After non-doms – 5 other ways Labour could ensure tax justice in Britain

Yesterday’s news cycle was dominated (pardon the pun) by Labour’s announcement that it would abolish the non-dom rule.

Doubtless there are a few of us who have been nodding along to the debate that ensued, without being totally sure of what a “non-dom” is. So for those who are faking it until they make it: non-doms are British residents who pay tax on UK earnings but whose permanent home is deemed to be outside the UK. Non-doms don’t have to pay UK tax on foreign income as long as they don’t transfer it to the UK. What constitutes a “permanent home” is very fuzzy indeed, since non-dom status has no clear legal definition. So in practice, non-doms can spend every day of their lives in this country, taking full advantage of our public services, all the while paying a lot less tax than you or me.

As the non-dom rule effectively constitutes a two-tier tax system, the Centre for Labour and Social Studies (Class) is in full support of its abolition. We believe Labour’s pledge is a “huge step forward for tax justice in the UK.” Having said that, even the most generous assessments of the pledge estimate it will raise just £4bn in revenue – a small fraction of the entire tax gap, which could be as high as £120bn.

So what other policies could a Labour government implement to ensure tax justice in Britain? Here are just five to get us started…

1.      Improve transparency

One of the easiest ways to tackle corruption within the tax system is to improve transparency, especially in the cases of tax havens and secrecy jurisdictions.

From 2016, UK banks will have to share information on all foreign-owned companies to which they supply services, but there is currently no obligation upon them to share this data with HMRC. In future, every UK bank should be required to collect and share this information on UK company directors with both HMRC and Companies House so that it can be used to ensure tax is paid.

There is also a need to better regulate the digital economy to make sure that large companies, such as Amazon, but also smaller companies and individual traders, pay the right amount of tax in the UK. Organisations such as Paypal, eBay, Visa and Mastercard should be obliged to supply information to HMRC on any person or company that has a trading account.

2.      Enforce penalties for abusive tax arrangements

The Coalition introduced a General Anti-Abuse Rule (GAAR) in 2013, but like many of their reforms, it is utterly toothless. To make this law work effectively it must apply to commercial arrangements that are tax abusive, for example, those of Apple and other IT companies that have structured their affairs to make sure they pay little or no tax in the UK. Penalties must be applied if it is shown that an abuse has taken place.

Labour has promised to introduce a penalty regime to the coalition’s GAAR, but it must go further. The ‘double reasonableness test’ and GAAR advisory panel both have to go before the GAAR can truly work. Labour should use Scotland as precedent.

3.      Enhance democracy and accountability

There are many measures that could be introduced to enhance democracy and ensure greater accountability in the tax system. In the first instance any organisation that has been found to engage in tax avoidance activity should be prevented from securing public contracts, loans, subsidies or grants in the future. Individuals from organisations that have been found to engage in tax avoidance activity should not be appointed to HMRC, any government department or be invited to advise government on policy.

4.      Reform HMRC

HMRC, the civil service department which collects tax, has failed to act in the public interest and has too often appeared to enter into cosy relationships with large companies and wealthy individuals. Because HMRC has no government minister directly responsible for it and no Select Committee in Parliament to scrutinise its activities, there is a damaging lack of accountability.

The Board of HMRC should be reconstituted so that it is representative of a broad range of taxpayers including: large and small business; employees; trade unions; pensioners; civil society; charities; and the investment community. HMRC should become directly responsible to a government minister and a Parliamentary Select Committee.

5.      Introduce a Robin Hood Tax

Taxation policy should assist in holding global capital to account so that it contributes to the common good. A Financial Transactions Tax (also called a Robin Hood Tax) is a tiny tax of about 0.05% on transactions like stocks, bonds, foreign currency and derivatives, which could raise £250 billion a year globally. The Robin Hood Tax is well-tested, cheap to implement and hard to avoid. If aggressive tax rates were applied that depended upon the volume of transactions undertaken, it would help slow down markets at times of instability and force those who are investing to take a longer-term approach. A Robin Hood Tax would seek to reduce the risk to the whole economy from the activities of the banking sector.

For our full election guide to the tax system, click here.

Ellie Mae O’Hagan is the Media and Communications Officer at Class