LONDON LETTER:City of London high earners who wish to quit the country over punishing new taxes may find it's not so easy, writes MARK HENNESSY
FOR THOSE affected, it is a day that will live in infamy. For most other people, it is a problem that they would love to have. From April 6th, those in the City of London fortunate enough to earn more than £150,000 a year will pay a 50 per cent tax rate on earnings above that amount.
For months, business leaders have warned that precious talent will flee the City for Zurich, the Middle East, or Asia. So far, however, the trickle has not yet become a flood, but the City is not happy.
According to international accountancy firm KPMG, London will go from being one of the most competitive tax environments among the world’s leading financial centres to one of the most expensive in one swoop.
Under changes introduced by the chancellor of the exchequer, Alistair Darling, all income over £150,000 will be taxed at 50 per cent, bar that gained from dividends, which will be taxed at 36 per cent.
But the tax rate change is just one part of Darling’s measures. Anyone earning over £112,950 will automatically lose their entitlement to a £6,475 tax-free personal allowance, while a National Insurance increase affecting everyone is due in 2011.
Bankers earning more than £1 million in pay and bonuses in London currently hand over £403,689 in employee tax and social security charges to the treasury – some £60,000 less than they would do in Geneva, Paris or Frankfurt. Only those based in Hong Kong or Dubai pay less. From next week, however, London will become the most expensive location for such high earners, who will pay £491,279 in taxes and charges. People may not be able to leave, but potential new arrivals will be deterred from coming, the City warns.
The possibility of flight has been hampered by a court of appeal ruling against a Seychelles-based British businessman, Robert Gaines-Cooper, who has been ordered to pay British tax even though he spends fewer than 91 days a year in the UK.
The judgment has raised the stakes considerably for those planning to quit the United Kingdom. Some tax lawyers are advising clients that they must sell their UK properties, move partner and family – and even cancel golf-club memberships.
Even then they could be caught in the UK tax net if they make occasional trips to London for business meetings, as one of the most vocal critics of the 50p tax rate has claimed.
Terry Smith of trading firm Tullett Prebon, who had previously said that his firm would do everything it could to help staff who wanted to leave, has said it is “still reviewing the options but I wouldn’t think that the number [leaving] is going to be that high”.
Under long-established tax rules, non-residents are allowed to spend no more than 91 days in the UK, but the court ruling means that HM Revenue Customs can set the bar lower if it believes that an individual has maintained “the centre of gravity of his life and interests” there, even if he or she might actually spend fewer than the 91 days in the country.
“Any of our staff who went would probably have to relocate entirely, taking their wives and children with them. But they don’t know now whether even coming back on a client visit would mean they qualify as residents. I wouldn’t say that [relocation is] not possible, but it’s less feasible than it was before,” said Smith, who warns that the UK is becoming a city unfriendly to financial markets.
The court judgment has led accountancy firms to warn that revenue and customs could now launch investigations into the residency status of many others like Gaines-Cooper (who intends to appeal to the supreme court), if it has doubts about the status of their exile.
So far, however, revenue and customs is keeping its powder dry. Every case is unique, it says, simply.
Inevitably, accountants are beavering away to find routes around the taxes, particularly trying to exploit the gap between income tax and capital gains tax, which stands at 18 per cent and which Darling did nothing to increase in his budget.
If some are finding it difficult to leave, however, it is equally true that some high-fliers living elsewhere have become more reluctant to take up positions in London, says Jonathan Moulds of Bank of America Merrill Lynch.
City traders can look nowhere for relief, since the Conservative Party often outdoes the Labour Party in its “bash the bankers” rhetoric, and shadow chancellor George Osborne has made clear that the 50 per cent rate will survive – even if he does not like it – if he takes office.
The City acknowledges that it has few friends at the moment, but British Bankers’ Association chief executive Angela Knight has already cautioned that London’s success over 30 years in international finance has depended on an “unwritten understanding” that the City would not be penalised. That understanding is now in question, she said.