I last reviewed the Isle of Man's subsidy from the UK as a tax haven in tax year 2004/05. Then I estimated it to be as high as £270 million a year. The VAT subsidy alone was some £233 million a year.
I have recently been challenged on this issue - some people saying that the subsidy has been eliminated as a result of the revision of this VAT sharing agreement in 2007. Others have questioned the data used because of the range of years involved. I have recalculated the data to deal with this issue.
The Gross Domestic Product of the Isle of Man is now £1.8 billion according to the latest data I can find from the IoM government. That for the UK is £1,275 billion, in contrast.
In 2008/09 the Isle of Man expects to collect £339 million in VAT - 59% of its total government income of £574 million. This is 18.8% of IoM GDP - which leapt in the meantime, including by an improbable 11.2% in 2006/07.
In the UK the identical VAT system (for all practical purposes) collects £83 billion a year - or 6.5% of GDP.
That means the IoM, which has reason to have a much lower VAT collection rate because of the very large size of its exempt VAT outputs in the financial services sector collects 12.3% more of its GDP in VAT than the UK does using an identical (indeed, shared) system.
This is, obviously, impossible. Just as it is impossible for a country to collect more in VAT than its GDP multiplied by the VAT rate (17.5% when the IoM budget was set). So it is glaringly obvious there is still a subsidy. I now suggest that the VAT subsidy is 12.3% of its GDP - or £221 million a year. There are other subsidies on health and defence over and above that. I have not revisited those issues.
In other words, for all practical purposes the revised Common Purse Agreement of 2007 has left the Isle of Man enjoying exactly the same subsidy as it did before the change. And they use this to do three things:
a) Force down tax rates in all the Crown Dependencies, so undermining their financial stability - a process the Isle of Man started when it announced 0% tax rates on companies in 2000 - a move it could only afford because of the UK subsidy, and which Jersey and Guernsey had to copy despite not having a similar subsidy;
b) It undermines tax revenue in the UK. For example, it refuses to automatically share data with the UK under the EU Savings Tax Directive, and so hides UK tax evaders in its banks. £400 million was recovered from such evaders as a result of a UK tax amnesty covering the Isle of Man in 2007.
The obvious question is this: when UK government revenue is so tight, why are we spending more than £200 million year to subsidise a tax haven to steal our tax revenues? Surely this is a question the Treasury has to answer.
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Why a subsidyof 12.3%? you can’t compare the economies of the IOM and the UK.
Most of the IOM income are from the Banking and Insurance sectors which are all 17.5% VATable to the EU, which you claim is with whom they do most of their business.
The finanial industry in the IOM is a lot higher % of the GDP than in the UK and has little VATable outgoings, compared to manufacturing and retail. SO obviously the IOM would have a lot higher collectable of VAT as a percentage of their GDP than the UK.
You assume that the IOM and the UK have the same VATable industries, they obviously don’t. You call into question the big aduit firms accounting estimates and ‘mark to market’ valuation policies, but you fall in to the same trap, and then you state your figures as if they are fact.
Creg
You’re right: output tax will be much lower in the IoM
I say this in the above
I can’t prove by how much so I offer a cautious estimate rather than a potentially inflated one, which I think would be unwise
It shows what a reasonable man I am
Richard
Richard
You should remember that the average person in the Isle of Man has more disposable wealth than in the UK so spending on Vatable goods will be higher.
At the end of the day most of the retail spending in the Isle of Man ends up in the UK anyway as most of our suppliers are UK based companies. Domestic companies over here don’t offer very much choice so most money goes to branches of UK companies or is spent directly on the internet.
I assume these UK companes pay corporation tax, not to mention the VAT they collect so I think you will find a substantial amount of money flows directly back into both the UK government and UK companies in general which in turn creates wealth through jobs, etc.,
As usual, you don’t look at the bigger picture!
So you do Mr Murphy, my apologies 😳
PJM
Note Creg directly contradicts you
So he should: what you say is so obviously absurd. No one can collect more from a tax than the sum of the maximum tax base (GDP here) multiplied by the tax rate (17.5%).
Stop making excuses: you’re subsidised. Face the reality and talk about what you’re going to do about it.
Richard
[…] million. It actually pays £2.4 million. That’s a subsidy of £39.8 billion to add to that mentioned yesterday on VAT of £221 […]
[…] million. It actually pays £2.4 million. That’s a subsidy of £39.8 million to add to that mentioned yesterday on VAT of £221 […]
Firstly Richard, GDP is a guess at best and secondly does not include imports which make up a substantial proportion of goods in the Isle of Man.
It’s 20 years since I studied economics I could be wrong however I do know that accurate calculation is almost impossible.
The point I was making was that you shouldn’t just count the cashflows one way, give credit where it is due for what goes back to the UK.
PJM
Respectfully, that is ludicrous.
of course GDP is an estimate: almost all accounting data is estimated to some degree or other. Anybody who has prepared a work in progress calculation or a deferred tax calculation will know that.
But to argue that over time it is not a realistic measure is absurd.
And if the same faults in measurement are present in the Isle of Man calculation as are present in the UK calculation, and that is likely, then your point is irrelevant
Richard
Richard
Again you fail to see the real point. GDP was a side issue, what I was getting at is that you only count cashflows one-way and don’t give credit to the funds that flow back from this island.
You do act, on a consistent basis, like a lazy journalist i.e. only looking for sensational headlines and ignoring balanced argument.
PJM
You clearly do not understand VAT. this is a tax were outputs are charged at standard, zero or exempt rates and inputs are claimed for credit ( unless the output is exempt or is by a consumer). As a result one expects the net recovery to be substantially less than the gross tax base multiplied by the standard tax rate.
This is reflected in the UK situation. that is why its proportion of recovery to GDP is so much lower and is entire statistically valid. The same should be exactly true of the Isle of Man. It is not. I do not need to adjust my calculations for what you have said. You simply show that you do not understand what you are writing about.
it is not that I ignore balanced argument: I ignore comment which is wholly unfounded. I offer analysis which is reasoned and based on fact.
Try doing the same
Richard
Richard
Again you have not properly read my post. I am not just talking about VAT but of all cashflows and benefits that the Isle of Man residents return to the UK.
If you are going to continue to fixate on VAT/GDP, shouldn’t you change your calculation to GNP? I haven’t looked at this in detail but it may make more sense given the nature of the manx economy.
if you are asking me to take the flow of dodgy money out of the Isle of Man into account – think again
Richard
[…] who argue with my analysis of the Isle of Man’s VAT subsidy from the UK keep saying that I’m wrong because the […]
[…] who argue with my analysis of the Isle of Man’s VAT subsidy from the UK keep saying that I’m wrong because the […]
Richard,
I think you are missing a vital point here – the nature of the Isle of Man’s economy – by far the majority of consumption is imported from the UK.
Gross Domestic Product only accounts for local Consumption, Investment and Government activity and Exports removes all imports from its calculation. I = C + I + G + (X-M)
Let me give you a simple example. An Island consisting entirely of retirees who are simply running down their savings. No Investments, No Government spending, the economy consists of just the consumption of these people buying imports.
GDP = C + I + G +(X-M)
In this simplified example the GDP is ZERO – no economic activity occurs on the Island, it is all imported in – the consumption is netted out by identical imports. BUT the retirees have still spent lots of money buying the goods – and hence have to pay VAT.
This is collected and sent to the big common purse which then remits it back.
At todays VAT rate, the retirees get back 15% of their consumption (ignoring exempt items etc!) – but that is an infinite percentage of the GDP which is ZERO – there is no net economic activity on the Island.
You are totally incorrect in saying that VAT as a percentage of GDP cannot be more than VAT rate – that totally ignores imports.
Given this your calculations are extremely disengenuous. No Cars, few domestic goods, etc etc are produced on the Island, but the Manx people pay out VAT to import them. That is I think PJM’s point, and it is most definitely mine.
The IOM does not track imports or exports – it calculates National Income using the income approach. Hence trying to use GDP to understand VAT reciepts is entirely pointless.
Regards
Chinahand
China hand
That is complete and utter balderdash
The Isle of Man government says this:
The latest GDP figures produced by the Isle of Man Treasury’s Economic Affairs Division show that the value of GDP in the Isle of Man economy for 2006/2007 rose to over £1.8bn, an increase of 11.2% over the previous period. This equates to real growth of 7.7%. The Island’s per capita national income as a result is currently measured as 18% higher than in the United Kingdom over the similar period and 24% higher than the EU* average.
http://www.gov.im/investiniom/gdp.xml
they are happy to do per capita comparisons
If so your assumption is entirely incorrect or alternatively the real GDP per head is absolutely enormous – which I do not believe
Therefore my calculations are completely and utterly plausible and your grasp of statistics very weak
Richard
No, Mr Murphy, your calculations are not plausible. They never have been – for one simple reason. Irrespective of whether Chinahand’s assertions are correct or incorrect – and I support his conclusion that the IOM’s share of the Common Purse appears inflated to reflect massive importation from the UK – there is simply no reason for the UK Government to behave in the way you imply. Why would they subsidise the Isle of Man to the tune of £200 million, or any other amount? It is not in their interests to do so. You will have to come up with a credible answer on this point before I will accept your figures.
As for your refutation of Chinahand’s argument – it’s nothing of the kind. The Isle of Man Government quotes GDP figures per capita, therefore the Common Purse Agreement must be based on relative GDP and not consumption of imports? That’s a complete non-sequitur.
Iliam
Sorry – wrong – VAT is a consumption tax – and so GDP per capita is a wholly rational basis for assessment
as for an explanation as to why this happens – there is a totally plausible one.
The deal was first signed in 1911 to relieve poverty. it was renewed in 1973 when the IoM was losing people
this was always meant to be a subsidy. it is a subsidy. it does exactly what it was designed to do
A couple of years ago the Isle of Man said it could not survive without this subsidy because it would cause economic turmoil in the island if they had to raise tax – and it would lose its tax haven status. at the time the UK Treasury was supporting that status. it has changed since then
What more explanation do you need?
The numbers are right. on this occasion they do not lie. there is a margin for calculation error – of course I accept that. but threefold margin? no way.
You are simply denying what is obviously true
why?
Richard
To answer your question, Mr Murphy: why I am denying what is obviously true? For the simple reason I do not believe it to be true. Your assertion about the 1911 agreement is almost certainly correct, and there was probably some element of subsidy in 1973 – although the then agreement was also designed to reflect the vast number of British residents who holidayed, and spent their money, in the island.
When the holidaymakers stopped coming at the start of the 1980s, the uplift, of course, became a subsidy in the true meaning of the sense, since it was intended to reflect spending that was no longer taking place. That is one reason the Common Purse Agreement was renegotiated a couple of years back.
But what I do not find credible is that the UK Government would have agreed a new deal – with a significantly extended notice period, no less – to subsidise a micronation wealthier than itself. Attitudes have certainly hardened in recent months, but the present UK Government has never been particularly pro-Crown Dependency, and I cannot accept that the need for the island to raise direct taxation or implement an equivalent import duty would have been of much concern to the decision-makers in Whitehall. Or to put it another way, there must be much more to that decision than immediately meets the eye.
Finally, to take your first point last, GDP per capita is of course a rational basis for assessment. But that does not prove that it was the only consideration in this case.
Iliam
So you agree the 1911 and 1973 agreements were meant to give a subsidy
The 20907 adjustment is now in place and the evidence (IoM accounts and budgets) suggests almost exactly the same fiscal position
So why isn’t it giving a subsidy?
And why is it implausible that the UK did not continue an arrangement on which the IoM was relying?
If it is not getting a subsidy now but was in the past how do you explain the consistency of the data?
Richard
Interesting points, Mr Murphy. I did not in fact accept that the 1973 agreement was primarily intended to deliver a subsidy – I said it “was also designed to reflect the vast number of British residents who holidayed, and spent their money, in the island”. In addition, I imagine it was intended to persuade the Isle of Man to follow the UK into the EEC VAT area, after the other Crown Dependencies had decided against doing so – I understand that the IOM Government of the day was actually considering not implementing VAT as it believed it did not require the additional funds.
Nonetheless, it is clear that the arrangement provided a subsidy during the 1980s when the island had few holidaymakers and a GDP only 55% of the UK’s. Whether it was still a subsidy two years ago, when the island’s GDP had overtaken the UK’s – and hence spending on VATable UK imports had spiralled – is a different matter.
As for income remaining consistent under the agreement, the figures I have seen suggested an initial reduction of £18 million as a result of the renegotiation. That, I would argue, was the real effect of the “subsidy” for non-existent holidaymakers – not the whole £200 million-odd you have implied.
In any case, one or other of us will shortly be proved correct. If you are right, we can reasonably expect the Common Purse Agreement to be terminated by the UK Government in the coming months, and for taxes to rise massively here when the agreement expires. If either, or both, of those outcomes fail to pass, I would respectfully suggest that I may have been correct, and that there may have been more to the apparent discrepancy than met the eye.
Richard,
I am afraid I do not understand your points can you clarify.
Of course GDP and GDP per capita can be compared between the IOM and the UK – I am not disputing that at all and do not see the relevence of your point. Simply though the components that build up those GDP calculations are based on very different fundamentals giving the different final values between the two economies.
And can you explain your point about real GDP per head being enormous – I am not in anyway disagreeing with you that IOM GDP per head is 18% higher than the UKs and do not see how anything have said would lead you to say I am.
The point I am making is that VAT receipts as a percentage of GDP cannot be easily compared between the two areas – because GDP does not include imports. For the IOM the majority of imports are invoiced from the UK and hence contain VAT.
This means that VAT is paid not only on local Manx production – as recorded in the Islands GDP figures, but also on that proportion of the Island’s imports that originate in the UK VAT area – which do not show up in the Island’s GDP figures – they are imports!
This is totally different from the situation for the UK where basically none of the imports include a VAT component. As a result, for the same amount of economic activity there will be a larger component of VAT paid in the IOM because it is importing VAT rated goods.
In the totally unrealistic example, but one which I hope explains the principle, I had an economy with no economic activity at all, importing VAT rated goods by running down savings – in that case VAT as a percentage of GDP is infinite – obviously the IOM is NOT like that – but it is closer to it than the UK is as it imports VAT rated items and the UK basically does not. Hence your statement that the IOM’s VAT reiciepts as a percentage of GDP should be the same as the UK’s is totally wrong.
That has nothing to do with real GNP per head, or the relative levels of GNP per capita, its just down to the IOM importing VAT rated goods.
Regards
Chinahand
Chinahand
I remian utterly baffled
Do you understand VAT?
It is a consumption tax
It is related to GDP per head
I do not believe that your savings ratio has any material impact at all – prove it has please
And let’s be clear the VAT systems are the same in the UK and IoM
In that case imports are irrelevant – they are one economy for this issue – with one happening to have higher GDP per head – which would according to all savings ratio suggest lower VAT capture per head
But the IoM collects 3 times as much
The reason is that the VAT system is not being applied – an arbitrary payment is being made – and I’ll be quite candid – unless you can prove your hypothesis with data as I have mine it belongs in cloud cuckoo land
Now give me those numbers….or don’t post again
Richard
Richard, I really think we are talking at cross purposes here.
Let me try again – this is nothing to do with savings rates – savings rates are the proportion of income which is not consumed in a year, quarter or whatever – in my extreme example there is NO income and none of it is saved. It is an extreme example and I don’t think it is helping you understand my point.
I am trying to show you that the differences you are seeing in VAT as a proportion of GDP are more than probably down to the different ratios of spending on local and imported goods, not differences in savings rates.
In my extreme example there was no spending on local goods – it was all imported – and all the imports had VAT on them.
In reality, on the Island a far higher proportion of the goods are imported, and most of them come from the UK and so have VAT applied.
The IOM is paying VAT on goods and services that are not made or undertaken on the Island – ie anything that arrives on the Island from the UK.
A manxman buys a car – it is imported to the Island from say Ford UK – the economic activity making the car is nothing to do with the IOM – it will not appear in the IOM’s GDP figures (I don’t think you will disagree with me on this?). But the manxman will still have to pay 15% on the £20K odd the car costs to the Government (do you doubt me on this?) This means the VAT receipts are higher than the UK’s for a comparable economic activity because the UK does make some cars or whatever.
The Isle of Man doesn’t even make the sandwitches on sale in Marks and Spencers in Douglas – they are imported from the UK and VAT is charged on that importation.
You data isn’t backed up by figures – you’ve just stated (with no evidence) that the amount of VAT collected in the IOM for any given level of economic activity will be the same as in the UK.
That is an assumption on your part – and I am trying to explain to you that it is not a fair assumption because it ignores the different the different structures of the IOM and the UK economies.
Imports are entirely relevent – there is one VAT system, but it is being applied to vastly different economies – one where 99.9% of the VAT invoices are paid in the same economy that they originated from – the UK – and one where probably less than 50% of them are – the IOM.
I don’t doubt your figures Richard – I checked them up! Its your assumption that they should be the same that I am challenging – you are not taking imports into account and as imports into the Island from the UK have VAT on them this complicates the issue.
I’m wracking my brain on how to show what the actual level should be – so that you can then compare to see if there is a subsidy – I’m not totally discounting that there might be one – but quite definitely to say the IOM’s VAT receipts should be 6.5% of GDP is incorrect.
Last go – yes VAT is a consumption tax – but GDP consists of Consumption, Investment, Government spending and net imports. If consumption, investment, government spending and the balance of imports to exports are different, but GDP is the same there is no reason whatsoever to assume that the ratio of VAT to GDP will be constant.
At the moment that is all I am saying, and I think it is self evident that it is true – VAT receipts will not be a constant proportion of GDP in different economies, even when the VAT rules are the same.
I will try to think of how to get data to show what the rates should be – I think it will be down to the proportion of consumption in the economy and the ratio of VAT’ed imports to exports, but it is not a trivial issue – neither the IOM or the UK have useable figures on their exports and imports to each other. I hope you will allow me to post such results if I can find them.
I hope you will post this comment – your last line of your last post is not helpful in trying to get clarity on this issue. I have not been rude or offensive, I’ve just tried to explain why I think you are incorrect to insist VAT levels to GDP should be the same in the UK and the IOM as their economies are vastly different.
Regards
Chinahand
Chinahand
Let me explain why you are wrong.
Some assumptions:
1. GDP per head is higher in the IoM than the UK
2. The consumption profile per head in the IoM will be slightly lower than the UK as a result
3. The IoM does import a higher proportion of its consumption goods than the UK and because of the peculiarity of the IoM VAT system (nothing else) these do not show as inputs and outputs in IoM VAT calculations as a result.
4. IoM GDP does have a significantly differing profile to the UK — a significant part of its national income is from financial services — which are exempt for VAT whether consumed locally or internationally. The IoM ratio of exempt outputs is much much higher than the UK proportion as a whole.
I think these indisputable.
Let’s also acknowledge all consumption carries VAT (if appropriate) irrespective of where made — so importing profiles should make no difference — it is consumption and export profiles that do.
Now in this case:
• The ratio of output VAT to GDP in the IoM should be much lower than in the UK — the financial services industry guarantees that. But it is three times higher
• The ratio of consumption to income in the IoM should be lower as income is higher — so VAT to GDP should be lower — but it is three times higher
• I accept input VAT charges to IoM businesses will be lower as more than average consumption comes from outside the island — point taken — but I can see now way on earth that this compensates for the massive distortion in the IoM top line because of the significant proportion of exempt VAT outputs on which nothing should go to the IoM government.
In other words rationally your direction of travel is wholly wrong. The IoM economic profile all suggests a lower VAT to GDP ratio — not a higher one, and your argument is horribly selective either because of bias or not understanding VAT.
In that case I repeat, please prove me wrong or give up — both my hypothesis and data are consistent and so far no one has offered anything but misinformation and abuse in response.
I am taking your argument seriously — now do me the favour of taking mine seriously. That requires work on your part — and as I think you’re an economist I can’t see why that is beyond you.
Richard
[…] I’ve long said that for Jersey and Guernsey going bust is the most likely scenario. It’s clear the same is likely in the Turks & Caicos, Bahamas, Bermuda and maybe Cayman. It would happen inn the Isle of Man but for its massive UK government subsidy. […]
[…] am, of course, the source of this criticism of the Isle of Man. Please follow the link to see exactly why I say the UK provides a heavy subsidy to the Isle of Man […]