UK reform of VAT to cost IOM 14% on annual income

By Sean O’Hare 12 Jul 2011 Daily Telegraph

The UK Government has withdrawn a total of £200 million in yearly subsidies from the Isle of Man, a move that will force major changes to the way the crown dependency operates.   The loss represents approximately 40 per cent of the Manx government’s yearly income and may lead to public services pension reforms, pay freezes, cuts and a change to the island’s tax policy in an effort to balance the books. In a statement issued today the Manx treasury minister, Anne Craine, said: “[We have] has no intention of trying to mask the fact that this change will mean challenging times for the island into the future, and further it will require tough decisions to be made by the next Tynwald and government.”

Since 1979 the UK and the Isle of Man have pooled VAT receipts under what was known as the revenue-sharing Customs and Excise agreement, generally accepted as being advantageous to the Isle of Man.
An independent investigation in 2007 by Richard Murphy, founder of theTax Justice Network, revealed that the Manx government was in fact receiving three times more revenue than it appeared to be entitled to because it is proportionately more structured to VAT-exempt activity than the UK.
His campaign to have the hand-outs stopped is believed to be behind the UK Government’s decision to withdraw £114 million in 2009 and now £75 million. The Treasury gave the reason that the arrangements were no longer considered a fair and equitable sharing of VAT and other duties.Richard Murphy said: “I know this is a massive problem for the Isle of Man, but it has been a long time coming and I don’t apologise for it. Why should the UK taxpayer subsidise the Isle of Man so that it can operate a tax haven and offer a standard rate of income tax of 10 per cent, a top rate of 18 per cent and a cap on total tax paid? It does not need a zero per cent corporation tax. It could charge capital gains tax. It could charge inheritance tax. All of these are choices: bad choices. Today’s ruling means they will now have to collect tax, change their tax regime and attract real business and tourism. It also raises another question: how long can these crown dependencies last? Jersey, Guernsey and the Isle of Man all have holes in their budget, their tax regimes aren’t viable and very soon they will have to apply to the UK or EU for inclusion.”
The withdrawals will be staggered over the next few years, resulting in projected annual revenue reductions of £30 million this year, £50 million in 2012/13 and £75 million thereafter. The new revenue-sharing formula will consider the Manx economy in terms of national income on a sector-by-sector basis rather than in totality.
“The reasoning behind this new approach is that in order to produce an Isle of Man share that is deemed ‘fair’ by the UK Government, there is a need to recognise that different sectors have different exposure to VAT and hence different capacities to generate VAT revenues,” said Ms Craine.
A spokesman for the Manx government said: “There’s no doubt about it, it is a tough deal but it can be managed because our economy is growing, we haven’t suffered a recession, we have strong reserves and no external government debt.”
The Treasury made it clear that unless the deal was accepted, it was ready to give notice to terminate the Customs and Excise Agreement which provides for the Isle of Man continuing as part of the EU VAT territory and offers opportunities which are not open to competing international business centres.
Ms Craine concluded: “There will be those who say that [the Manx] government has not fought hard enough, that we should have refused to accept any revision of the Revenue Sharing Arrangement, or that more robust political lobbying in the UK could have improved our position.
“To those I would say, the Isle of Man government has negotiated robustly in a much harsher economic and financial world than most people on the island have experienced. The world has changed; we have to get real. The present financial situation within the UK is serious and their government is substantially reducing department budgets and fund allocations to local authorities. To expect sympathetic or preferential treatment from the UK Government, especially in the current economic climate, would be naive.”