IoM Reaches Revenue Sharing Deal With UK

by Jason Gorringe, Tax-News.com, London

19 July 2011

The Isle of Man government has said that it has reached agreement with the United Kingdom on the future structure of value-added tax (VAT) and customs duties revenue-sharing arrangements going forward, bringing greater certainty to island businesses.

Addressing the matter in the Isle of Man parliament, Tynwald, Treasury Minister Anne Craine said that although the revision of revenue sharing arrangements with the United Kingdom proposed in 2009 would bring fiscal strains for the Isle of Man, the government has time to adapt to the new challenge.

Clarifying the series of events, the government said that negotiations with the United Kingdom had been initiated after UK Treasury sought revision to the agreement stating that it was not equitable in terms of the Isle of Man's contribution. The UK government threatened to terminate the agreement if an amended version was not agreed.

Craine explained that if the Isle of Man was an economic microcosm of the UK and that it had a similar tax system and economic structure, the issue would not have arisen. However, the Isle of Man offers tax exemptions on a number of goods and sectors that are not offered in the United Kingdom. Therefore, revenue sharing, calculated by way of domestic national income was considered flawed by the UK government. Instead, revenue sharing under the new arrangements is calculated on a sector-by-sector basis, and revenue will be divided from sectors taxed in both states.

The government spokesperson acknowledged that the change in regime would put financial strain on the territory, but said that in negotiations the United Kingdom had agreed to transitional payments. Under the deal, the UK has agreed to make transitional payments to the Isle of Man this year and next year of GBP45m (USD73m) and GBP25m, respectively. This means that in simple terms the new Arrangement will reduce the Isle of Man's shared revenue by GBP30m this year, GBP50m in 2012-13 and GBP75m a year thereafter.

"[The] government has no intention of trying to mask the fact that this change will mean challenging times for the island into the future, and further it will require tough decisions to be made by the next Tynwald and government. We must remember that we do have a strong economy, we have a buffer of reserves to draw upon where necessary and we have a continued determination for the island to develop and prosper."

"[However], the new Arrangement provides for certain - and not insignificant - income going forward, which in turn will provide greater certainty and stability when rebalancing, planning and formulating our budgets in future."

"The Customs Agreement itself provides for the island's continuance as part of the EU VAT territory and so continues to offer us many opportunities which are not open to competing international business centres. The continuation of the Customs and Excise Agreement benefits island business, residents and government."

Craine explained that without the revenue sharing arrangement, business would suffer increased administration, compliance and cash flow costs as they would need to separately register and file indirect tax returns and customs declarations in both territories as trade with the United Kingdom would become imports and exports. The Isle of Man would also suffer the increased costs of setting up customs barriers to identify revenues on imports that would otherwise be lost whether that be through mail order, internet purchases or residents on shopping trips to the United Kingdom, she said. In addition, residents would be faced with the probability of customs barriers when they travelled and the possibility of double taxation on their purchases from the United Kingdom unless they carefully followed and complied with the United Kingdom’s retail export scheme.

Craine continued:

“Turning to the financial implications, the broad strategy for rebalancing the Budget, as set in last year’s Pink Book remains valid, although in future Budgets the relative balance between spending reductions, taxation revenues and use of Reserves will need to be adjusted. Clearly there will need to be continued and even more rigorously applied downward pressure on public spending, including consideration of the future scope of government.”

"It is too early to be precise as to how this will be achieved and over what period. That will require the refinement of Government’s policies and have to form part of ongoing Budget considerations with Departments and other public sector bodies. However, it will be government’s ambition to continue to do this within the broad principles we have previously set out, namely to protect where possible front line services and the more vulnerable in our society. It is understood that in a situation like this, it is natural that the thought and talk of abrogation might arise."

"But let me emphasize, that [the] government is satisfied that the island’s immediate and long-term economic interests are best served by the continuation of the Customs and Excise Agreement with the United Kingdom, and those interests have been protected by the acceptance of the new Revenue Sharing Arrangement, even with the significant reduction in revenues that it brings."

"I emphasize that it is the wish and intention of both governments, which was confirmed at my meeting with Minister David Gauke, the Exchequer Secretary to HM Treasury, that the acceptance of the new Arrangement will produce a period of stability and certainty and as such should not require any further significant review of the sharing Arrangement in the short to medium term."

Craine concluded:

"It is in our island’s nature to continue to diversify and grow our economy so that together we can generate the income that we need to provide public services. This will not change. We will continue to do all we can to safeguard employment and most importantly the quality of life we all enjoy. We have achieved this in the past and I am confident that having secured the Customs and Excise Agreement, as long as we are all committed to work together for the good of our island and its people, we will continue to achieve this in the future."

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