Cyprus aims to grab share of shipowners set to flee London

— UK Budget may include £30,000 tax on non-domiciles

 

A new tax of GBP 30,000 a year on “non-domiciled” businesspeople and their enterprises in the U.K. to be announced in Wednesday’s Budget speech could push several leading members of the bustling shipping community to abandon the City of London and return to Greece or even head for Cyprus, where most of their ships are managed or registered.

Russian investors, too, some of whom have Cyprus-based companies that have listed on London’s AIM alternative market, may consider making a move to the Mediterranean island.

Michael Ioannides, President of the Cyprus Union of Shipowners, whose more than 40 members are Cypriot and Greek shipowners with a significant presence in the U.K., said that many of his colleagues are concerned and will be waiting for the final outcome in the Budget.

Richard Lambert, the Director General of the Britain’s Confederation of Business and Industry (CBI), has suggested that the Budget speech should consist of only one sentence, announcing that there will be no new tax and spending measures or changes in public finances until the economic outlook is clearer in 2009.

All eyes are on Chancellor of the Exchequer Alistair Darling who is expected to announce whether the Government will implement the new tax regime for foreigners living in Britain that was announced in last autumn’s Pre-Budget Report as part of the preparations for “the election that never was”.

Darling has been accused of copying Conservative proposals to raise more revenue from people who live most of the time in Britain but pay little tax because their business interests are abroad.

The Treasury was well aware that tinkering with the tax arrangements for foreigners who are resident but not “domiciled” in Britain would open up a Pandora’s box of economic troubles. Yet Gordon Brown, in his pre-election panic, seemed to forget all the Treasury reports that he himself had commissioned, which concluded that Britain derived significant economic and fiscal benefits from maintaining a unique 200-year-old distinction between tax “residence” and tax “domicile”, the Times reported on Monday.

“If Mr Brown now argues that Britain’s system of taxing foreigners must be reformed because it is an international anomaly, he had better acknowledge that Britain’s international financial dominance is an unsustainable anomaly, too – as is the high proportion of British government revenues coming from taxes paid by foreign companies and non-doms. Britain‘s unique tax system and its unique success as a financial centre are two sides of the same coin,” the Times report added.

The biggest consequence of the “non-dom” tax reform would be the Greek shipping industry planning to move en masse back to Athens. This would hurt the shipping-related services sector that employs 15,000 people in the City alone.

Furthermore, pharmaceutical companies are preparing to shift expansion plans to Switzerland and New Jersey; aerospace engineers are moving back to France, Germany and Italy; and the museum world is facing demands for the return of artworks loaned by non-doms.

Even Moscow is expected to benefit from the exodus as Russian businessmen wind down their offshore operations and delist their companies from the London Stock Exchange.

In this inter-governmental saga that sounds like an episode out of “Yes, Prime Minister”, Treasury officials have opposed reforms to the non-dom regime since the 1960s and have advised against it as recently as last summer. Since then the global credit crisis must have made them even more worried about potential job losses and revenue losses from the City of London. Officials at HM Revenue & Customs (HMRC), by contrast, have long been urging chancellors to move against non-doms. When Prime Minister Brown abruptly decided last autumn to back the HMRC position, the balance of power between the two institutions suddenly reversed – and this shift in the institutional dynamics in Whitehall has greatly increased the potential damage from the non-dom reforms.

Other measures proposed by the HMRC that foreigners in Britain will find even more oppressive include sweeping demands for disclosure of worldwide assets, restrictions on trusts and tightened definitions of tax residence, which will make it difficult for foreign businesses to use London as a base or even to hold conferences in Britain or fly through British airports.

According to a survey of fund managers and hedge funds published last week by Phoros, which specialises in tax planning for financial institutions in London, “75% of key non-domiciled investment management talent now intend to leave Britain” and “at least 50%” of new hedge funds that would have been launched in Britain will now be set up overseas.

The Times proposed four reforms that would undo much of the damage done by Gordon Brown’s pre-election panic last autumn. The first would be to exempt non-doms paying the £30,000 levy from inquiries into their international assets. The second would be a public promise not to increase the £30,000 annual levy for five years. The third would be a reversal of the travel restrictions that would damage London‘s position. The fourth would be a one-year delay in the implementation of all the non-dom reforms.

“If the Government had any sense, all four changes would be announced in the Budget. But common sense has been notable by its absence in the Brown Government, so far. Will Mr Darling change this on Wednesday?” added the Times.