The Isle of Man’s Chief Minister, Tony Brown, has made a statement this morning to the Tynwald (Manx Parliament) on the revised VAT agreement with the UK. The detailed statement is here.
The cost to the Isle of Man of revising the ‘common purse agreement’ is higher than expected. He said:
[F]or the financial year 2010-2011 the Island faces a total reduction of some £90million in relation to our revenue income from the Revenue Sharing Arrangement, from that previously estimated, with that figure increasing to £140million in subsequent years.
Current estimated income per annum is £572 million. Almost 24% of government income is being lost as a result. I stress though: a subsidy remains: I have estimated that subsidy as £230 million a year. VAT was estimated to be £339 million of total income this year: income tax just £127 million and company tax just £21 million to put this loss in proportion.
And, as the Chief Minister acknowledged, the EU is also looking unfavourably on the Isle of Man zero-ten system. This though is unsurprising — it had already failed to meet EU standards and as such this is not big news, but only adds to the fiscal uncertainty in the Island, and the potential loss it could face.
In the light of that the Chief Minister’s comments were amazing. It was all about cuts, redundancy, the end of support for voluntary programmes and more. Tax is mentioned just twice in the whole statement. and then with regard to the EU Code of Conduct, about which he said:
The U.K.’s views on this area have been helpful to us in confirming our own understanding of the situation. This will allow us to develop and position the Island and its future tax regime, so the Island can continue to remain competitive and at the same time be accepted by the international community as responsible and co-operative.
It is obvious that the people of the Isle of Man are going to pay for the mess their politicians have got them into. And have no doubt, that mess is of their own making and they were warned of this. In March 2007 Isle of Man Today reported:
Negotiations between the Island government and the UK began in 2006 and a new deal was reached in the last few weeks. Mr Bell said VAT will still be pooled with the UK but the deal now introduced new criteria with payments in future being related to GNP.
'This changes the focus of our thinking because in future the higher the growth in the economy the higher our receipts will be in this new arrangement. But the new system brings more stability to our system and we ought to be able to plan further ahead.'
Mr Bell also made reference to an article in The Observer newspaper (Sunday March 18) which alleged that UK taxpayers were subsidising tax cuts in the Isle of Man to the tune of £270million a year. The article referred to the VAT sharing scheme. Speaking to other business breakfast delegates before his speech Mr Bell had pointed out that the article included several inaccuracies, the most glaring being that the Island's population was 26,000.
In his speech Mr Bell said the article had been initiated by the Tax Justice Network which he described as a 'motley crew doing their very best to stir up resentment against not just the Isle of Man but off-shore jurisdictions in general.'
'They (the Tax Justice Network] will use every opportunity to undermine the Island and try to damage our economy,' he said.
'We do need to keep an eye on these sort of bodies as well.'
The Observer did of course quote earlier versions of my work, revised downwards since because of VAT rate changes and the impact of the revised deal. It seems such a shame Mr Bell could not have acknowledged the truth at the time that the UK really was massively subsidising the Isle of Man, as I said. He might have better prepared his island for the change that will now be forced upon them. Instead he hurled abuse in my direction.
So is the resulting change my fault, and the fault of my Tax Justice Network colleagues? Maybe, in some small part it is in that we drew attention to this arrangement. Certainly no one else, anywhere, drew attention to this issue. But I don’t apologise for that. The Isle of Man does not need a standard rate of income tax of 10%, a top rate of 18% 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. It could charge its banks to tax at more than 10%. All these are choices: bad choices. And yet none of them are mentioned in the Minster’s statement today. So please don’t blame me for what is coming the Isle of Man’s way: blame your own ministers who ignored the warnings, who denied the truth, who would not disclose the nature of the agreement with the UK or of the calculations made, and blame yourselves for thinking you could successfully free ride off the back of the UK tax payer. I did not try to damage your economy. I drew attention to weaknesses in your own economy and the cost that imposed on the UK.
I don’t apologise for one moment for helping end that abuse.
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And I’m sure every mid level public sector employee that loses their job (and there will be thousands) will thank you for it.
As for the financial sector, well, there’s alway Mauritius, Hong Kong or Dubai…
Unlike Jersey and Guernsey, the Isle of Man had already implemented this so called ‘zero ten’ policy. They were just playing catch up.
Your misinformation only proves that you have an axe to grind and that you have nothing better to do with your life. Instead of being opportunistic, like an entrepreneur, you would much rather watch other people’s demise.
I hope one day you’ll think that you could have been somebody. Enjoy your moment in the spotlight; it will only be for a fleeting moment. There is one thing that might give you some comfort – the Isle of Man, Jersey and Guernsey will be around long after you my friend.
I certainly wouldn’t blame you for anything that has happened, Mr Murphy: without wishing to appear rude, I would not credit you with sufficient influence to change UK Government policy. Put bluntly, if the Isle of Man were receiving far more than its fair share under the Common Purse Agreement, then it was almost inevitable that a cash-strapped, anti-Crown Dependency British Government would address the issue.
I would, however, be interested in your comments on a posting I made on another website (in turn an expansion of an earlier posting here). Whatever our political and ideological differences, I recognise your expertise in taxation system design, so would be fascinated to hear your opinion on the following potential changes to our tax base and rates:
• Freezing the personal allowance and higher rate tax band for several years
• Increasing the basic rate from 10% to 12.5% and the higher rate from 18% to 22.5%
• Abolishing the tax cap (which has not worked, in any case)
• Increasing the upper limit for national insurance contributions to the UK level
• Removing the ability of the self-employed to treat Class 4 NIC as tax-deductible
• Introducing a standard rate of corporate tax of 10% (which also solves the zero/ten non-compliance problem)
• Introducing capital gains tax at 10%
‚Ä¢ Introducing inheritance tax at 10% on estates over £1 million
‚Ä¢ Introducing a £1 passenger arrival levy and £5 car arrival levy into the island
‚Ä¢ Increasing the cost of work permits for new residents from £25 to 1% of annual earnings or profits (with a minimum of £250)
• Privatising the Manx Electricity Authority and Bus Vannin
• Closing final salary pension schemes for the public sector
• Reducing the Civil Service headcount by 10% through natural wastage
• Abolishing all 24 local authorities and transferring their powers to Tynwald
• Replacing local rates with a national property tax, set at 0.25% of market value
‚Ä¢ Introducing a £100 per capita waste collection charge
• Placing a moratorium on all new government capital projects
• Abolishing mortgage and loan interest over a five-year period (by reducing the maximum claim allowance by 20% each year)
• Introducing stamp duty at 1%
Clearly, I have not been able to calculate the impact of these changes, but based intelligent guesstimates on some of them, I believe this would go a long way to filling the “black hole” whilst enabling the island to remain competitive internationally.
Iliam
I cannot do this now (I have a lecture to write to be presented at the Treasury on Thursday) but I do think your comment a little disingenuous
I claim very little credit
But no one else saw this coming
And your government denied there was a subsidy – which you now seem to readily concede
And do you think Alan bell protested about TJN so much if we weren’t hurting?
Richard
Fair comment: your blog was the first place I saw any mention of a subsidy. But despite my low opinion of the UK Government, I would have expected some Treasury bean-counter independently to have noticed that the Isle of Man was receiving tens or hundreds of million pounds more than its entitlement under the sharing agreement.
Curious that you keep mentioning the EU. Last time I looked IOM was not part of the EU nor does it get a red cent from the EU.
@Iliam Dhone
ID, Dear Brown William
Your final point is pertinent and one that lovely Richard always dodges. If there is/was a subsidy to the IOM, then why? What on earth was in it for the UK, especially considering that we all understand that the agreement was recast only two years ago.
Richard had nothing to do with this (despite his vanity in thinking so), nor as you puffed him up earlier, is he an expert on tax system design. His constant references to himself, and the cross-references from John Christensen (aka the TJN blog), give him apparent credibility, but it is bogus. How pompous is it to blog I can’t do this now as I’m preparing for my Treasury visit? Name dropping of the highest order.
What doesn’t kill you makes you stronger – remember that IOM!
The Girrl
“So is the resulting change my fault, and the fault of my Tax Justice Network colleagues? Maybe, in some small part it is in that we drew attention to this arrangement.” Don’t flatter yourself Mr. Murphy. The only reason why the lines have been re-drawn with the Customs agreement is because UK is skint, broke, bust, bankrupt.
Why would the Isle Of Man be sharing its VAT receipts with the UK anyway?
and – how is it that Isle Of Man generated Vat receipts are now defined as a subsidy from the UK?
and – which money exactly is it that UK payers are subsidising the Isle Of Man with?
and – who’s politicians have got who in the biggest mess?
Call me na?Øve, but if the population of jurisdiction A pay tax which is handed over to jurisdiction B, only to receive a proportion of it back, then how can the good people of land A be receiving a subsidy from the good people of land B.
I am sure that you will beg to differ, but it would appear that the UK is receiving foreign aid from the Isle of Man!
The simple fact folks is that the UK is bust and, as it has always been, it is a big bully
For those confused about this issue please see here http://www.taxresearch.org.uk/Blog/2009/05/18/isle-of-man-costs-uk-at-least-15-billion-a-year/ and here http://www.jersey.attac.org/RJMIOMSibsidy.pdf
I heard on the radio that the UK will be paying £6 billion a year in interest on thier debt, no wonder they cant afford to give us a “£50 million (you quote) subsidy”! They’ll be putting a for sale sign up at Buckingham Palace next lol
Can anyone explain what sort of financial complications it would have on the IOM if we went dependant? by having our own tax and handing nothing to the uk government, would we not have more money? would we be allowed to vote on this?
Also anyone up for booing the queen/representative on tynwald day?
@Karl
Karl
Firstly, ask yourself (and your politicians) how much the Manx eceonomy would generate if you charged a local-only 17.5% VAT. Then ask yourself how interlocked the Manx economy is with the UK’s. Then ask yourself what additional institutions you would need (e.g. Foreign Ministry). Finally, could it work?
In the case of the Isle of Man, I suspect hat independence is actually imposible just now. We in the Channel Islands would be able to do it more easily – especially if we confederated – but politically I suspect that the move wouldn’t pass muster.
The Girrl
Are you not all French in the Channel Islands?
Mr Murphy,
Ive been an avid reader of your blog for quite some time and have to say I have usually agreed with most of the comments you have made in respect of the Isle of Man.
There are many people living in this beautiful little Island, including myself, who have felt increasingly uncomfortable with the Manx Government’s over arching policy of dependence on financial services.
That policy has led to social divisions and to our young people being unable to afford decent housing.
Property prices are ridiculously high, private rental charges are obscene and public sector tenants are stigmatised. You might recall one of our current Government ministers served a prison sentence for arson. This crime was committed as part of a protest against the activities of the finance sector on the Island.
Regarding the Common Purse there seems little doubt that Isle of Man officials ran rings around the UK negotiating team in 2006(?) when the Common Purse arrangement was re-negotiated. I would guess that Minister Bell would have been beside himself with delight.
Since then, the activities of the Island’s film industry, in particular, has raised GDP to unlikely levels and the VAT take has been much larger than might reasonably be expected.
You have been a lone voice in pointing this out.
Im less sure than you are about the magnitude of the “subsidy” the Island has enjoyed.
I do know that under the present arrangements no one can be certain how much VAT is generated on the Island and how much is over returned (if you will pardon the expression).
Mr Murphy, you are an expert on these matters, and I wonder would you be able to advise how the VAT sharing arrangement might evolve into something which all parties might have confidence in.
Would it be possible, for example, to put a reporting regime in place which would quantify, precisely, the amount of VAT and other customs duties which relate to the Isle of Man?
The fallout from this sea change event is likely to effect ordinary Manx citizens rather than those who have made lucrative livings from financial services.
It is now probable the Manx Government will attempt to maintain its immoral economic policy by seeking to recover the VAT shortfall from its citizens.
I doubt very much if the shared intellect of the Isle of Man legislature is up to the task of formulating a sustainable and ethical economic policy.
Watch this space!
IOM will find a way, they always have.
Once again Murphy showing his true colours, he knows that a man with a fishing rod can feed himself and support himself, but break his rod, and give him his fish and then you can control him.
All he wants is to destroy any means the Crown or OFT can support themselves, so they will have to rely on subsidies from London and the control with it.
A good book to read is “Confessions of an economic hitman”, to see the usual tactics used
@Crofter
“The fallout from this sea change event is likely to effect ordinary Manx citizens rather than those who have made lucrative livings from financial services”.
Can you be more precise? Who is the “ordinary” Manx citizen?
“Since then, the activities of the Island’s film industry, in particular, has raised GDP to unlikely levels and the VAT take has been much larger than might reasonably be expected.”
What garbage. What might you “reasonably expect”?
“I doubt very much if the shared intellect of the Isle of Man legislature is up to the task of formulating a sustainable and ethical economic policy.”
Very disingenuous remark given that the IoM Government, by law/convention, has to budget for a surplus and has done so for many, many years. I’d call that pretty much sustainable, wouldn’t you? As for ethics, or lack of, you need not look any further than the UK. Is it ethical that a government who taxes the backside from it’s population that it squanders every last penny in order to remain popular? I’d call that immoral and unethical. And you wonder why people even contemplate mitigating their tax liability and protect their assets in other efficient jurisdictions?
The reduction in the VAT share to IoM has come about because the UK Treasury is skint. The method of calculation is largely irrelevant in this case. It’s political. The UK Treasury is getting a larger slice because it can. It won’t lose any votes will it?
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