The UK – paying the Isle of Man to be a tax haven

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Tax Research issued a press release today on work I've undertaken on the income of the government of the Isle of Man. The full text is here, and it includes the sources for all the data referred to in this blog entry. The Observer has covered the story.

To put to simply I noticed an odd fact about that income. When I compared the VAT that it claimed to receive in its government accounts with its declared GDP the ratio was 21.7%. That's odd as their maximum VAT rate is 17.5%. It's even stranger as the UK, using a slightly more onerous VAT regime which is however broadly similar to the IoM's collects just 6.1% of GDP as net VAT revenue.

Now the UK has suffered carousel fraud, but the Isle of Man has an enormous finance sector in its economy which does not even charge VAT so I decided that the two should be comparable. If that's the case then the Isle of Man should only collect 6.1% of its GDP as VAT. How come it got more?

The answer is simple. The UK government gave it the excess. I mean that. It gave it the rest - some £233 million of excess VAT. This happens because the UK and the Isle of Man share a 'common purse' agreement on VAT. This means the Isle of Man's VAT is paid into the UK Exchequer, in effect. And then the UK gives it a payment in exchange based on a formula which is unpublished but which clearly has nothing to do with the real level of economic activity in the Isle of Man.

To put this another way, the UK is simply giving the Isle of Man the income it needs to run its government so that it need not raise it from its own population, and as importantly the tax exiles and their companies that are located there. That means the UK is paying the Isle of Man to be a tax haven.

What is more, by doing so the Isle of Man can be a particularly aggressive tax haven. It is they who are driving the race to 0% tax among the Crown Dependencies and it is they who are proposing the introduction of income tax caps (£100,000 maximum bill in their case). All this is done at UK taxpayer expense.

We even subsidise their defence budget by £37 million as well. The net result? The UK government subsidises the Isle of Man government by at least £270 million a year - which is about half their government spending.

Put simply, this has to stop. And the UK can stop it. It has a duty to do so. No longer can it claim to have no influence on the UK's tax havens. By subsidising the Isle of Man as it does it has had a massive impact on trends in their behaviour over the last few years. By simply ending this subsidy all of them would be able to, and indeed would have to charge tax as this is the only way they could survive. Why should the UK want for anything else?

Or is it really the case that the UK promotes the havens after all? It's time for the people of the UK to be told. It's time for the people of the world to be told. After all, some of them are pretty upset about the Isle of Man as well.