Gregory Jones, Director: Tax of KPMG Isle of Man considers the tax provisions of Alf Cannan’s third Manx Budget
No sudden introduction of death duties or other capital taxation.
No tinkering with – let alone abolition of – the income tax cap.
No hike in ordinary income tax or national insurance rates.
No scrapping of the “0/10” regime, the backbone of the Isle of Man’s company tax system.
The absence of all these measures was for me the highlight of Treasury Minister Alf Cannan’s third Budget, in the sense of no news being good news.
Not literally, of course. Over 50 pages of facts and figures the Treasury Minister made the point that the Isle of Man economy is riding the crest of a wave of confidence:
– unemployment down
– income tax receipts up
– a revenue surplus of £18m (these are big figures for the Isle of Man) higher than initially projected
As a result, Mr Cannan felt able to increase income tax personal allowances to £14,000, representing a 33% increase since 2016 and providing a much needed response to the UK’s own hike in personal allowances, which in itself undermined our lower tax differential.
Recognising that tax cuts stimulate economic activity, Mr Cannan also announced a 1 year national insurance holiday for returning students and new island residents (who have not lived here in the past 5 years) with up to £4,000 in NIC rebates available (although a salary well in excess of £60k would be needed to generate that level of refund).
The maintenance of a benign tax regime continues to be necessary if the Isle of Man is to continue to be able to attract investment, and create wealth and jobs. We need taxpayers to feel they are contributing without being fleeced, but at the same time fund our welfare state and benefits system.
Unfortunately if global trends are any indicator, this will not get easier. Rising expectations – and therefore costs – of social care multiplied by an aging population can only be financed by a steady increase in tax revenues, whether these are achieved directly by taxing people’s income and wealth, or indirectly by taxing what they buy. The Isle of Man is not immune to these global trends (indeed, our healthcare system is currently the subject of a review being undertaken by Sir Jonathan Michael) and I fear for the Treasury Minister who has to announce the abolition of the income tax cap, the introduction of capital taxation or an increase in ordinary rates of tax beyond the long established relatively pain-free threshold of 20%.
Mr Cannan referred in his speech to the Isle of Man’s introduction of so-called “substance” rules on 1 January 2019 (in response to EU pressures). These rules require Isle of Man companies which carry out certain activities (including exploitation of intellectual property) to demonstrate minimum levels of activity, physical presence and supervisory control on the island. It would not be hugely surprising (indeed it has been predicted by many) if the next development were for the international powers-that-be to require that all countries impose a minimum rate of corporate tax. Notwithstanding the intellectual arguments against this (which I am happy to discuss over a coffee with you when you have the time!) and accepting that some companies would close down or relocate rather than subject themselves to a tax rate in excess of zero, a minimum rate of even 2% could create tens of millions of pounds of revenue annually for the Isle of Man government. Just a thought …………..
For the moment our problems are first world ones, such as funding the public sector pension deficit when the reserve fund has been spent.
Notwithstanding his upbeat message, Mr Cannan cautioned against complacency: let us hope the confidence displayed in this year’s budget does not prove to be misplaced.