U.K. Financiers Battle Government Over Taxes as Brexit Looms

  • Cases come before abolition of long-term ‘non-dom’ tax perks
  • HSBC CEO Stuart Gulliver among executives facing tax probes

Why the Financial Sector Is Braced for a Hard Brexit

There are signs Britain is getting tougher on financiers just as it needs to attract them.

Tax officials are pursuing probes into the residency status of HSBC Holdings Plc Chief Executive Officer Stuart Gulliver and Chi-X Global Inc. Chairman-Emeritus Anthony Mackay, as the government clamps down on people -- oftentimes bankers -- who work in the U.K. but are domiciled elsewhere.

Stuart Gulliver

Photographer: Simon Dawson/Bloomberg

“HMRC has come under political pressure to take abuse of the non-dom rules more seriously, and there are signs that it is," said Jolyon Maugham, a tax lawyer and anti-Brexit campaigner, referring to Her Majesty’s Revenue & Customs. Lawmakers "are doing what the Conservatives tend to do, slowly turning up the temperature and hoping that doing it that way the lobsters won’t all jump out of the pot at once.”

Starting Thursday, those who’ve lived in Britain for 15 of the past 20 tax years will be deemed as domiciled in the U.K. for tax purposes, effectively putting an end to long-term “non-dom” status. All U.K. residential property will be subject to inheritance tax, whether held directly or in an offshore company. Those changes, likely to hit high-earners in London’s financial industry, come at a precarious time for the City, with rival European capitals vying to lure bankers away as Brexit unfolds.

King George III

Britain’s non-dom regime was introduced in 1799, when income tax was first imposed, to allow landowners in King George III’s dominions to escape levies on their colonial wealth unless they brought it back to England. Now, it’s frequently bankers who use the rules to escape tax on foreign earnings. 

The Gulliver and Mackay disputes, which relate to periods when each worked in the U.K. but was domiciled in Hong Kong, have reached London’s High Court.

Mackay, 57, could face a 2.7 million-pound ($3.4 million) bill, according to filings prepared for his case and viewed by Bloomberg News. He’s appealing a government order that he was “ordinarily resident” in the U.K. from 2004 through 2007.

Mackay’s lawyers concede he was employed in the U.K. and lived with his wife and children in Surrey, England during those years. But they describe him as one of a “new breed” of highly mobile individuals who “work on the other side of the globe from their spouses, from their families and from the homes occupied by their spouses and families,” the filings show.

Global Nomads

His account describes the nomadic lifestyle supposedly enjoyed by the world’s top earners. The details provide a glimpse of how far tax authorities must go to prove the residency of executives running global businesses, and suggest why few cases reach the top court.

“I relied on the company tax advisers and ultimately did what I was told,” Mackay said while giving evidence on March 17. He declined to comment for this article.

Gulliver, who previously faced questions from British lawmakers over his personal taxes and offshore bank accounts, last month lost a bid to end a tax probe that started in December 2015. While HMRC isn’t making allegations of impropriety against the HSBC chief, a British resident who has spent time living in Asia, the inquiry centers on where Gulliver was domiciled for the 2013-2014 tax year.

Deep Dive

HMRC has requested answers to 123 questions and asked for 33 categories of documents, involving an “examination of a number of aspects of his personal and professional life dating back to 1981,” according to Judge Jonathan Richards, who presided over the hearing. The revenue office said Gulliver hasn’t answered all of the questions and it would be premature to close the inquiry, the ruling showed.

“I pay millions of pounds of tax to HMRC at the top rate each year, as I should,” Gulliver, 58, told lawmakers on the U.K. Public Accounts Committee in March 2015. The CEO said he has been a U.K. tax resident since 2003 and that his “affairs are in order.”

HSBC said the hearing sought court guidance on a technical matter related to a tax ruling made at the time Gulliver was posted to London in 2003.

While their cases concern events from years ago, they illustrate the complexities of reporting earnings in the U.K. for those with a web of investments, according to Alex Henderson, a senior tax partner at PWC, who said things are going to get more complicated.

“The non-dom regime wasn’t just about relieving tax, it was about relieving administration, and the world is now much more complicated,” he said. “Everything is potentially within the U.K. tax scope.”

Clock Ticking

There were 116,100 non-domiciled residents in the U.K. who paid 6.6 billion pounds in the 2015 tax year, according to law firm Pinsent Masons.

Ever since Britain voted to quit the EU last June, officials across Europe have set out to attract bankers leaving the City of London. That competition is bound to intensify now that Prime Minister Theresa May has started the clock on two years of Brexit negotiations.

“Tax is not the only reason that influences people’s choice of where to be based or why people might want to come to the U.K., but it is undoubtedly the case that for those who already have a substantial working life in the U.K., the cost of staying will markedly increase," said Henderson.

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