Why do rich foreigners come here? The answer is simple: for wealthy private individuals, Britain is one of the best tax havens in the world.
This is serious money. We seem to have become a magnet for the mobile rich to such an extent that we are earning, according to an estimate by Guinness Flight, the City fund managers, as much as pounds 5bn a year across the exchanges. This comes from the money that these people bring in to support their lifestyles. That is an astonishing sum, enough to cover more than one-third of the current-account deficit, and five times as much as we will gain this year from Japanese investment in our car industry. It is mostly recorded as a capital inflow, rather than a current item, and may go a long way towards explaining why we have been able to finance our balance-of-payments deficit as comfortably as we have. Becoming a haven for the mobile rich is one important way that Britain is earning its way in the world.
How we stumbled on this role is a mystery - indeed, it was never a policy as such. There was, of course, a policy to cut top tax rates for Britons: our top levels of income tax for UK residents are now at the bottom end of the industrial-world range. But every large industrial country ended the Eighties with lower top rates of income tax than it had at the beginning of the decade. That was the result of a realisation all around the world that high tax rates were inefficient: they simply did not raise much revenue and led to serious distortions. Britain embraced that view rather more vigorously than most. What makes us different is not so much that we cut our income-tax rates, but that we have become one of the few real countries (if that is not too offensive to places such as Monaco and Lichtenstein) that has been successful at pulling in the seriously rich.
The attraction for foreigners who locate here, apart from our much-maligned British way of life, is not the 40 per cent top tax rate. Rather, it is the fact that, thanks to our liberal domicile and residence laws, provided they leave the bulk of their money offshore and just bring in what they need to live on, they need to pay hardly any UK income tax at all.
Rich UK residents in the Eighties were in much the same position, for they were able to move their capital offshore into Channel Island or Isle of Man trusts where it could accumulate free of capital-gains tax. They would pay tax only on their UK income. This loophole was substantially closed in the 1991 Finance Act. But for Britons who got their money out before that - people such as Sophie Mirman of Sock Shop, or Andrew Knight of News International - and, of course, for the mobile foreigners, the British tax situation remains extremely attractive.
To most people, this will seem very unfair - and it is.
Equity dictates that we should try to rebalance tax law to gather as much revenue as possible from this community. But we should remember that pounds 5bn coming across the exchanges. We should also appreciate that the country is seeing the early stages of a big shift in the balance of power between rich individuals and nation states.
Consider the position of a country negotiating with a multinational. Countries have become accustomed to the idea that they have to bid for foreign commercial investment by giving the company a free factory or, in the case of the European Bank for Reconstruction and Development, pounds 40m for fitting its offices with the appropriate quality of marble. That makes people feel uncomfortable but it is the way the world works. If countries do not offer investment incentives, they do not get the investment.
This is also starting to affect company tax policy. The annual lecture at the Institute of Fiscal Studies last week pointed out that countries could use taxation to attract mobile resources: 'With modern technology, the head office of a multinational enterprise can operate in London, New York, Brussels or Munich . . . There is a danger countries - and not just in Europe - will engage in competitive bidding for these resources by designing tax regimes which are specifically tailored to attract particular kinds of activities.'
That is uncomfortable, too. But how much more uncomfortable might honest, tax-
paying citizens feel if they knew that we may have to become accustomed to the idea that countries use tax to bid for rich people as well as rich companies. The argument is identical. They, too, bring money; when they spend it, this, too, creates jobs; and they are highly mobile.
It is this mobility of people that is changing the world. These people fall into two groups. There are what might be called the 'conventional' international rich. These people are in practice beyond the tax net of any individual country, for there will always be some tax haven that will welcome them, and they are rich enough not to have to work in any one particular place. This group of people has existed for generations but we are more aware of them, partly because three or four decades of prosperity has increased their numbers and partly because Britain has attracted more of them in recent years.
Then there is a second group, at present much smaller in influence but which will ultimately affect government policies even more. These are the beneficiaries of the telecommunications revolution. They are the new mobile professionals, for whom the computer, the fax and the video phone have given the freedom of location hitherto available only to the very rich.
For the moment, the group is small and consists of people who are basically performers: writers, pop stars, people in the film industry. But, gradually, it will include anyone who can carry out enough of his or her job at home not to need to go into the office more than, say, once a fortnight: freelance editors, computer programmers, fund managers, even tax lawyers. For them, the choice of residence will come to depend on a mixture of the attractiveness of the lifestyle and the tax regime.
The key change is that up to now people have had to live in the same country as their job. With the communications revolution, they will no longer need to do so. Suddenly a whole new vista will open for many professionals: they will become mobile, just like the international rich.
'Globalisation: The Implications for Tax Policies' by Dr Jeffrey Owen, published by the Institute for Fiscal Studies.Reuse content