New tax rules will drive us out of London, say big City firms

Big City firms - including Goldman Sachs and Morgan Stanley - are understood to be threatening the Treasury that they will scale back their London operations in a row about the tax paid by employees from abroad.

HM Revenue & Customs has moved to outlaw the use of dual contracts for those staff from overseas who also spend large parts of the year working outside the UK. This is part of a long-standing review of the rules covering so called "non-domiciled" residents, who live and work in Britain but pay a fraction of UK taxes.

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High-profile business people such as the Chelsea football club owner Roman Abramovich, along with wealthy expats and many people at top City firms, use the non-dom rules to cut their tax bills. The Treasury estimates that are 60,000 workers with non-dom status, out of 100,000 non-doms overall, but others believe the figure could be as high as 250,000.

The Chancellor announced a review of the tax rules governing non-doms in the 2003 Budget. However, little was done until earlier this year when the Revenue said it had "new legal opinion" that the use of dual contracts was illegal.

The practice is a common wheeze of investment banks. A Norwegian, say, working for a US bank in London, who visits clients outside the UK, has two employment contracts. One pays him in the UK, so that he pays UK tax. The other pays him offshore for the work done abroad, avoiding UK tax.

Aileen Barry, the director of national tax investigations at the law firm DLA, said: "These schemes have been around for a long time. It is mainly City high-flyers who use them. The Treasury is now going after them quite strongly."

City investment banks have reacted angrily to the change. Through their trade body, the London Investment Banking Association (Liba), they have told the Treasury that it could make it less economic for them to be based in London.

"The banks have been threatening to shut down parts of their operations," said a leading tax lawyer. "Morgan Stanley has been particularly vociferous."

Morgan Stanley has denied it is leading the lobbying, saying it is merely supporting Liba's actions. However, other sources cited both Morgan Stanley and Goldman Sachs as putting pressure on the Government.

The row comes as leading figures from the "Big Four" accountancy firms are calling for a voluntary code of conduct between the Revenue, tax advisers and corporate taxpayers. Support for a code is growing among tax professionals and the CBI as a way to defuse hostile relations with the Revenue. A spokesman for the Treasury said: "A voluntary code of conduct is one of the many issues which gets discussed."