But a Reuters analysis shows that some "non doms," as they are
known, have also found a way to use the status to avoid tax on money
made in the United Kingdom.
By shifting ownership of their companies offshore, these non doms -
including television stars and a former owner of the Harrods
department store - have legally moved wealth worth billions of
pounds out of the tax authority's sight.
Reuters has identified 26 people who have either said they are non
doms or been identified as such by public officials or business
associates. In the past 20 years, 13 of these people have amassed
assets in the United Kingdom worth at least 2.6 billion pounds ($4
billion) which they have held through offshore structures. These
foreign-held UK businesses have generated more than 1 billion pounds
in gains for their owners, all of which would escape tax if the
gains were kept offshore.
The ownership-shifting technique is common, accountants say. But it
allows non doms to use their status in a way that was not intended.
The rule is not meant to shelter British assets, Britain's tax
authority says in a guidance note. Non doms "will pay UK tax on any
of your income and gains which arise/accrue in the UK." Non doms can
avoid this thanks to a gap in the rules.
The tax authority, which declined comment for this story, says there
are around 114,000 non doms in Britain. It's difficult to know how
many have used their status to shield money made in the country,
because business owners don't have to publish that they are claiming
non-dom status.
Generally speaking, "there is no rational basis for a system that
transfers ownership of this UK income abroad," said Jolyon Maugham,
a tax lawyer who has fought the tax authority on behalf of
individuals and companies and advised the opposition Labour Party.
"This is income that is derived from the UK, so it's difficult to
see any basis on which it should not be taxed in the United
Kingdom."
The finance ministry, which oversees the tax authority, said
everyone must pay their fair share of taxes, and it plans to crack
down on aggressive tax avoidance, including what it called "abuse of
the non-dom rules."
Even when non-dom status is used as intended, it is controversial:
All other British residents pay tax on worldwide income, no matter
where they make it. The Labour Party promised to ax non-dom status
before this month's election, and other opponents, who include
captains of British industry and establishment newspapers such as
the Financial Times, say non doms get an unfair way to avoid taxes.
The system's backers, who include employers' group the Institute of
Directors and free-market think tanks, say the non-dom status
attracts foreign talent and money at no cost to the taxpayer.
One high-profile businessman who is known to be a non dom is James
Caan. His case shows how British taxpayers may in fact be losing
out.
Caan was born in Pakistan, which allows him to claim non-domiciled
status in Britain, according to his lawyer. He has become a business
guru following his role in "Dragon's Den," a television series about
business startups, and has hosted a business show on CNBC. His best
business decision, he has told several newspapers, was to found a
recruitment consultancy in 1985.
He set up the company, Alexander Mann, in "a glorified broom
cupboard" in London's Mayfair and built it, through hard work and an
eye for changes in corporate hiring needs, into one of Britain's
biggest talent acquisition and management services groups. At the
turn of the millennium, he sold the company - which made more than
98 percent of its sales in Britain - to a private equity group. It
was "the height of the market," he said later.
At the time of the sale, Alexander Mann was worth 130 million
pounds, Caan said in a 2013 interview, although his lawyer told
Reuters the figure may not be reliable. After the deal, Caan said,
he did not have to work again. "I took up flying planes, went back
to school and bought a yacht," he was quoted as saying in 2009.
Before Caan sold, he did something perfectly legal which would have
implications for his tax bill. In 1998, he transferred ownership of
his company to a Jersey-based family trust.
It was the trust that sold Alexander Mann. Lawyers for Caan said he
did not control the trust, and there were several beneficiaries to
it. Nonetheless, as a result of that move, Caan himself owed no tax
on money he made on the deal - although he may have been liable for
tax on any money he brought back to Britain for personal purposes.
If Caan had been a normal UK resident, the tax authority would have
had the power to look through this offshore trust and tax his
capital gain. But as Caan is a non dom, the trust was – and remains
- legally excluded from the tax authority's sights.
Caan declined to comment for this story. His lawyer said Caan had
paid all the tax he owed. At the time of the sale, the lawyer added,
the effective rate would have been around 10 percent; companies in
which the offshore trust had invested had since generated more than
50 million pounds in UK tax.
TRUSTS
The non-dom idea stems from an 18th-century sense of fair play, its
proponents say. The tax break helped colonial plantation-owners, as
well as aristocrats fleeing the revolution in France, to shield
their foreign interests from tax, according to Edward Troup, deputy
head of Her Majesty's Revenue and Customs (HMRC), the UK's tax
authority.
Until 1914, anyone could choose not to pay tax on overseas income
that was not sent to Britain. Today, only non doms can.
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To qualify for non-dom status you have to be born outside Britain,
have a parent born or tax-domiciled outside Britain, or have lived
outside Britain yourself for a period. You also have to say you plan
to leave Britain in the future, show "personal links" to another
country, and may have to pay a fixed annual levy to the tax
authority.
Since one-third of babies born in Britain have at least one foreign
parent and another 12 percent of residents were born outside the
country, tax advisers say many millions of people could apply for
non-dom status.
In the Reuters analysis, nine of the 13 non doms who held UK assets
offshore have British nationality. Besides Caan, former racing star
Jackie Stewart is another example of how non-dom status lets even
Britons send British-earned profits offshore.
Stewart moved to Switzerland in 1968 to avoid punitive UK taxes. In
the 1990s, the tartan-wearing "Flying Scot," as he was known,
returned to live in Britain so he could establish a Grand Prix team.
He retained his Swiss tax domicile, he told the Sunday Times in
1997. His company, Stewart Grand Prix, was based in Britain but was
owned via a Jersey trust for the benefit of Stewart's family.
In 1999 he sold his team to Ford, turning an initial 1 million pound
investment into a 76 million pound sales price, according to company
filings. Because the team was held by an offshore trust, and because
Stewart was a non dom, this gain was not subject to UK taxation.
Stewart declined to comment.
THE RULES
Britain has had rules to restrain ordinary taxpayers from avoiding
tax by shifting their assets offshore since at least 1936, and
advisers say the rules on non doms have recently tightened.
Now, even if a non dom holds a British business offshore, any
capital gains they make on selling shares in the business are
taxable. That should remove any tax benefit from asset-shifting,
said Christopher Groves, partner with law firm Withers LLP.
But the non dom can still escape tax if there is an offshore trust
between the non dom and the company owning the British assets.
"It's a common tax-planning technique," said Mark Davies, who
specializes in advising non doms on tax.
Trusts are frequently cited as the ultimate beneficial owner of UK
assets controlled by non doms, filings show. Among other non doms
who held UK-based businesses in offshore trusts were a car dealer
and a peer of the realm. (For details, see "UK 'non-doms' and their
British offshore firms")
Even one of the most British of institutions found its way into the
tax gap.
Harrods department store was, for 25 years, owned by Mohamed
Al-Fayed, the Egyptian business magnate whose son, Dodi, died in the
1997 car crash that killed Princess Diana.
Harrods funded a lavish, largely untaxed lifestyle for Fayed and his
family. In the 1990s, the tax authority alleged that "enormous
dividends" from Harrods went offshore, and that Harrods covered the
cost of family expenditure without Fayed paying UK tax on the funds.
These included the costs of corporate jets and a yacht in the
Mediterranean that Dodi used to entertain Diana, according to
documents from court actions between Fayed and the tax authority in
the early 2000s. Fayed said at the time he always fulfilled his
legal tax obligations.
All this was possible because of Fayed's non-dom tax status, which
allowed him to cut a deal with the tax authority under which he
would pay around 200,000 pounds in income tax annually between 1985
and 2003, irrespective of how much he earned.
Repeatedly denied UK citizenship, Fayed sold Harrods in 2010.
Profits on that sale and on the sale of another retailer made Fayed
and his family around 1 billion pounds, company filings show.
Had Fayed been domiciled in Britain, the sale would have represented
a windfall for the tax authority. However, because of his status and
the fact Fayed controlled Harrods via Bermudan companies and a
family trust, Fayed would have escaped UK tax on the profits of the
sale, Davies said.
A spokesman for Fayed said he had always conducted his tax affairs
in a manner that is both legal and proper: "He has been resident but
non-domiciled and as such has been entitled to such benefits as that
entails."
(Edited by Sara Ledwith)
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