He highlighted a substantial upturn in the Island's finances: a lower than anticipated budget deficit due to a substantial increase in income tax receipts, substantial returns to the Island's taxpayers through an increase in personal allowances, and significant investment via the capital expenditure programme.
Reference was made to the Island's ongoing commitment to the implementation of international standards and recent engagement with the EU and OECD on matters of corporate substance. Although it didn't grab the headlines, it may be the most significant issue from the Isle of Man's perspective.
The Island was one of a number of territories included on an EU 'grey list', as those needing to address certain deficiencies in their tax system by the end of 2018. The issue centres around our 0% corporate tax rate and the argument that this rate could artificially (and unfairly in the EU's view) attract business to the Isle of Man – business without the necessary economic substance to warrant enjoyment of our tax system. The upshot is that by the end of this year, we will need to at least agree measures which satisfy the EU on this point.
At this stage we don't have details of what the EU will expect. Possibilities include self-assessment of substance by companies or a demand for a positive rate of income tax. The latter seems unlikely, as the ‘race to the bottom’ on corporate tax rates continues among EU Member States, which would be good news for us given that the 0% rate is the cornerstone of our financial model, and any changes deemed necessary would present a challenge.
We should await further updates on EU discussions with great interest. One way or another, the outcome will represent a substantial development for the Isle of Man.
In terms of specific Budget measures, those items of interest included:
There was an uplift in the personal allowance from £12,500 to £13,250.
A new anti-avoidance provision designed to prevent the perceived abuse creating a participator loan in order to defer income tax liabilities was introduced. It applies in cases where certain assets – goodwill and shares in private companies – have been sold to privately-held companies in exchange for a loan to equivalent value. This new measure will treat loan repayments (tax-free) as distributions (taxable).
Minister Cannan made it clear that the Government will not tolerate tax avoidance and measures will be introduced to counter any perceived mischief.
Following earlier consultation on a new form of Manx pension, we finally know the details. The Pension Freedom Scheme, or PFS, is an entirely new scheme which will provide greater freedom to the member in retirement.
The key feature of the PFS is that the member will be able to draw their entire fund from age 55; the first 40% of the value of the fund will be tax-free, with the balance taxed at the usual rates. Tax relief will be available for contributions up to a maximum of £50,000 per tax year, which is the aggregate allowance applicable to contributions to all schemes.
There will also be the option to transfer into a PFS from an existing private scheme, which may be attractive to some. The benefits would have to be weighed against the one-off 10% levy that applies to the funds on transfer between the two schemes. A quick calculation reveals that if a member wishes to transfer into a PFS and then immediately withdraw all available funds, the effective rate of tax, including the 10% charge, is 20.8% on the total fund.
There was reference to a series of VAT surveys that will be carried out over the course of 2018/19 and the importance of broad engagement from the population was emphasised. The aim is to obtain comprehensive and reliable VAT data for use when Government next discusses the VAT Revenue Sharing Arrangement with the UK Government. These will have an impact on both the historic and future share of VAT revenue. We strongly encourage people and businesses to actively engage with these surveys.
Director, PwC Isle of Man
Tel: +44 (0) 1624 689465