UK presses ahead with tax changes for 65,000 foreign bankers

The government has published a background paper reviewing the tax status of non-UK citizens working in the UK. The paper concerns a loophole in the tax rules on residence and domicile, which significantly reduces the tax paid by non-UK citizens, making the City of London a more attractive place for US, French or German bankers for fiscal reasons than their domestic financial centres.

Gordon Brown, the UK chancellor, announced a formal review of the rules in his budget last year. The Inland Revenue has studied the issue, and is now pressing ahead with a formal consultation process.

Brown announced the paper in his budget speech as "a further action to modernise and simplify the tax system." He said the paper, which looks at the residence and domicile rules affecting individuals' tax liabilities, has been published "to provide a framework for further analysis and discussion".

The Corporation of London urged the government not to press ahead with any changes. Michael Snyder, chairman of the Corporation's Policy and Resources Committee, said: "Consultation on this important issue is welcome but nobody should be under any illusion: any new tax burden on non-domiciles would be seriously damaging." He said if the changes went through, other financial centres would lure international bankers away, which would have a siginificant impact on the UK economy.

The document outlines that the rules should be fair, should support the competitiveness of the UK economy and should be easy to operate. In an indication of the government's thinking, the document then invites comments on whether the current rules successfully identify those indicviduals with "a long-term connection to the UK who have an obligation to help support the UK exchequer on the basis of their worldwide income".

The tax rules currently allow individuals who earn a salary in the UK, but who are not domiciled there, to pay tax only on their UK income. They do not have to pay tax on any overseas earnings unless they bring them into the UK.

Any change to the residence and domicile rules could have a significant impact on the UK's financial services community. Investment banks, securities firms, fund managers and private equity firms employ numerous highly-rewarded individuals from overseas.

As many as 70,000 such individuals could be involved. The government said that, on the basis of data from self assessment tax returns, there are 100,000 individuals who work in the UK but do not have to pay tax on their offshore income. It said that a further analysis of the 40 largest employers of such individuals showed two-thirds of the individuals worked in banking and financial services.

Tax specialists reacted gloomily to the paper. Inez Anderson, a tax partner at KPMG, said: "The good news is no changes have been announced as yet, but it is acknowledged within the paper that any changes must ensure the UK economy remains competitive in the global market place. The bad news is that is still uncertainty behind this whole area which could impact on individual's personal decisions and employer's business strategy."