Stability, growth and public services were the key priorities of the UK Chancellor's Autumn Statement on Thursday 17 November 2022. Jeremy Hunt's new budget follows months of significant uncertainty when it comes to the reliability of the UK Government and the implications of tax changes for people across the UK.
Watch our Tax team's reaction videos and read our commentary on the main tax changes to better understand how you and your business may be impacted on the Isle of Man.
Attributed to Harold Wilson, a former UK Prime Minister in the 1960s and 70s, this quote is often used to describe how quickly events can, and do, turn in the political world. These words seem more relevant than ever in the current day.
If we cast our minds back just two months, the then Chancellor, Kwasi Kwarteng was presenting a 'Fiscal Event'. This was a tax-slashing, growth plan aimed at providing a framework for economic growth in the UK. Income tax, Corporation Tax, National Insurance, VAT....they were all up for grabs as the Chancellor set out one of the most aggressive economic strategies ever seen in the UK. It was bold and it was brave. The trouble was that the financial markets made it very clear that they didn't want bold and brave and so the strategy, like the Chancellor and the Prime Minister, was abandoned.
Fast forward to the announcements on Thursday delivered by the new Chancellor, Jeremy Hunt, in his Autumn Statement. Growth was also cited as an objective but with a very different approach to achieving it. This time, stability is seen as the key to delivering a platform for growth in the UK with a focus on reducing inflation and delivering public services. And that stability, along with additional funding for public services, will be funded by tax increases. As stark a policy U-turn as could be imagined.
So, how will this new strategy work out? That’s a difficult question at any time and an impossible one to answer in these troubled economic times. Instead, we're focusing on what the tax increases will be, and more importantly, how they may impact the people and businesses of the Isle of Man.
The overriding theme of the Autumn Statement was that the strongest in society should shoulder the burden of the tax increases. This led to a number of measures aimed at personal taxation, the key ones being:
A reduction to the Additional Rate Threshold (the point at which higher rate tax at 45% becomes payable) from £150,000 to £125,000;
Freezing income tax personal allowances and the threshold for paying 40% tax at current levels until 2028;
Freezing the main thresholds for National Insurance until April; and
Reducing the Capital Gains Tax Exempt allowance from £12,300 to £6,000 at first in April 2023 and then further to just £3,000 from April 2024.
There were also changes to the corporate landscape including:
Confirmation that the main Corporation Tax rate will increase from the current rate of 19% to 25% in April 2023;
A firm commitment to introduce the OECD Pillar II requirements around a global minimum tax rate. The UK will look to implement this regime for all accounting periods beginning on or after 31 December 2023;
The freezing of the VAT registration and deregistration threshold at the current level of £85,000 until April 2026.
It could be argued that a number of these tax 'increases' are nothing of the sort - they’re simply holding taxes at current levels and rates. However, the impact of 'fiscal drag' in this instance shouldn't be underestimated. In a 10% plus inflationary environment, a 5/6 year freeze is hugely significant and will mean that taxes paid will rise sharply.
This was badged by many commentators as a bad budget for those doing business in the UK with additional taxes on businesses and their owners, and little or nothing positive to make the UK stand out as a place to live and work. Stability might be achieved, but at what cost to the UK's international reputation?
So then, the key question is; does this matter for the Isle of Man?
In general, the Isle of Man will always be interested in the UK's economic affairs. As our closest neighbour and trading partner, the Island’s own economic fate is greatly affected by the UK's position. If then these measures can curb inflation, provide stability and ward off or end recession then that must be good news for the Island.
There will also be a direct impact from these measures on our own tax system. The Isle of Man has a commitment with the UK to operate our National Insurance system broadly in line with their own. While it’s possible for the Island to deviate from the UK's model in terms of rates (among other things) it may well be that the Isle of Man Government decides to simply follow the UK's lead. This would prove to be a costly move for the Island's employers if it happens, although there would be a very significant tax benefit to the Isle of Man Treasury. Similarly, the Island operates VAT directly in line with the UK system, so the freezing of the registration/ deregistration threshold will have a direct impact in the Isle of Man and could lead to a number of additional registrations being required as much needed turnover increases aren’t matched by the VAT system. Finally, the Isle of Man will consider with interest the UK's decision to set out a firm timetable for the application of the OECD Pillar II reforms - determining the Island's own position in this regard is a focus for our Government at present.
But, perhaps the biggest impact for the Isle of Man will be in terms of its positioning as a place to work and live. Earlier this year, the Chief Minister rolled out the Isle of Man’s Economic Strategy for the next 10-15 years. Underpinning that strategy is a desire to grow the economically active taxpayer base on the island. Key to this will be attracting workplace and entrepreneurial talent to the Island. To do this, the Island needs to sell itself to the right people. Of course, lifestyle and infrastructure are key considerations for anyone considering a location change, but tax and the business environment are also very important factors. The changes announced in the UK Autumn Statement will increase the tax differential enjoyed by those living in the Isle of Man when considered against the comparative UK position; this difference increases very sharply for those on higher incomes. This increase may prove to be helpful in the Isle of Man’s quest to attract talent, something that is likely to determine whether the goals of the Economic Strategy document can be successfully delivered.
Overall, a hard budget for UK residents and businesses with an increasing tax cost for many. While there may also be some associated tax costs coming on the back of the Autumn Statement for Manx residents, it may well prove to be a catalyst in driving the economic growth the Island is looking for.