Hamish McRae: We must remain a magnet for global talent

Wednesday, 13 February 2008

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It is partly about money but it is also about human capital. I will start with the money.

Why did the Chancellor announce plans to increase taxation on the "non-doms"? Partly because he was nudged into it by the Tories but also because his Treasury minions reckoned they could raise some money in a year when he desperately needs it.

Why did he yesterday start to row back on that plan? Because he realises that far from raising additional money, his plans will actually cost him revenue, probably in year one and certainly in years two, three and beyond.

Not very bright. How could poor Mr Darling get himself into such a mess?

You have to start from the point that non-domiciled status has been abused and therefore something had to be done to curb it. This idea that if someone chooses to come to live here they should be able to keep their overseas financial assets out of the UK tax net, and just pay tax on their UK earnings, makes practical sense.

But there are people who have lived in the UK all their adult life and still are "abroad" for tax purposes. It gets worse. I was told by a top Tory about a youngish Briton who was a non-dom because his grandparents had fled from the Continent in the 1930s. The chap was rather proud of it.

You can't have this. You cannot have a society where the bulk of the country pay what is now really quite a high level of taxation on all their income and a growing minority who are able to avoid paying so much tax by establishing domicile overseas. So something had to be done, partly for political reasons, but also because what started as a tiny loophole was become a yawning chasm.

The problem was how to do so sensitively and effectively. The Tories came up with a £25,000 a year poll tax on non-doms, which I am sure they would have had to refine had they had the responsibilities of office. The Inland Revenue might have been able to concoct a scheme but as part of the mad re-shuffling of Whitehall departments under the Brown chancellorship, this responsibility has been transferred to the Treasury. So some hard-working but inexperienced 35-year-olds were under the gun to come up with something fast.

That is a recipe for disaster and unsurprisingly they screwed up on the detail. Now ministers seem to be bad-mouthing the Treasury for its supposed incompetence, which is pretty disgraceful since they were merely doing the best they could under the circumstances. This is the fault of politicians, not that of civil servants. Presumably, thanks to the energetic lobbying of amongst others, important Labour donors, a less damaging plan will emerge. I suspect that on balance tax revenues will still be down because you only need a small number of non-doms to leave, or simply not spend as much time here, to offset the modest gains from the levy. If that happens, then the Government and, I am afraid, we UK taxpayers will have learnt an expensive lesson.

By the way, there is a separate issue about the treatment of the Britons who have moved abroad for tax purposes. Under separate regulations, the Government has cut the number of days they are allowed to be in the UK by counting the day of arrival and the day of departure as a day here. That too had become an abuse but the remedy is another own goal. If you want tax revenue from people, say from VAT, they have to be here to spend the money. Limit the time they are here and you will get less revenue. Not very bright, again.

But why, you might reasonably ask, should the UK put itself out for foreigners? Why should we try and craft a tax system that is attractive for them? Why should we put ourselves out for our own people who choose to live abroad? The answer to that is in two words: human capital.

Go back 30 years and this country had all sorts of incentives for foreign companies to build manufacturing plants in areas of high unemployment. So the Japanese and the Koreans would come and have a factory built for them and given to them for free. The thing that mattered, or seemed to matter, was physical capital, the factory and the know-how that went with it.

That made sense at the time and some such plants, Nissan in Sunderland for example, have done very well. But those sorts of jobs are generally in decline. They have gone to lower-wage countries. The new capital, the new competitive edge, comes not in the form of a factory but in the brain in a talented person's head.

So what is happening is that we are increasingly being forced to bid in the global pool of talent, just as we used to have to bid in the global pool of manufacturing investment. We have been very successful at it: this is the main reason why the UK economy has grown faster over the past 15 years than the big Continental economies of France, Germany and Italy.

But it creates a tension because we are effectively saying that people who choose to come here will get better tax treatment than those who are here already.

This is not a left/right issue. Growth in the numbers of non-doms has risen much faster under Labour than it did under the Tories. And it was Ken Livingstone, for heaven's sake, who employed a US traffic advisor under much better terms than he would ever have extended to a Briton. Nor are we as a country alone in this practice. The Netherlands has special tax deals for foreign footballers. Greece has recently reformed its tax treatment of shipping, with the result that most of the Greek families who ran their global businesses out of London are heading back to Athens. Switzerland has played its role as a haven for talented foreigners (well, at least rich ones) with consummate skill.

Belgium is a haven for rich French and part of President Sarkozy's plan is to cut taxes to try and get them back. It is just that in Britain the tension between the need for a tax system that is seen to be fair and the need to attract global talent is particularly acute. Low taxation is not the only thing that attracts the world's smartest and most energetic people; the quality of services and public life matter too. But it is a very important one.

So what is to be done? I think we have to be practical about this. We need tax revenue and the last thing we want to do is make changes that will reduce revenue. We need to remain a magnet for global talent and the last thing we need to do is to encourage people to take the talent – and their money – to some other jurisdiction. For every one person we push out there will be many others who don't come.

But there have been abuses and those need to be tackled. It should not be beyond the skills of the authorities to fine-tune our tax system in such a way as to increase revenue but at the same time continue to attract talent. Surely we can do a deal.