The non-domicile rule is a distant echo of empire. It allows some residents of the UK to cite some other country as their real domicile and then, unlike all other residents, to pay UK tax on their earnings in the rest of the world only if they "remit" the money to the UK.
The idea of taxing anybody on this "remittance basis" was introduced when income tax was first imposed - in 1799 - in order to allow those who owned land in his majesty's dominions to escape tax on their colonial wealth unless they brought it back to England.
This remittance rule was then attached, for the first time, to the idea of a "non-domiciled resident" in 1914 to allow those who had been born in the colonies to live in England without paying tax on their foreign rents and stocks so long as the money remained abroad.
Today, however, the rule has been taken over by some of the wealthiest people in the country who can claim to be linked to some other domicile and who thus are allowed to escape UK tax on all of their income and capital gains in all of the rest of the world, providing they do not bring the money into the country.
On the best estimate we can find, there is a shifting population of some 60,000 of them. In the past, the German-born Tiny Rowland, the Czech-born Robert Maxwell and the Cypriot Asil Nadir were all entitled to this enormous break.
Today, the UK accepts non-domicile status for Greek shipping magnates, Saudi princes, American corporate heirs, Mohamed Al Fayed, the controversial owner of Harrods, Lakshmi Mittal, the Indian steel magnate and an assortment of foreign business executives.
Apart from the Irish Republic, which inherited the rule, we can find no other country in the world which allows any of its residents to claim that their real home is elsewhere. The United States says it does not matter where you were born, if you qualify as a resident of the US, you must pay US tax on all your income and capital gains all over the world.
The Australians, the French and the Danes do the same if you spend more than six months of a year there. The Canadians and the Spanish do it if you spend 183 days of a year there. The Germans and Belgians and Greeks do it if your "customary place of abode" is there. The Japanese have a version of the UK domicile rule but only if you stay there for fewer than five years.
Those who wish to take non-domicile status in the UK find the route is simple and easily negotiated. During their first tax year as residents in the UK, they can fill in a short Inland Revenue form, known as a Dom One, in which they provide their family background, list any "business, personal, social or other connections" with their country of birth, and state their intention not to stay permanently in the UK.
Tax advisers say they have never heard of an application being rejected and that, on occasion, the Inland Revenue has granted non-domicile status to wealthy people born in the UK simply because their parents could claim a different domicile.
The debate about the value of the rule centres on two points. First, its defenders argue that it promotes inward investment. However, its critics point out that, in itself, the rule appears to deter investment by requiring a non-domiciled resident to pay tax on global earnings precisely and only if they are remitted to this country. They say that parliament can better encourage inward investment with tax breaks specifically designed for the purpose.
Second, defenders of the rule suggest that, if it is scrapped, the result will not be that wealthy foreigners in the UK start to pay full tax but that they will leave the country, thus taking with them the little UK tax that they do pay.
Critics, however, point out that they would have no incentive to leave, because no other country will accept them as non-domiciles and that, in any event, it is essentially unfair that a small group of wealthy people should be given such a tax advantage.
Twice in the last 15 years, the Treasury has considered abolishing the rule only to be confronted by a powerful lobby of foreign millionaires claiming such a move would cost the economy hundreds of millions of pounds because non-domiciles would flee the country.
A senior government source describes these claims as "unlikely to be true", primarily because there is no hard evidence that the non-domiciles have invested any substantial extra funds as a result of being encouraged to live in the UK.
<a class="postlink" href="http://www.guardian.co.uk/uk/2002/apr/11/politics.economy1" onclick="window.open(this.href);return false;">http://www.guardian.co.uk/uk/2002/apr/1 ... s.economy1</a>
