09/05/22

UK: 'Ghost dom’ tax loophole hampering efforts to stop sanctioned Russian money flowing into country, says official.

As published on independent.co.uk, Monday 9 May, 2022.

Efforts to stop sanctioned Russian money flowing into the UK are being hampered by a tax loophole that allows the wealthy to withhold details of their assets or income from authorities, The Independent can reveal.

The provision – dubbed “ghost dom” – enables someone to claim both non-domicile status and that they have no UK income. It also means they do not have to submit any tax return, even if they live permanently in Britain.

Investigators from the UK’s newly formed corruption force – the National Crime Agency’s Kleptocracy Cell – are increasingly frustrated that they are struggling to target high-profile Russians linked to the Kremlin who have been blacklisted during the war in Ukraine.

One official working on British sanctions policy told The Independent that the UK’s tax system, and specifically “ghost doms” and non-doms, “severely limited” their ability to track and trace individuals’ income streams.

Another said it was impossible to know the full scale of use of ghost dom status, but that its ability to harbour criminal or other undesirable activity was a “serious concern”.

Labour said the loophole should be closed as “a matter of national security”.

Some 70,000 individuals claim non-dom status each year, according to official figures, but there is no record of how many ghost-doms exist in Britain. Unlike non-doms, ghost doms pay no income tax at all as they claim to have no taxable UK income.

Sources added that the lack of data on both non-doms and ghost-doms is a “known problem” within the Treasury and that some officials had noted the potential benefits of reforming these statuses in recent months.

These “ghosts” within the UK’s tax system are often some of the world’s richest individuals, wives, mistresses or children of criminals or senior foreign politicians, as well as entirely legitimate individuals such as wealthy retirees.

Scrutiny of Britain’s tax regime has intensified in recent weeks after The Independent revealed that Akshata Murty, the wife of Rishi Sunak, held non-domiciled status. Ms Murthy, an Indian citizen whose family business is thought to be worth some £3.5bn, continued to use the non-dom status after her husband became chancellor in 2020.

It was revealed days later that Sajid Javid, currently the health secretary, had held the controversial non-dom status for six years while working as a banker. Mr Javid also made use of an offshore trust while working as a key aide to George Osborne in 2011, which reduced his personal tax burden.

Rachel Reeves, Labour’s shadow chancellor, said the ghost dom revelation raised serious issues.

“This is extremely concerning – and not just because of how a few at the top are taking advantage while working people and businesses in Britain are hit with the biggest tax burden in 70 years,” she told The Independent.

“This is a matter of national security and must be urgently addressed to ensure it isn’t hampering our efforts to come down hard on dirty money linked to Russia, as Putin’s horrifying invasion of Ukraine continues.”

Labour has promised to abolish the non-dom tax status, which it described as “outdated”.

The kleptocracy cell, linked with the UK’s National Economic Crime Centre and the former Department for International Development’s money laundering experts, was set up earlier this year.

Ghost doms rely on section 809E of the 2008 Finance Act to justify no tax claim and use of the status is not an indication of wrongdoing in and of itself.

But while some wealthy individuals who are “quite normal” use the provision, others form a hidden “uber elite” in the system, according to one wealth adviser who has guided clients towards using the provision.

These are often individuals for whom the risk of later litigation, if their financial affairs become subject to investigation in the UK, is less troublesome than sharing details of the origin of their income to HMRC, the adviser said.

They asked to remain anonymous because of the sensitivity of their clients’ affairs. “It’s just one less data point if there’s no tax return”, they added.

They said they had advised wealthy individuals including people with Russian, Belarussian, Kazakh and Iranian citizenship to use this status.

The kind of individuals who might use such mechanisms, and where they could intersect with sanctions policy could include figures such as Polina Kovaleva, the alleged stepdaughter of Russia’s foreign minister Sergei Lavrov, the same adviser said. The UK was criticised for its delay in sanctioning Ms Kovaleva earlier this year.

Dan Neidle, founder of Tax Policy Associates, a non-profit tax policy consultancy, said there was a broader problem of transparency around the affairs of those using non-dom status.

“Non-doms are a black hole. HMRC has no information on their returns about their worldwide income or assets.”

Individuals can become non doms quite simply, by using a separate “clean” offshore account to fund their UK expenses, and when they transfer money from this offshore account to their UK bank there will be no UK tax consequence.

This is a widely adopted, and entirely legitimate, tax planning technique, experts, including Mr Neidle noted.

The government has been criticised for delays in implementing a register of offshore owners of UK properties, which experts have also said includes a host of loopholes.

Ghost doms’ wealth is often channelled through countries such as Switzerland or offshore tax havens which allow banking secrecy to conceal the sources of their wealth.

With little or no knowledge of their incomes, it is hard to use the UK’s recently developed anti-money laundering tools such as Unexplained Wealth Orders, to target their financial affairs, one source said.

“We are led by the data we hold on individuals, in combination with intelligence gathered at home and overseas. We all too often fail to see the implications of the data we do not have. This is again so often the black holes, ghosts, in our tax system,” one official said.

The National Crime Agency declined to comment.

The Treasury did not deny that concerns had been raised by officials about tax provisions such as non-dom and ghost dom status in the fight to sanction Russian-linked individuals or other enemies of the British state.

A UK government spokesperson said: “Non doms play an important role in funding our public services through their tax contributions – worth over £6bn a year.

“Tackling those who deprive public services of vital funding remains a crucial part of HMRC’s work and they have the appropriate powers, including fines and penalties, for those found to be dishonest on their self-assessment tax returns.

They added: “Where sanctions evasion is taking place, the National Crime Agency will investigate, and the government has recently announced a new dedicated ‘Combating Kleptocracy Cell’ to target sanctions evasion and corrupt elites’ assets hidden in the UK.”