Alistair Darling backtracked on the controversial "non-dom" Bill after pressure from the financial services industry, amending the most pernicious effects of his proposals and reducing the tax take from the measures by £100m next year.
The City welcomed many of the changes to the non-dom tax outlined in the Budget but accountants complained that the legislation was confusing and tortuous.
Nicola Roberts, a senior manager at PricewaterhouseCoopers, said: "We welcome the changes that have been made since the publication of the draft legislation, as it shows the Government has been listening to our concerns. It would have been nice for further consultation before the rules become effective."
Stephen Quest, a tax partner at Grant Thornton, added: "They have bowed a bit to pressure, with many of the proposals much more workable; but it is now mind-bogglingly complicated."
Mr Darling in effect drew a line under the Bill yesterday after numerous amendments since it was first announced, saying the rules would not be reviewed in this parliamentary session or the next.
The tax is targeted at non-domiciles who have been resident in the UK for more than seven of the past 10 tax years. They will have to pay an annual £30,000 charge on their foreign income and gains made outside the UK. This is in addition to any tax on UK income and gains on foreign income remitted to the UK.
Lord Paul, a close ally of Gordon Brown, said: "This is a very good thing. He has simplified it. If anyone wants to call themselves a non-dom, then they will have to pay £30,000."
Mr Darling first announced the tax in October, after similar proposals by the shadow Chancellor, George Osborne. It caused consternation among wealthy foreigners and multinational organisations, especially banks, lawyers and private equity firms, many of whom threatened to relocate to Zurich and Monaco.
When the draft legislation was published in January it went further, than most had expected. Ms Roberts said: "The original proposals removed many incentives to live and invest in the UK. These new amendments have gone some way to addressing that."
The Chancellor had originally said the estimated revenue of "modernisation of residence and domicile taxation" would be £800m in his pre-Budget report in October, but the Budget revealed that after the amendments, the figure has fallen to £700m. That equates to almost 24,000 non-doms paying £30,000 each.
Other amendments include changing the taxation plans on offshore trusts as well as how the £30,000 was to be paid, a raise in the taxable threshold and a potential victory for US citizens in Britain.
Before April, any gains realised by offshore trusts were not taxable, but the original non-dom plans were to tax any gains made offshore, rather than just those realised and remitted to the UK. The legislation would also have been retrospective, covering the period since March 1998. This has since been changed.
The Government has also raised the threshold of taxable foreign income from £1,000 to £2,000 and the charge will only apply to those over 18. Mr Darling also changed the rules of paying the £30,000. Under the initial legislation, non-doms bringing the money from abroad to pay the treasury would be taxed on that sum. One expert described it as a "tax on a tax," but that has since been scrapped.
Nevertheless, non-doms' advisers argued there had been too little time, and the Government should have consulted further. It has delayed the income- shifting legislation for a year, and some feel they should have done the same for the non-dom rules, which become effective early next month.
The Treasury has also agreed to proposals that US citizens living in Britain will not have to double pay the £30,000, although it is waiting to hear from the Internal Revenue Service in the US.
The British Bankers' Association said: "We are concerned to see that the non-dom proposals remained in the Budget and would have preferred the Government to ... submit its entire package of proposals for detailed consultation, as we remain concerned that the effect of the levy could be damaging to UK competitiveness."
At the centre of the nom-dom debate
Wealthy non-doms have generally stopped short of promising to leave the country but Dermot Smurfit, the Irish paper and packaging tycoon, said last month that he was considering a move to Monte Carlo or Switzerland if the Government went ahead with its plans.
Two of Alistair Darling's nightmares came together when it was revealed that Ron Sandler, appointed by the Chancellor as chairman of the nationalised Northern Rock, was a non-dom.Mr Sandler grew up in Bulawayo, Zimbabwe, and holds a German passport.
The Indian-born steel tycoon has criticised the Government's non-dom charge as an "unfair levy" which risks undermining the economy. Lord Paul is Gordon Brown's most generous personal backer and last year offered funding if the Prime Minister called an October election.
SIR GULAM NOON
Sir Gulam Noon, the Indian-born food magnate who was nominated for a peerage by Tony Blair, has said "everybody is against" the Government proposals. Sir Gulam has backed Labour with donations of more than £450,000 and his personal wealth is estimated at £70m.Reuse content