Brown forced to close tax loophole after 'Mittalgate'

Gordon Brown plans to close a loophole that allows millionaires living in Britain – including the steel tycoon Lakshmi Mittal and other Labour Party donors – to pay little or no tax in this country.

The Chancellor will publish proposals to change the system under which people with strong links to another country can claim "non-domicile" status, which allows them to escape tax liability on their income from overseas while they live in Britain.

Nine of Labour's biggest donors are believed to exploit the rule. They include Mr Mittal, who gave the party £125,000 last year, just before Tony Blair supported his bid to buy a Romanian steel plant; Christopher Ondaatje, the financier, who gave Labour £2m last year; David Potter, chairman of Psion, who donated £90,000; and the food tycoon Gulam Noon, who has given £200,000.

Mr Brown commissioned a study by the Inland Revenue into the loophole after last year's general election. It reported to him early in January, before the Mittal affair erupted. It found that about 60,000 people benefit from "non-domicile" status and put the loss to the Treasury at hundreds of millions of pounds a year.

The Inland Revenue report is expected to pave the way for a twin-track system under which people living in Britain for short periods – perhaps up to four years – could continue to claim "non-domicile" status, while those staying longer would not qualify. The investigation found that many of the people taking advantage of the rule stayed in Britain for relatively short periods, usually less than four years.

Although no final decisions have been taken, Mr Brown is determined to tackle those who abuse the rule.

Inland Revenue sources said attempts to reform the law in 1956, 1974 and 1988 foundered because the rules were so complex. "A lot more analysis and work has got to be done to get this right," said one. The crackdown could be implemented in next year's Budget.