Standard: "If these reports are true, I'm delighted once again that the Conservative Party is driving the government's economic policy. It does beg the question, why do we have this Chancellor of the Exchequer?

"The Chancellor is in full retreat on almost all areas at a time when we need strong and competent leadership in the face of uncertainty. We have a desperately weak Chancellor and a dithering Prime Minister."

An HMRC draft of the Finance Bill for the Budget had suggested that offshore trusts owned by non-doms would be caught by capital gains tax for the first time. The Treasury also declared that, contrary to some reports, foreignowned paintings brought into the UK for public display would not be hit by the tax reforms.

The non-doms reforms, which were announced at the same time last October, were aimed at anyone who has spent more than seven years in the UK without being "domiciled" here for British tax.

Mr Darling faced fresh pressure today when foreign business figures warned they would quit Britain if the tax rises went ahead. It emerged that Labour donors and the entire Greek shipping industry are highly critical of the changes. Lord Paul, the Indian-born steel tycoon who helped fund Gordon Brown's Labour leadership campaign, today said that the non-dom move was an "unfair levy" which risked undermining the economy.

Sir Gulam Noon, who has also backed Labour with £450,000, said "everybody is against" the plans.

Dermot Smurfit, the Irish paper tycoon and racehorse owner, said he was investigating moving to Monte Carlo or Switzerland if the changes were introduced. Greek family-owned shipping firms today told the FT that they were planning to leave London in response to the tax crackdown.

Q&A

What is a non-dom?

People who live in the UK but do not call Britain their home for tax purposes. They do not pay British tax on anything they earn overseas - unless they bring that money into the UK.

What did the Chancellor announce last year?

Non-doms who have been resident in the UK for seven of the past 10 years will have a choice - either pay a new £30,000 annual levy or pay normal UK tax on worldwide income.

Is the £30,000 levy the only change?

No. There were also plans to tighten up rules on UK residency and - most controversially of all - to crack down on offshore trusts owned by non-doms. Normally immune from capital gains tax, offshore trusts are being used by smart accountants to ensure that wealthy individuals avoid paying any tax at all. The Treasury said it wanted to apply CGT to the trusts to "remove the flaws and anomalies" that allow tax evasion. Some claim that items brought in from abroad, such as paintings, could be hit - the Treasury denies this.

How many non-doms are there - and do we need them?

The Treasury has said 110,000, but the Tories say there are 150,000. Even the Treasury admits they contribute £4 billion in income tax on the earnings they bring into the UK. But financiers argue that non-doms spend a massive £16 billion, yielding the Treasury £3 billion in VAT and £300 million in stamp duty.

How much money would the Treasury changes raise?

About £350 million in 2009/10 and £200 million in 2010/11. The Tories have separate plans for a £25,000 annual levy that they say will raise £3.5 billion by affecting more people.

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