London’s position as the financial capital of the world is something we should all celebrate. It is not just a vitally important source of the tax revenues and investment that underpin our public services and our economy. Its success also attracts talented people from all over the world, in areas from enterprise and science to culture and the arts. The success of the City and the broader economy it supports is entirely dependent on the talent of its people.

Which explains why there is such widespread concern over the government’s proposed changes to the taxation of resident nondomiciles.

In the past week we have heard unusually frank warnings from David Lewis, the lord mayor of London, and even Digby Jones, the trade minister, that the proposed changes risk driving away people and investment. These public warnings are increasingly echoed in boardrooms across the City.

Those of us who work here know all too well that we should never take London’s success for granted – after all the City has been the principal beneficiary, at New York’s expense, of the unintended consequences of the burdensome Sarbanes-Oxley regulations in America. The climate of economic certainty only makes it more important not to shoot ourselves in the foot.

This does not mean there are no valid arguments that the “nondom” rules should be revised. The tax system can function only if it commands the widespread consent of taxpayers and the recent explosion in the number of UK residents claiming nondomicile status has served to highlight these issues. A system for foreign residents that is one of the most generous in the world is regarded by many as unfair.

That is why the City broadly welcomed the proposals announced by George Osborne, the shadow chancellor, last October as striking the right balance between fairness and competitiveness. The proposals were for an annual levy of £25,000 for those who wished to claim nondomicile status and thus avoid declaring and paying tax on foreign income that they do not bring into the UK.

The levy was designed to be creditable against tax paid elsewhere (specifically America), simple to administer, and would have avoided any requirement to disclose details of foreign tax affairs and trusts. Those with only small amounts of foreign income would have had the option of paying normal UK tax on their global income instead of the levy, just as in almost all other developed countries.

Before the announcement, I consulted as widely as possible, given the need for confidentiality, on the likely response to Osborne’s ideas in the City. The response was overwhelmingly positive. In particular, people welcomed the commitment to end the continuing uncertainty over nondomicile status by committing to no further changes for at least a parliament.

That uncertainty had been exacerbated by the Treasury’s review of the issue, which had been in progress since 2002 with no sign of a conclusion. It was also recognised that, by limiting the additional tax paid to a maximum of £25,000, the levy would be regarded as an acceptable price to pay for the sake of certainty and simplicity by the wealthiest – and most internationally mobile – individuals who bring so much business to the UK.

In contrast there is widespread concern that the proposals on which the government is now consulting risk driving away exactly those individuals. When Gordon Brown and Alistair Darling stole the Conservatives’ ideas in October’s mini-budget, they added some of their own. As well as the idea of a levy, they also proposed the removal of personal allowances for nondomiciles, changes to the rules on days of arrival and departure for the purpose of establishing tax residence and a series of complex changes to the rules on remittance, disclosure of foreign income and trusts.

It’s these other changes that are causing the most concern. Britain now has one of the toughest residence tests in the world and I have heard of people who are resident elsewhere avoiding meetings in London for fear of accidentally incurring tax liabilities here as well as at home.

In addition, a survey by the Society of Trust and Estate Practitioners (Step) found that more than half of the wealthiest individuals in the UK are either leaving, considering leaving or selling their UK assets as a result of proposed changes to the remittance and disclosure rules.

Even those who decide to stay will reduce their contribution to our economy. As well as undermining the highly valued privacy, certainty and simplicity of the British regime, the proposed changes also create perverse incentives to invest money anywhere except in the UK. As a result, Step estimates that the government might end up losing revenue overall.

The government is still consulting on its proposals. We must hope that the right lessons are learnt and acted upon. The clumsy handling of the capital gains tax increase and the Northern Rock crisis have already damaged Britain’s reputation and undermined trust in the government.

Darling must ensure that the final proposals strike the right balance between fairness and competitiveness. Otherwise he and Brown may find they have killed the goose that has laid so many golden eggs for this country over many years.

Michael Spencer is the founder and chief executive of Icap and the Conservative party treasurer

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