Richard Lambert, Director-General of the CBI, yesterday called for a fresh look at the laws that allow more than 100,000 people to escape certain taxes by claiming non-domiciled status.
His comments coincide with a rapid growth in the number of people who are claiming to be non-domiciled in Britain and the growing controversy about tax inequality.
Mr Lambert acknowledged unease over non-domicile laws as he gave warning of the possibility of a political backlash springing from a “new capitalism” of private equity and hedge funds, globalisation and increased income inequality. He said: “An effective tax system has to be seen to be fair. There are questions though about non-domicile, but we need to know the extent of it . . . questions have to be asked but carefully.”
Mr Lambert said that hasty moves or “clunky action” would delight Michael Bloomberg, the Mayor of New York, because it could drive top flight financial figures from London to the US.
The numbers of those with non-domicile tax status has soared in recent years. To claim non-domiciled status an applicant must show that a country other than the UK is their “true home” but the tests are imprecise.
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The most recent figures available, for the tax year to April 2005, show that 112,000 people declared themselves as non-domicile in self-assessment, a 74 per cent increase over 2002’s figures.
It is believed that that figure will increase further because of an amnesty offered by HM Revenue & Customs in March to those with money in offshore tax havens. Tax advisers believe that many people with offshore accounts will instead declare themselves non-domicile to avoid paying tax on offshore accounts.
On the taxation of private equity, which has become a key concern for unions and other groups, Mr Lambert said that low taxation rates of 10 per cent were acceptable if they rewarded entrepreneurial risk.
However he said that it was not always obvious that in the very large deals there was risk that needed rewarding. He said: “Clearly there is a question to be asked on these large deals about whether it is risk or income . . . if it is a duck, it is a duck, if it is a chicken, tax it as a chicken.”
His acceptance that low taxation is not always appropriate for private equity came as the TUC and British Venture Capital Association held talks yesterday. The round table, which was described as positive, was organised after a sustained union campaign against private equity led by the GMB. Unions are concerned about the lack of transparency of private equity, the amount of debt it pumps into businesses and its taxation regime.
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Mr Lambert said that although growth in the world economy was at its fastest rate for a generation, there were concerns that the benefits were not obviously feeding through to the population at large.
He said: “In the developed world, the impact of all this growth has been unevenly distributed. Not surprisingly, given the enormous rise in the overall pool of labour, the benefits have flown more to the owners and managers of capital than they have to labour.
“We need to be sure that there is a social consensus behind pro-growth policies.”
Mr Lambert encouraged business to be aware of the social impact of the new capitalism but said that protectionist policies, particularly in the US and France, were not the correct response. He said: “It is vital that business presents itself as an important part of the solution to this great global challenge. If it fails to do that, it will instead be seen as the problem, with very damaging consequences for all of us.”