With inevitable consequences for City Law, UK Chancellor George Osborne yesterday (8 July) pushed back the date the country will rebalance its books, ditched the bank levy and tinkered with the fiercely-criticised non-dom status.
Delivering the first budget for a majority Conservative government since November 1996, Osborne announced plans to reduce corporation tax from 19% to 18% by the end of the decade, cut the bank levy that sparked a global review at HSBC on where the bank should be headquartered over the next six years and delayed the date Britain’s books will run a surplus to 2019/20.
Offering an olive branch to the banks that have voiced discontent over the levy introduced on banks’ balance sheets in 2011 and has been steadily increased since, Osborne said the bank levy would be reduced until 2021 and adjusted to only cover UK balance sheets. It will be replaced by a new 8% surcharge on banks’ profits from 1 January in a move the Chancellor said ‘will actually raise more from the banks’.
John Baldry, a barrister at Temple Tax Chambers, said the reduction of the bank levy currently raising around £3bn a year ‘is a reaction to some of the banks moving their headquarters offshore’.
Michael McKee, head of financial services regulation at DLA Piper, added: ‘Phasing out the banking levy would be a benefit to both the banks and the UK economy. The levy has a direct financial impact and also an important symbolic impact. Its removal would help British banks compete internationally.’
The Chancellor then surprised many with plans to abolish permanent non-dom tax status from April 2017, which he said would bring in an additional £1.5bn in annual taxes. While the reforms will not eliminate the tax status, individuals who have lived in the UK for 15 of the past 20 years will lose the right to claim it.
Official figures show there were 114,800 individuals recorded as non-doms in their self-assessment tax forms in 2012/13 and the issue has been a political potato, with many left-wing politicians critical of the tax breaks given to people working in the UK but handed tax breaks but being domiciled outside the country.
Ashley Crossley, chair of Baker & McKenzie’s Europe and Middle East wealth management practice, told Legal Business: ‘The non-dom changes are to be welcomed if they end the political football that politicians sought to play on this issue at the election. The deemed domicile rule of 15 years is a fair compromise but we will need to see the detail as to whether these changes will work in practice. The proposed changes to non-dom taxation contain a potential sting in the tail to trusts and a potential redraft of the anti-avoidance rules.’
David Klass, a London-based tax partner at Gide Loyrette Nouel, concedes that while ‘the changes remove one of the major appeals of the UK non-dom regime – the unlimited duration of its application – a large proportion of the non-dom community is not likely to be here on a long-term basis in any case’. For Klass, there is a strong argument that this tinkering does not materially affect the UK’s competitiveness against other European countries ‘since the non-dom regime is mirrored in few other European jurisdictions and continues, albeit in amended form’.
Tax commentator Jolyon Maugham QC of Devereux Chambers, said the changes did not go far enough. ‘It’s a very modest attack on some really rather unjust rules. A modest attack for the reasons. The real problem, testing whether you’re entitled to non-dom status is in practical terms impossible as you’re trying to work out whether someone is telling the truth as to their future conduct. There’s no way a judge can sensibly test that and there’s only been one challenge to non-dom status brought before the courts.’
The government will also intensify its crackdown on tax avoidance by ploughing a further £750m into HMRC to ‘go after offshore trusts’ and wealthy individuals as it aims to triple the number of tax evaders it prosecutes. The Treasury hopes to bag £265m from capital gains avoidance by private equity in 2015/16, rising to £390m by 2017/18.
But the key aspect of yesterday’s summer Budget was the announcement of plans to replace the minimum wage with a ‘living wage’ for low-paid workers, with Osborne declaring that ‘Britain deserves a pay rise’. From next April, everyone over the age of 25 will be entitled to £7.20 an hour, which will rise to £9 an hour by 2020.