Special Report – Britain’s home-grown tax haven

One hallowed feature of Britain’s finances is a tax break for individuals called “non-domiciled status.” The break, which is more than 200 years old, is designed to attract foreign investors by allowing them to keep wealth they make abroad out of the reach of the British tax authority. Tax specialists say Britain is the only developed country to have such a system.

But a Reuters analysis shows that some “non doms,” as they are known, have also found a way to use the status to avoid tax on money made in the United Kingdom.

By shifting ownership of their companies offshore, these non doms – including television stars and a former owner of the Harrods department store – have legally moved wealth worth billions of pounds out of the tax authority’s sight.

Reuters has identified 26 people who have either said they are non doms or been identified as such by public officials or business associates. In the past 20 years, 13 of these people have amassed assets in the United Kingdom worth at least 2.6 billion pounds which they have held through offshore structures. These foreign-held UK businesses have generated more than 1 billion pounds in gains for their owners, all of which would escape tax if the gains were kept offshore.

The ownership-shifting technique is common, accountants say. But it allows non doms to use their status in a way that was not intended. The rule is not meant to shelter British assets, Britain’s tax authority says in a guidance note. Non doms “will pay UK tax on any of your income and gains which arise/accrue in the UK.” Non doms can avoid this thanks to a gap in the rules.

The tax authority, which declined comment for this story, says there are around 114,000 non doms in Britain. It’s difficult to know how many have used their status to shield money made in the country, because business owners don’t have to publish that they are claiming non-dom status.

Generally speaking, “there is no rational basis for a system that transfers ownership of this UK income abroad,” said Jolyon Maugham, a tax lawyer who has fought the tax authority on behalf of individuals and companies and advised the opposition Labour Party. “This is income that is derived from the UK, so it’s difficult to see any basis on which it should not be taxed in the United Kingdom.”

The finance ministry, which oversees the tax authority, said everyone must pay their fair share of taxes, and it plans to crack down on aggressive tax avoidance, including what it called “abuse of the non-dom rules.”

Even when non-dom status is used as intended, it is controversial: All other British residents pay tax on worldwide income, no matter where they make it. The Labour Party promised to axe non-dom status before this month’s election, and other opponents, who include captains of British industry and establishment newspapers such as the Financial Times, say non doms get an unfair way to avoid taxes.

The system’s backers, who include employers’ group the Institute of Directors and free-market think tanks, say the non-dom status attracts foreign talent and money at no cost to the taxpayer.

One high-profile businessman who is known to be a non dom is James Caan. His case shows how British taxpayers may in fact be losing out.

Caan was born in Pakistan, which allows him to claim non-domiciled status in Britain, according to his lawyer. He has become a business guru following his role in “Dragon’s Den,” a television series about business startups, and has hosted a business show on CNBC. His best business decision, he has told several newspapers, was to found a recruitment consultancy in 1985.

He set up the company, Alexander Mann, in “a glorified broom cupboard” in London’s Mayfair and built it, through hard work and an eye for changes in corporate hiring needs, into one of Britain’s biggest talent acquisition and management services groups. At the turn of the millennium, he sold the company – which made more than 98 percent of its sales in Britain – to a private equity group. It was “the height of the market,” he said later.

At the time of the sale, Alexander Mann was worth 130 million pounds, Caan said in a 2013 interview, although his lawyer told Reuters the figure may not be reliable. After the deal, Caan said, he did not have to work again. “I took up flying planes, went back to school and bought a yacht,” he was quoted as saying in 2009.

Before Caan sold, he did something perfectly legal which would have implications for his tax bill. In 1998, he transferred ownership of his company to a Jersey-based family trust.

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