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 And then the UK gives it a payment in exchange based on a formula which is unpublished but which clearly has nothing to do with the real level of economic activity in the Isle of Man.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.
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Sophie – I discovered there’s little point trying to reason ont his website – in Richard’s mind, his opinion is the right one and he really doesn’t want an open debate – he just wants to shoot down anyone with genuine points to make.
Sophie and Andrea
Something that always suggests to me that a person has no real argument is their resort to personal abuse. It does not become either of you to do so.
The reality is that I do understand international finance. What is more, many people think I have a very clear understanding of the way in which places like the Isle of Man work. I would not enjoy the audience that I do if they did not.
In addition, as a practising chartered accountant ( which I am, in between doing this stuff) I have to be very familiar with the rules concerning money laundering and all related issues. When I was last inspected by the Institute of Chartered Accountants in England and Wales with regard to this matter they were unable to find fault in my procedures.
So let us assume that I do have a valid knowledge base from which to comment.
Then please answer the allegation is that I have posed day on this site with regard to Guernsey here
http://www.taxresearch.org.uk/Blog/2008/11/14/guernsey-should-expect-no-special-favours/. they apply equally to the Isle of Man.
Having some know your client rules in place is absolutely inconsequential when it is your government’s policy to undermine the regulation of another state.
In practice, there is no more evidence that your banks reported those abusing the UK taxation system and disclosed that fact to them by refusing to exchange information under the EU savings tax directive then there is in the case of, for example, Jersey
And as Sen Carl Levin has made clear, substantial abuse is possible through the Isle of Man.
But even if that abuse is in the form of tax avoidance and not tax evasion, why do you think that is acceptable? just because something is legal it is not necessarily morally justifiable. I am sure there are legal acts that you would not perpetrate. More than that, I am sure you do not spend your life trying to get around the law, which is exactly what tax avoidance is. do you really think that the basis for a sound economic policy? do you really think that morally justifiable? Do you really think that is what a professional person should be advocating? Do you really think it is the job of your government to help people avoid their legal obligations in the United Kingdom or elsewhere?
If you do then I think you’re in for a rude awakening.
But you are of course welcome to tell me why I’m wrong – but if you plan to do so please avoid personal criticism. It will not serve your case
Richard
Apologies if you thought that was a personal attack. The reason that I am no longer entering into the discussion is that you have no interest in any point that anyone puts forward that is different to your own. That is not a personal attack – that is a fact based on your previous responses to me and other correspondents.
Andrea
That’s a cop out
I have asked for answers and you say you won’t provide them
If you want a debate you have to take part, and not just say I am wrong
If I have al the arguments and you present none of course I win
What is your argument?
Richard
Tax avoidance is not morally wrong – it’s completely rational thinking! If you could reduce the tax you paid, wouldn’t you?
Whether people choose or not to do it is an individual decision. These companies have been set up because their is suffucient demand to do so.
Also, I find it shocking to think that you could actually believe that the Manx government is looking to purposefully undermine other government’s administrations.
However, with your Chartered Institute of Accounting, it would seem that you are infinitely more qualified to discuss this than myself, a lowly bank worker.
Sophie
We clearly have different perceptions of morality, and I have certainly found that the smaller the island a person lives on the greater their apparent acceptance of tax avoidance. But this is a point of personal difference and I cannot argue with you about tax avoidance being legal. That said, I can, and will say that a great deal of what is undertaken in places like the Isle of Man which is described by local professional people as tax avoidance is actually tax evasion because they accept assurance from their client that they will make declaration of the transaction in their home jurisdiction and perform no check to make sure that they do. In my opinion that is negligent and a major failure in international regulation which must be redressed.
As to your suggestion that it is shocking that I say that your government deliberately creates structures that undermine the taxation regulation of other jurisdictions, what other explanation do you have your offshore financial services industry? That is its sole purpose.
Richard
Richard, I’m sorry to see you have such a misanthropic view on matters – but who are we to question whether clients declare tax or not? Do we automatically believe that all customers are liars?
However, you may be right in your misanthropy in that the services sector in the Isle of Man does enable this behaviour to a point, but in no way would any government want to be seen as aiding criminal behaviour. The idea is absurd.
You have pointed out however, that much of what you say in your personal opinion – I think that is the crux of the matter.
Sophie
I note your comment:
“who are we to question whether clients declare tax or not? Do we automatically believe that all customers are liars?”
I also note that you work for an Isle of Man bank.
I have to inform you that you have an absolute legal duty to be concerned about whether your clients declare their tax or not in the country in which they are located. If they have obligation to do so, but do not, then they are tax evading. Tax evasion is a money laundering offence. It does not matter whether a money laundering transaction takes place in the Isle of Man or not for the purposes of reporting suspicion by a bank to your financial services regulator. You have the obligation to report that suspicion in either case, and in both cases you have a duty to form the opinion.
If a client declines to exchange details of the interest that they have earned to their domestic taxation authority under the terms of the EU savings tax directive then I, as a trained money laundering officer, believes that any bank should have a suspicion that the customer may be tax evading, and as such has a prima facie obligation to report that customer to the relevant money laundering institution within its country for this reason.
If you are indifferent to tax evasion in another country you are neglecting your legal duty as a regulated financial services institution and may be subject to criminal sanction as a consequence.
We find it very hard to accept that a place is properly regulated when institutions located within it ignore their obligations to identify suspicious transactions which should be reported for money-laundering purposes to their relevant regulatory authority.
Do you now understand why I have concern about the standard of regulation in the Isle of Man? By your own admission it appears to be inadequate.
Richard
Richard,
I believe this conversation was over before it had even started because you have obviously not taken anything I have said into account.
I resent that you say I am indifferent to regulation – it’s not true. I understand I have a legal obligation to report suspicious transcaction – don’t believe I don’t. But still, if the client hasn’t done anything to raise suspicion, what can the bank do? Thinking practically, how would the bank feasibly check – what about the inherent liars?
Would you be happy if your bank questioned your integrity as an individual to pay your taxes? You have questioned MY integrity, but I’ve done nothing wrong. You make it sound as if the service sector actively strives to promote money laundering.
I think your blog has become a place for whinging and ranting and not for reasonable discussion. I won’t be bothering to post again.
Sophie
Respectfully, all I did was analyse what you said. And all I said was that if a customer of your bank refused to exchange information with to their domestic tax authority I thought you would have reasonable grounds for suspicion that they are tax evading. What else could you think?
I suggest that unless you make enquiry of them to exclude that possibility you would have to report suspicion that they were money-laundering.
I know that this is not happening in the Isle of Man but I can see no way you can refute my argument. Indeed, I note that you have not sought to do so although I have given you every opportunity.
In that case I make one last comment: please never again suggest I do not engage in debate on this site or that I will only hear opinion that agrees with my own. I have engaged with you, I have sought to explore the information you have supplied, I have offered logical analysis and it is you who has run away from the debate. That is always what happens.
Please feel free to differ – but please say why.
Richard
Richard – serious question – do you think people stop engaging with you because you are so aggressive in your responses to them? There is not one post where you have been positive in your response or at least taken on board something of what the respondent has said. Perhaps if you were more engaging, there would be more of a debate.
I have another question – you were a partner of a firm of accountants – were you a director and if so, did you receive dividends?
Andrea
2 questions – two answers
Yes, I have received dividends. Is there a problem with doing so? I have never argued there is anything inherently wrong with them.
Re responses to people who leave comments: just read this blog a little more widely and you will see there is ample evidence that your comment is wrong. I frequently agree with people. I am always open to persuasion. I can change my mind. Equally, when I think people are putting forward opinion that has no foundation in fact or logic I am more than happy to say so. Why not? When, as I have, you promote a cause that is counter cultural, and when you do so with very few resources at all hen pitted against a culture with billions at its disposal you a) don’t worry if occasionally some people might be offended by your opinion as that is inevitable and b) have to be willing to be robust. If a few sensitivities are offended on the way, so be it. I am profoundly offended by a great deal of that which happens on the Isle of Man. Have you yet offered me an apology for that?
Richard
I note that the Isle of Man Tax Assessor and a director of Tax Justice Network will debate the tax haven issue at an event in the Isle of Man on Monday 24th November 2008.
How many other successful transparent highly regulated jurisdictions have offered the same high level opportunity?
It is no coincidence that we have the longest continuous democratic government (more than 1000 years).
I am proud to uphold the highest standards in the Isle of Man as a project manager licenced by the UK Government Office of Government Commerce, as an international director of the royal chartered IT professional body and as a student member of the Securities & Investment Institute.
Best regards,
Graeme Jones
IT Project Manager
Graeme
You’re right – John is in the IoM this weekend
But these invitations aren’t unusual – we just don’t tend to go further afield – it’s an issue of cost
I hope you join in the debate
Richard
I know what you mean about costs….
…the UK government introduced the Air Passenger Duty regulations that only require APD on the first flight if two flights connect at the same airport within 24 hours. However, the UK airlines, customs & excise, trading standards and government have repeatedly refused to refund the illegally charged second APD on all onward holiday and business flights from the UK.
The formula for “arbitrary reallocation of VAT” is clearly a blunt tool perhaps originally intended to save public sector costs on real data processing and analysis. It would be nice to acknowledge that Isle of Man residents pay massively disproportionate other tax to the UK government and a VAT only argument is out of context to some extent if the VAT formula includes an offset to correct a tax injustice!
Richard
I did not say there was a problem with receiving dividends, I was asking a question as to whether you had received them. My understanding is that if a Director of a company receives a dividend and it is paid gross, rather than going through payroll, then this a way of avoiding making NI contributions, both for the employee and the employer. Another way of tax avoidance if you like.
With regards to you being offended by a great deal of what happens on the Isle of Man, I don’t believe it is my place to apologise to you!
The annualised passenger totals in September 2008 were 778,000 and, if only 50% were illegally charged an extra £10 APD for onward flights, almost £4 million has been illegally collected and paid to someone!!
I attended and contributed to an excellent public debate on “Tax Havens” in the Isle of Man last night with Malcolm Couch the Isle of Man Government Tax Assessor and John Christensen from the Tax Justice Network.
I asked if the EU is hypocritical to consider the alcohol section in Tesco Calais a perfectly acceptable tax haven. The Isle of Man does not offer any similar duty free purchases.
I also asked if tax competition between high tax jurisdictions such as the UK and low tax jurisdictions such as the Isle of Man could be mitigated by stronger open government and accountability to the taxpayer to prevent high MP expenses, etc. and support equally low tax rates!
Graeme Jones
“The Isle of Man is itself totally dedicated to undermining the tax systems of other countries, the deomocratic process worldwide and in exacerbating world inequality and poverty”
I am Lost. Why would the Isle of Man NOT do this? What do they benefit from not promoting themselfs to Companies for Tax purposes. Maybe i am alot stupider than you but we have the right to Tax what we like. The UK must feel they get something out of the Arangment otherwise why would they continue to “give” the island £200odd million
DM
And perhaps we do not think we get good value out of this agreement any more. Perhaps that is why the review is to take place
perhaps that is why you should be worried.
Richard
Me again – fresh from the ‘Tax Haven’ comments – I do find this site totally compelling. Everyone has a right to an opinion but argueing with everyone that they are idiots or crooks and therefore you are right all the time is amazing. There are some very very good points made above and you have simply dismissed every one. As an accountant the style of your statements is very sensationalist. Much as I argued about banking money going to the UK and therefore beniftting the UK economy the same can be said about sales – we are a small island that has to buy everything from the UK and we charge no import duty so there is no local protectionism even if we did. So lots of UK companies benefit from the income. Also the cost of certain itesm such as Petrol, Gas and Electricity are at much higher levels than the UK and, guess what, VAT is a percentage so the collected amount is proportionately higher. To use a specific example of this, until recently telecommuncations costs in IoM were 30% higher than in UK becasue of lack of competition – Manx Telecom regularly made in excess of £12m pa in profit against £35m revenue – so a high VAT income – but just to make things worse who owns Manx Telecom – O2 so where are the profits repatriated to – the UK. Then along comes competition on the mobile side from Sure (Cable and Wireless) who send their profits to Guernsey and then back to the UK – I don’t believe there is a single airoplane that lands on the island any more that is owned by an IoM company – we sold our national airline to BA who then marginalised it before selling it finally on to Flybe. What would be an interesting statistic to factor into this is the balance of payments against the GDP.
It’s also worth pointing out that some of the large capital projects such as the Incenerator and the Electriciy Cable were funded not out of income or even capital reserves but by secured borrowing from financial institutions like Barlcays from the UK and/or the issuance of IoM Govt Bonds. What difference does the proportional size of the financial sector with London have to do with anything – the IoM economy is so small that purchasing patterns can have a profound effect that is completely different to a GDP based calculation. When the Govt spends £120m on a single capital project such as the MEA cable, £175m on a new hospital, £50m on new sewage systems and £40m on a new prison, and the vast majority of contractors (and particularly materials) are UK sourced then this is going to throw an interesting curve ball.
As for defence – what exactly does that entail? Would the UK implement an IoM foreign policy? Are there any army, air force, naval or even coastguard presences in the Isle of Man. Do the Falklands pay proportional amounts for the presence there – do Afghanistan or Iraq? At least they would all be able to see what they got for their money.
I’d hate to have you as my accountant if you make people pay more Tax than they have to becasue you want to take the moral high ground on their behalf, which is what you imply above. Making sure that people don’t pay too much tax and providing legal tax efficient financial structures is at least part of what the global financial industry is about – lets not also forget that the global finance industry is what is funding the government borrowing – does the govt vet who buys bonds and gilts?
Well i think you will find Many Manx people agree there should be a review. I know of many who want nothing to do with the UK. There is not much for us to be worried about.
I agree with DM – I was at a meeting last night for my professional body and everyone else felt the same – we welcome the review as it will put an end to many of the fallacies that you promote on this website!
By the way, I was not surprised not to receieve an answer regarding dividends and their use in “avoiding” NI contributions.