No Match Found
The Isle of Man economy, like economies the world over, is under pressure. Although tax revenues are solid, and indeed likely to be above expectation in the current financial year, spending pressure is quickly mounting. Our National Insurance Fund, used to fund benefit and pension payments to Manx residents as well as support funding to the Department of Health and Social Care, is running out and will be exhausted by 2047 per current projections. Inflation is running high at over 10% meaning significant increases are needed generally on spending and in particular to honour pension ‘triple lock’ commitments. Focus on public sector pay is also intense – so far, the Isle of Man has largely avoided the huge disruption seen in the UK as various bodies ‘down tools’, but can this persist?
The solution will hopefully come through the delivery of the Isle of Man’s long-term economic strategy. You’ll recall this was launched last year as a bold initiative to grow and develop our economy with some aspirational growth targets including the following highlights; a population increase to 100,000, thousands of new and well paid jobs, and an additional £200m of government revenue.
So, can the economic strategy be delivered? In his announcement, the Treasury Minister Alex Allinson noted some early signs of encouragement here as 1700 new work permits were issued in the last year, 2400 new visas generated and a healthy pipeline of enquiries about the Isle of Man coming through Locate. However, a lot more focussed support will be needed if the extremely challenging growth targets are to be achieved. A key announcement is the creation of an Economic Strategy fund designed to allow investment into the Island to help provide support where needed to those individuals and institutions involved in the quest to grow.
A high level of support like this comes at a cost though, with the 23/24 Budget predicting an eye-watering deficit of £152 million and plans to fill this gap by drawing on reserves. This significant annual deficit should decrease in the following years but clearly the Islands future economic stability will rely heavily on the successful roll out of the economic plan. Whether or not a successful roll out occurs will be in part influenced by the Island’s tax system.
Although economic growth is the key for the future, there was little in the Budget from a tax perspective that might serve to generate interest from the type of entrepreneurial, value-adding individuals and businesses the Island seeks to attract. The Budget did include:
A welcome extension to the current National Insurance Holiday Scheme, providing relief from NICs in the year of arrival for new arrivals and students returning to the Island to work.
Confirmation that for Manx employers providing benefits to employees, only the value of benefits above £600 per annum will be subject to income tax.
However, the headline tax announcement was without doubt confirmation that for higher earners an additional income tax charge will effectively apply via the erosion or removal of their personal allowance. For higher earners, the personal allowance will be tapered and reduced by £1 for every £2 that a person’s total income is above £100,000 (£200,000 for jointly assessed couples). This means if a person’s total income is £129,000 (£258,000 for jointly assessed couples) or above their personal allowance will be zero. A similar measure exists in the UK tax system and provides an effective way of increasing the income tax burden for higher earners without the need to increase the headline income tax rate (currently 20% in the Isle of Man). The danger of doing that would be to make the Island seem uncompetitive from a tax perspective when measured against other offshore jurisdictions such as the Channel Islands. Most likely, the sophisticated taxpayer will likely see this measure as an additional tax charge nonetheless and so it is likely to be unhelpful in the Island’s attempts to attract new high-earning talent.
The other major tax matter mentioned in the Budget was about the corporate tax environment. Here, the Isle of Man, like the rest of the world, is wrestling with the OECD’s insistence that a global minimum corporate tax rate of 15% should apply to the profits of all big corporate groups, wherever they are located. The Treasury Minister confirmed that the Island is still considering its options in this regard. It is likely that we will introduce measures in line with the OECD requirements as we seek to preserve and enhance our hard-earned reputation as a compliant global tax citizen. There is an important point to be made in that regard, which is that if the Isle of Man does not introduce this tax for relevant Island resident companies, other jurisdictions will tax them in any case so the tax revenue might as well be collected and remain local. We do not at this stage have a feel for the revenue this might raise for the Island, but perhaps it could prove to be a useful contributor in closing the revenue gap in future.
Other significant tax changes announced were concerned with National Insurance (NI). As well as simplifying things for self-employed earners with the merger of Class 2 and Class 4 contributions in the near future, some more significant measures are likely to be announced in the near future following the close of a consultation held on the effectiveness of certain elements of the NI system. The case for a fair and equitable NI system is key here, and in particular for one where the level of NICs payable is not impacted by the choice of business operating model.