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Chancellor Jeremy Hunt has been urged by Conservative colleagues not to put “politics before economics” as he considers last-minute plans to abolish or scale back Britain’s “non-dom” tax rules.
Hunt and Prime Minister Rishi Sunak will set out final decisions for the March 6 Budget on Friday, prioritizing raising cash to fund pre-election national insurance or income tax cuts.
But sources within the Government revealed that the Office for Budget Responsibility’s latest forecasts left Hunt with £2 billion less than he expected, putting pressure on him to activate emergency revenue-raising measures.
The Financial Times revealed on Thursday that one option being considered would be for Hunt to copy a flagship Labor policy and eliminate or reduce tax benefits under the colonial-era non-domiciliary regime.
Hunt’s allies declined to comment on a Bloomberg report that the chancellor was considering stealing another Labor policy by extending a windfall tax on the oil and gas sector.
The idea of eliminating the current non-dom regime has attracted criticism from a senior Conservative MP, while others have warned it could drive wealth creators away from London. Hunt had previously warned against such a move.
Last year the Daily Telegraph reported an internal Treasury analysis that found Labour’s plans to scale back the non-dom regime would end up costing £350 million as the rich would abandon the country.
“I always think that putting politics before economics is a bad idea,” former minister Sir Jacob Rees-Mogg told the FT. “There is no point in the Conservative Party adopting Labor measures which are harmful and make the UK a less open economy.”
George Osborne, the former Tory chancellor, argued that adopting Labour’s policy would “take money off the table” and force the opposition party to say what other taxes it should raise to fund its policies.
It would also help blunt the Labor attack that Sunak is wedded to the no-dom rule because it benefits wealthy Tory supporters. His wife Akshata Murty had earlier benefited from the scheme.
Downing Street declined to comment on the Budget “speculation” but said: “The Chancellor has talked about having an internationally competitive British tax system.”
The current UK regime allows overseas domiciled citizens resident in Britain to earn money from capital abroad without paying UK tax on it for up to 15 years, provided they do not remit any income or capital gains into the country .
According to HM Revenue & Customs, there were 68,800 non-doms in the UK in the financial year ending 2022. Scrapping the scheme altogether would raise around £3.6 billion a year, while Labor is trying to maintain a four-year exemption which would raise around £2 billion a year.
Christopher Groves, partner at law firm Withers, said: “This is a very simplistic debate which misses the essential point of the scheme, which is how we attract new dynamic wealth creators to the UK, not how we earn seeds of these. who are already here are screaming.”
Sophie Dworetzsky, partner at Charles Russell Speechlys, said: “Many individuals who are not dominant generate significant economic activity and entrepreneurial wealth in the UK, so we fear that these changes could shrink the UK’s private wealth sector.
“The UK also faces a world of greater tax competitiveness, and many regimes, not least the Italian one, are increasingly attractive to people deciding between the two,” he added.
Hunt has already defended the regime. In 2022 he told the BBC: “These are foreigners who could easily live in Ireland, France, Portugal, Spain. They have all these patterns. All things being equal, I would rather they stay here and spend their money here.”
But Hunt faces a very tight fiscal situation as he tries to save money to fund a 2p cut in national insurance rates, equal to the same £10bn-a-year cut announced in his autumn statement.
Things became more difficult for the chancellor on Wednesday when the OBR took a less optimistic view of the “growth-stimulating” potential of Hunt’s proposed budget measures, cutting £2 billion from Treasury estimates, according to people close to the process.
The difficult situation led Osborne, on his Political Currency podcast, to claim there was “friction” between Hunt and Sunak ahead of the Budget.
Osborne highlighted the fact that Sunak has long supported headline-grabbing income tax cuts. In his 2022 Tory leadership bid, Sunak proposed cutting the basic rate from 20p to 16p by 2029 if he wins the election.
But Hunt favors cuts to national insurance, a tax that specifically hits workers but is less understood by voters. The OBR said the 2p cut in NI rates in the autumn statement could boost employment by 28,000.
Government insiders denied any disagreement. “It’s total rubbish,” said one Sunak ally. “Osborne doesn’t speak to anyone at Number 10.”
They pointed out that Sunak fully backed the 2p cut to national insurance in November and that the prime minister’s support for big income tax cuts in 2022 came “at a different economic time”.
Treasury insiders have accepted that income tax cuts, which would also benefit people on investment incomes and wealthier pensioners, are more popular with voters. But the NI cuts fall more squarely into Hunt’s promise of “smart tax cuts” to boost growth and jobs.
A 1p cut in NI employee contributions would cost around £5 billion and a 1p cut in income tax would cost £7 billion.