Sunday Times
March 10, 2002

The use by Labour donors of the loophole, called "non- domicile status", was first exposed by The Sunday Times two years ago. Last month it emerged that Lakshmi Mittal, the Indian-born steel baron whose £125,000 donation to Labour plunged Tony Blair into a crisis over sleaze, benefited from the loophole.

Other top Labour donors to benefit include Christopher Ondaatje, the international financier who gave the party £2m; Gulam Noon, an Indian-born entrepreneur who has given the party more than £200,000; Lord Paul of Marylebone, chairman of the Caparo Group; Nat Puri, another Indian-born businessman; and David Potter, chairman of Psion. The loophole often means they pay little or no tax.

The cost to the exchequer is about £5 billion a year, equivalent to 2p off the basic rate of income tax, according to estimates by Graham Thornton, the accountants.

Under current rules, foreigners living in Britain can avoid paying UK tax on their income from overseas as long as they have substantial ties to a foreign country. These may include membership of clubs in other countries or ownership of a burial plot. Many of the beneficiaries carry British passports and have lived here for years.

Most of the people who take advantage of the loophole stay in Britain for relatively short periods, although this is not true for the majority of Labour's wealthy donors.

Accountants say that the rules are unusually generous and explain why so many wealthy foreigners choose to locate in Britain. They also warn, however, that clamping down on the use of the loophole may be difficult, particularly if the government adopts a two-tier approach in which some foreigners can continue to use non-domicile status. This would mean they would pay some tax on income generated or brought into Britain, but all other earnings would be protected under the rules from UK tax. In the case of Mittal, who arrived in Britain seven years ago, the profits of his company, LNM, are sheltered in the Dutch Antilles, an offshore tax haven. His personal assets, estimated at up to Ï2 billion, are sheltered offshore as well. Mittal's £6m house, the Summer Place in Hampstead, north London, is also owned by an offshore company, Leadon Ltd.