Taxation of Pension Schemes - Isle of Man Government

26 October 2012

Taxation of Pension S c h e m e s The Taxation Strategy 2012-2016

A Response Document Issued by: 2

nd

Income Tax Division Floor Government Office Buck‟s Road Douglas IM1 3TX

Taxation Strategy 2012-16 – Consultation Response

Contents

Page

TABLE OF CONTENTS

(click on page number to go to section)

1. Introduction ................................................................................................... 1 2. Responses ...................................................................................................... 1 2.1

Taxation of individuals .............................................................................. 1

2.2

National insurance .................................................................................. 35

2.3

Taxation of businesses ............................................................................ 49

2.4

International taxation issues .................................................................... 65

2.6

Additional comments............................................................................... 78

3. Summary ..................................................................................................... 81

Issue Date: 26 October 2012


1.

Introduction

In July 2012, the Income Tax Division issued a consultation, “The Taxation Strategy 20122016‟‟; seeking views on future changes to our taxation and national insurance systems. The consultation forms part of the preparation for a new tax strategy to be published by the Treasury Minister, Hon. Eddie Teare, MHK. In all, 66 replies were received; one of the largest responses the Division has received to a consultation. This document provides a summary of the comments made to each question raised in the consultation. The Treasury would like to thank all respondents for the time and effort that has been put into replying to the consultation.

2.

Responses

2.1

Taxation of individuals

Question 1

What changes might make the tax system for individuals fairer? Comments received: 

Everybody should make some contribution to the tax system no matter how small that may be. If you are a contributor you are entitled to expect some consideration for your contribution. Once you are paying tax it becomes normal and acceptable as opposed to a cost that you feel you should not have to pay and therefore try to avoid. Those who have never paid tax will always resist paying and go out of their way to avoid paying whilst those who have always met their obligations will always contribute no matter how grudgingly.



Complete abolition of national insurance (NI) contributions which are not invested in a fund in preparation for distribution at a later date. Therefore, it is no more than a tax on income and a consolidated single income tax is fairer, simpler and achieves the requirements of tax authorities.



NI and income tax should be amalgamated as this would tell us how much tax we actually pay.



A different income tax rate for sole traders and entrepreneurs. It is not fair that a person utilising their own funds in setting up a new business and taking personal risks should pay the same income tax as someone who works for a large company. People who work for a company that has more than 10 employees should pay a higher rate of income tax.



The current system is relatively fair and simple and no changes are required.



The Isle of Man (IOM) tax system is easy to use and to follow and the officers of the ITD are, on the whole, friendly, pragmatic and helpful. While there are some areas which could be made fairer and the burden eased on those most in need, no major overhaul is required, especially with regards to personal tax.


Page 1


 To be truly „fair‟ everyone who benefits from living here should bear a „flat tax‟ rate in proportion to their income. The mechanism by which tax is collected should not be used to further social or political aims such as alleviation of hardship, so there should not be any allowances. However, the benefit of taxing individuals with a low level of income might not be cost effective and a „flat tax‟ rate on high earners might be counterproductive, so there is still room for personal allowances and a tax cap.  Individuals - any increase in taxation, regardless of how it is achieved, is likely to deter people from moving to the IOM. Around 15 years ago the cost of living was slightly higher than in the United Kingdom (UK) but was substantially offset by low rates of tax. With extremely high utility and food bills this offset has been rapidly eroded over recent years to the extent that the majority of residents on low or middle incomes are now worse off than their UK neighbours despite lower rates of tax. There is a possibility that many middle earners will relocate off-Island if changes are made to the system.  With specific reference to the tax treatment of non-resident occupational personal pensions the tax system could be made fairer by taking the following into account:  taxation of Qualifying Recognised Overseas Pension Schemes (QROPS) should comply with the European Union (EU) harmonisation initiative. As part of this, as well as for “fairness”, non-resident taxpayers should not receive worse treatment than residents.  Practice Notes should be issued to cover all of these topics. Individual negotiations leading to discretionary decisions by officers of ITD on such major topics are unacceptable and not conducive to encouraging new business.  Inward investment to the IOM that eventually produces an “income” during the pension age should be treated equally for tax at the point of drawing.  To make the tax system for individuals fairer:  abolish the Personal Allowance Credit (PAC) immediately, and instead use the benefits system to help those in need;  increase the tax cap to £150,000;  reintroduce a system to tax retailers who have a physical presence in the IOM, regardless of where the ownership is or whether the trade is operated by a company, partnership or sole trader.  It would be fairer if all individuals in the tax net paid the same proportion of their income, the tax cap is seen as providing an unfair advantage to the very well off and could be removed or increased.  Changes should be made which make more people pay the appropriate/fair amount of income tax and NI contributions according to their circumstances. This will mean some paying more as well as some paying less.  Income tax should be charged according to ability to pay. An income tax system that charges the incomes of individuals who are employees and pensioners to income tax calculated at 20%, while making no charge to tax in respect of the incomes of individuals who are able to arrange for their incomes to be received into companies which they own and control, is unfair. It makes no sense to give a tax holiday to those who can best Issue Date: 26 October 2012

Page 2


afford the tax at a time when Tynwald needs every penny it can get. The manifest unfairness of the present system of income tax must beg questions about its acceptability to most taxpayers and its longer term sustainability.  Introduce Capital Gains Tax or impose Stamp Duty.  Introduce some form of tax-friendly vehicle for retired people living on investment income.  Apply a Capital Gains Tax on land formerly designated for agricultural purposes which is rezoned for development.  Leave unchanged other than phasing out the tax cap.  Make the state retirement pension free of income tax.  Would strongly oppose further tax increases for ordinary working individuals, either through increases in tax rates, or reduction in reliefs etc., especially whilst wages remain stagnant and inflation has been a problem. Taking money out of people‟s wages through increased taxation will reduce spending and could put more pressure on, for example, local traders. Individuals have already suffered increased direct taxation recently as stated below and further increases to effective take home pay should be avoided in the present environment:  tax and NI increases including the higher rate of income tax increasing from 18% to 20%;  personal allowances being frozen during periods of high inflation;  mortgage interest relief for higher rate taxpayers. This relief is not one for the “better off”; it is one that has helped many working families who wish to own a home, despite income arising from non-employment activity such as bank interest and child benefit being taxed at the 20% rate. This change will have had a significant effect for some families and was introduced with very little notice for families to budget their revised net income. All the above are effective tax rises; they have resulted in individuals paying more tax in relation to their income and the cost of goods.  Ensure that the taxation of state benefits is fair and consistent. For example, the taxing of child benefit means that higher rate taxpayers receive less net benefit than lower rate taxpayers, despite this being a universal benefit. Child benefit is stated as being at UK levels but in the UK this benefit is not taxed. Therefore, IOM families actually receive less than UK families. It may be the case that child benefit should not be taxable at all as it is designed for the benefit of the child who is not an income earner and in that sense not a taxable person.  IOM taxation would be fairer if, like many countries including the UK, the same personal allowances were provided to non-residents as to residents. It is harsh to penalise nonresidents who, unlike their resident counterparts, receive no personal allowance and no 10% rate band on pension income drawn from IOM pension schemes.


Page 3


 The Payment on Account (POA) system does not currently operate as fairly as it should. For example, in January 2012, an individual taxpayer is obliged to settle in full the projected liability for the entire 2012/13 tax year, even though at that stage the individual is only part-way through the tax year in question. This is inequitable. If an individual is assessed 9 months though the tax year, it would be fair for the assessment to be an initial 9/12 of the estimated annual figure, with the balance to payable at a later date.  Fairness is entirely subjective and consideration needs to be given as to whether it is fair to tax income and not wealth. The questions are endless and there are no answers; at least, no objective ones.  The current tax system is not unfair at present. However, there is a danger that it will become so as Treasury seeks to balance the budget. The IOM should be looking towards a smaller Government which targets expenditure more effectively.  It should be possible to claim a tax allowance for each child so partially mitigating the potential loss of child benefit from other reforms such as means-testing. While parents are happy to, and should, make sacrifices to provide for their children, they should be recognised as having an allowance like earning adults and for the fact that they have a net benefit to the IOM in terms of future tax revenues and paying for all our pensions.  Everyone should be required to contribute to essential expenditure for the common good. A statutory minimum contribution on all (of say £50) would remind everyone of their shared duty to try to contribute to the needs of the community, rather than feel an entitlement to simply take from it. This is a simple but powerful concept.  Income tax should be dramatically simplified and stated as chargeable at only two rates: a Zero Rate Band and a Flat Chargeable Unlimited Rate Band (e.g. at 17%). There should be no cumulative aggressive penalty in the form of incrementally increasing rates of tax on people desiring to work more and to earn more. The target objective should then be to reduce the Flat Chargeable Rate by reducing the scope and reach of Government by allowing people to shape service provision via market forces.  Income tax on deposit interest for IOM residents should be abolished thereby eliminating at least one unfair form of double taxation of the same income and encouraging thrift and self reliance in the population.

 For fairness and equity, income tax policy and rates should be announced as fixed for a multi-year basis and must not be the subject of constant annual variation as a result of inadequate adherence to budget plans.

 A fairer tax system can only be achieved when Government prioritises reducing salary costs.  It would be better if personal taxes were more in line with a person‟s entire wealth rather than just their current income. In some countries there is a wealth tax but as this is effectively an honesty tax it can be open to abuse. There is only one part of a person‟s wealth which cannot be hidden - their house - which given rising house prices can generate significant untaxed wealth. It is therefore suggested that a 0.1% residential tax based upon the market or rateable value of the property be introduced to allow removal of the current lower tax rate and reduction of the higher tax rate to 10%. Issue Date: 26 October 2012

Page 4


 Currently, there are no personal allowances for non-residents taking benefits from IOM pensions. A non-resident who has previously built up funds in an IOM scheme would therefore be disadvantaged compared with a resident when taking benefits. Consideration should be given to equalizing the personal allowance system in this regard. This would not create an advantage for a non-resident member but would redress an existing disadvantage.  The goal of a tax system should be to raise the money needed to finance public services and welfare benefits in as economically neutral a way as possible. The tax system should not encourage choices or activities without economic benefit. The fairness - or perceived fairness - of the tax system for individuals is that the level of taxation should take into account the overall contribution of taxpayers to the economy. There are some taxpayers whose effective rate of tax on their significant income is low; however, these same individuals own and manage businesses that contribute greatly to the IOM‟s economy in terms of creating jobs and demand for goods and services.  Arguably, a „flat tax‟ would be ultimately fair, but it would probably be politically unacceptable to tax the less well off at the same tax rate as that applied to an individual with a seven-figure income, given the lack of personal allowances that would apply. Similarly, applying that rate of tax to a high earner may well deter them from living in the IOM and bringing their entrepreneurial skills here.  There have been comments in the public domain surrounding the ability of wealthy individuals to shelter part of their income in a company - to be taxed at 0% - and live off capital whilst most employees have no such facility. This situation is seen as unfair in that it results in a higher income tax liability for the less well off. However, the position arises as a direct consequence of the 0/10 regime taken together with the requirement not to have a DPC or ARI regime, or an equivalent. Given the likely consequences of the removal of the 0/10 regime, there is no obvious answer to that conundrum. A change to resolve this may have consequences that are far more adverse than the position at the moment.  The basis of the current system has been in place for very many years, and financial decisions would have been made on the not unreasonable assumption that this will continue. If Treasury is minded to change this, it should ensure that taxpayers are treated fairly by giving extended notice of any changes.  The tax cap measure is generally perceived as unfair. The aim of attracting rich people to settle here may be laudable, but was a hope that has not been realised. Asset rich people will be attracted here by the relatively low income tax rates and nil corporate, capital gains and inheritance taxes. The consultation document itself regards this as "the settled view of Tynwald". If as is stated on page 3 of the consultation document "Treasury is aiming for a regime which, so far as possible, is fair" and "We feel that everyone wants the IOM to have a fair tax system which is applied impartially" the tax cap measure needs to be rescinded. To do so would be a clear indication to the majority of taxpayers that the fine words are sincere.  Abolition of the ARI may have created a situation whereby self-employed high earners with excess disposable income could arrange for it to be accumulated and sheltered within an IOM company under their control and ownership. Doing so could avoid paying income tax. The re-issuing of Practice Note 174/12 in June 2012 did not fully address this potential loophole for tax avoidance. Unwittingly, Treasury has created circumstances which could advantage a minority sector of the public to the detriment of the majority. It Issue Date: 26 October 2012

Page 5


is not fair and needs addressing in the new Taxation Strategy.  Our current tax system is quite generous as it is. The tax rates and allowances are favourable. There is no capital gains tax. The current system is simple enough.  Fairness is subjective and relative. It is not helpful in the construction of a taxation system unless carefully defined. The true objective should be a system that delivers prosperity for all who participate and in some proportion to their contribution together with a short term safety net to catch those falling on bad times.  It is critical that all aspects of our economic system (including taxation) stimulate valuable production and efficient consumption. Taxation by definition stifles valuable production and distorts consumption. Its only purpose should therefore be to fund the production of valued services (whether economic or social) that a free economy would not otherwise produce. Where taxation must be levied it is critical that its impact on total valuable production and efficient consumption is minimised. This is something that can be objectively calculated and assessed.

Question 2

What changes might make the tax system for individuals simpler to deal with? Comments received:  All aspects need to be in plain English; as it is, there are references to classes of income and tax legislation references. Technical terms should be replaced with simpler English perhaps a user group could determine or review.  There should be a step-by-step online questionnaire style return.  Simplifying administration is all very well, but taking people out of the tax system often means that they want to stay out and do whatever it takes to avoid recapture.  Do not subject bank deposits to income tax and therefore alleviate the need for people to obtain evidence of the amounts received which in turn simplifies the system for banks as well.  The tax year should be aligned with the calendar year. This may cause a temporary interruption to Treasury cash flow but for many people it will remove confusion caused by a tax year based on 5 April.  The present NI and income tax systems should be scrapped. A single tax rate with a higher personal allowance should be introduced with only allowances allowed as currently. This would make both the taxation system simpler to administer, simpler to understand and bring the IOM to the forefront of taxation in the world. In addition, it would bring significant cost savings to Government, through a reduction in the duplication of services. This would mean that any changes made in the UK would not have to be thought about and reflected on as they would simply be irrelevant. A figure could be ascertained that allowed the total tax collection to be similar to the current combined tax and NI in order that there would be no loss of revenue to Treasury.


Page 6


 Automatic submission of interest, income and mortgage charge details from financial institutions should be introduced and then all simple Income Tax Instalment Payment (ITIP) taxpayers should not be required to complete a tax return.  There appears to be a harsh focus on the current system in the belief that it is complex. As a married individual, with a sole trader business and some rental properties, my tax return should in theory be very difficult. However, it is fairly simple and straightforward to complete, and the system needs very little alteration. You are in danger of trying too hard, and thereby increasing complexity. Very little really needs to change.  To make the tax system for individuals simpler:  introduce cumulative ITIP tax codes so that employees and pensioners could pay the correct amount of tax in the year if the final tax code is correct;  have banks provide details to ITD of bank interest paid and received in respect of all Manx resident individuals so that return details can be pre-populated;  change the law (Section 65 of the Income Tax Act 1970) so that persons whose liability to pay income tax is fully met by ITIP deductions in a year of assessment have no need to complete a tax return and there is no need to issue an assessment.  Introduce a more transparent system with a flat rate of tax without relief, so that the tax payable could be calculated immediately on the basis of gross income; this could enable a reduction in the present basic rate of tax.  The tax system is probably already as simple as it could reasonably be expected to be, with a few exceptions such as a move to independent taxation for all individuals.  Try to keep annual changes on tax forms to a minimum.  Simplify the registration verification process for online tax services.  The reduction in the number of reliefs in recent years, such as the removal of relief for life assurance premiums paid, has already produced significant simplification.  A tax system would be simple if there were limited relief from taxation and simple tax brackets, which the IOM tax system currently has. However, it is recognised that there are circumstances where the tax relief given is to achieve a political objective (e.g. encouraging saving for retirement) and therefore there are wider issues than a simple tax system which need to be considered.  The tax system is not particularly complex for individuals. There may be some individuals with learning or comprehension difficulties who might struggle with their tax return, but the ITD provides them with suitable assistance and has a walk-in service. The move to online services has made it more convenient for the average person.  Remove all allowances and reliefs of a purely social nature and the Personal Allowance Credit (PAC). Introduce two tax rates levied upon assessed income - Zero Rate and Flat Rate.  Moving to online filing would simplify matters provided that adequate free training or user guides are made available to those who may need them. Online filing should provide Issue Date: 26 October 2012

Page 7


tailored, bespoke questions without the need to work through a multitude of questions that are not relevant to the user.  Given that there is a penalty for failing to deliver a return on time, it would be helpful if the Assessor of Income Tax were to acknowledge receipt of returns together with an indication as to when the assessment might be expected to be issued.  In terms of its simplicity, the existing tax system for individuals is relatively straightforward and if there were to be changes to the tax system on other grounds (e.g. fairness) then these changes should not compromise the simplicity. Simplicity means that the cost of administration is low, both for taxpayers and the tax authority. It also makes it easier for people to understand the tax system. Other measure that would assist are:  the availability of more information online - both client information and generic information (legislation, guidance, concessions, etc.);  the availability of a blank tax return form template and;  a separate telephone number for enquiries regarding individuals.  Simplification of the tax system has to come with a note of caution. This is for two reasons: firstly, what may be seen as unnecessary complications do in fact exist to prevent unfairness; secondly, changes in rules from a system perceived as complex to a system designed to be simpler have to have transitional provisions, and there is the risk that those provisions are themselves so complex as to - at least in the short term - cancel out any intended benefit.  Tax refunds or payments could be generally reduced by revising the ITIP system so that the codes work on a cumulative basis during the tax year.  The requirement to complete tax returns could be removed from a considerable number of taxpayers. Doing this, whilst still collecting the correct amount of tax, pre-supposes that you already know all that you need to know about the taxpayer. Taxpayers in this position would need to be advised to tell the Division of any income that was not already properly taxed. It would probably be simpler for them to complete a tax return. Furthermore, by completing a tax return each year a taxpayer consciously has to make a declaration that all their income has been entered on their return. If no return is required, but the taxpayer simply has to tell the Division of income not taxed by requesting and completing a return, it will be much easier for items of income to be overlooked - and possibly allowances and deductions under-claimed - which could lead to a complicated resolution process some years ahead.  A taxpayer could be exempted from the return requirement for a year, and instead be sent a statement setting out the figures that ITD holds for them, calculating the tax liability, and also stating that any income not included needs to be declared at that point.  The personnel in ITD are always helpful and the tax system for individuals is straightforward.


Page 8


Question 3

What changes might make the tax system for individuals simpler to administer? Comments received:  Given that the vast majority of taxpayers have tax deducted from their earnings those individuals might be exempted from the requirement to submit an annual tax return. However, every taxpayer should receive an annual summary of the tax they have paid and be given the opportunity to appeal.  Remove all straight forward taxpayers from the need to complete tax returns.  It is already simple. However, the necessity to supply a detailed breakdown each year of sole trader accounts split up between business names seems pointless.  To make the tax system for individuals simpler to administer:  abolish the co-habiting couples with a child allowance;  abolish the additional allowance for single parents.  Have a flat rate of tax.  Further promotion of electronic communication (e.g. access to see your personal tax affairs) provided security challenges can be met. Progress made in the development of online services has made compliance simpler for many taxpayers and agents.  The move to online services already makes the system simpler to administer. Further encouragement for individuals who have not already done so to move to online services may help, although care must of course be taken to not penalise or alienate those who for good reason find it difficult or impossible to use online services.  Individuals who are employed earners and receive only modest amounts of investment income should not be required to file and submit income tax returns; rather, their tax affairs should be dealt with solely under the ITIP system. Tax would be deducted according to their notices of coding and this would be their final liability, with no refunds or balancing payments at the year end. This would be the case for all employees with no more than say £1,000 of non-employment income. This would remove a significant proportion of employees from the annual reporting cycle. Individuals in receipt of nonemployment income and/or investment income exceeding a modest level would continue to file returns as at present.  A move to online filing and automated transfer of data to eliminate duplication.  Would favour a simpler tax system and a minimum of reliefs and allowances to be offset with an increased personal allowance to make the overall impact cost neutral.  The obstacles most frequently encountered relate to the systems used to administer the tax system. For example, situations which are not covered by the ITD‟s software; or a case has been made to fit the nearest available alternative; or because the software could not accommodate the situation such as where employment income was a different amount for tax and NI purposes and the processing of the NI details resulted in an incorrect tax assessment. In the latter case, it seemed that three different sections (with Issue Date: 26 October 2012

Page 9


responsibility for income tax assessments, NI assessments, and the allocation of income tax payments respectively) were involved in the process, none of which had an overview of the situation. This issue could be addressed by the early assignment of complex cases to a responsible person/team with an overview. On the other hand, such issues might be resolved by way of the consolidation of the system for collection of income tax and NI, particularly in respect of employment taxes.  The fact that all resident taxpayers are required to prepare a tax return creates an administrative burden for many, particularly those who are basic salaried employees with little or no interest/other sources of income.  Ideally, a tax system which dispensed with the requirement for basic tax returns with little chance of generating any meaningful tax return for the Government would be useful. However, the tax system is not specifically geared up for releasing taxpayers from preparing compulsory tax returns for a number of reasons, including:  there being no deduction of income tax at source from earned interest;  there being a regime whereby the majority of taxpayers are likely to receive some form of tax relief (e.g. loan interest relief), the level of which is likely to fluctuate each tax year;  there being no cumulative ITIP system, whereby adjustments to tax codes collect tax under/over paid in previous months and the difficulties which arise in respect of joint assessment;  prior year underpayments not being collected through ITIP codes for the following years - i.e. coding adjustments.

Question 4

Would you think it fair if Treasury simplified the tax system for individuals by removing all allowances and reliefs other than the basic personal tax-free income allowance, but made this cost-neutral in total by increasing the personal allowance level or reducing tax rates? Comments received:  To remain competitive the personal allowance should be increased to £15,000 (jointly assessed couples - £30,000), all allowances and reliefs removed and a „flat tax‟ rate of 20% charged on all income above the personal allowance. This would remove many poorer people from paying income tax and reduce the number of people having to complete a tax return.  Personal reliefs should be retained.  Full tax relief should be given for pension contributions and mortgage interest paid. Removal would penalise those who take responsibility for their own financial futures (if they are able to do so) and are not relying partly or wholly on the state for their pensions and financial wellbeing.  All allowances and reliefs should be removed in return for an increase in the basic personal tax-free income allowance. Issue Date: 26 October 2012

Page 10


 This question relates to the apparent overall aim of this process which is to „simplify‟ the assessment of tax. The difficulty is that the outcome would absolutely have to be cost neutral especially as some allowances (those for old age and for blindness) affect some of the most vulnerable in our society and also such people often come within more than one allowance category.  Disagree that “in general, allowances and reliefs tend to be claimed more by and to have more effect on the tax position of the better-off”. Some people who are not in the betteroff group are dependent on these allowances to remain “self-sufficient”. A generous increase in the personal allowance may compensate for this should the flat rate be fixed at 10% or lower for all earnings thereafter, but it is difficult to see how such a move could be cost neutral for each and every individual.  A single needs-based assessment can be made each year, based on an online questionnaire which could automatically generate a tax code.  If personal allowances were increased by the same amount for everyone, or tax reduced by the same amount for everyone that would be fair and simple. However, it would not be cost neutral to the individuals as some would gain and some would lose. But if you try to do so in a way that puts different individuals in the position they were in before the change by tailoring the rates for them then that would not be simpler, and would be very difficult to compute and manage.  It would seem sensible to continue the current ability for individuals to claim tax relief on their Private Medical Insurance payments. The waiting list for the Pain Clinic at the hospital is over 2 years for a National Health Service patient, so incentivising individuals to go privately by claiming the cost against their tax would provide funds for the hospital and possibly shorten waiting lists for those people who cannot afford the private costs.  Budget 2012 announced a reduction from 20% to 10% for the rate at which tax relief for charitable donations and charitable deeds of covenant can be claimed. This was a severe blow to the Manx third sector as a whole, halving the financial incentive for a donor. The information pack explains that the cost of such reliefs will reduce from £0.51m to £0.29m - an estimated saving of just £220,000. This at a time when Government surely needs more than ever the help of charities, churches and other voluntary agencies to deliver services in the light of its own necessary cutbacks. Weighed against the saving to Government consideration needs to be given not only to the resulting loss of income to charities but also the consequent loss of goodwill, especially as this blow becomes more widely known. It is not too late for Government to have a change of heart on this matter and restore the 20% relief before current proposals are implemented.  Abolish the single parent and co-habiting couples‟ allowance, and PAC, but retain the other allowances. At the same time, reduce the 10% band from £10,500 to £9,000 and increase the personal allowance to £10,000.  If the aim is to increase tax revenue, the fairest method would be to set up a third tax band (say 25% at over £25,000) rather than limit the allowable deductions. Allowable deductions such as mortgage interest relief provide much needed assistance to first-time buyers and help to stimulate the economy. Charitable donations and nursing home relief encourage planning for retirement and ease reliance on state pensions.  The age-related allowance recently introduced is unnecessary. An overall increase in the personal allowances would be fairer, not only aiding the aged who are on low income, Issue Date: 26 October 2012

Page 11


but also younger taxpayers who also struggle on low earnings but do not have the benefit of an extra personal allowance.  If a person ultimately pays the same amount of tax, it is hard to see what advantage this complicated process would have.  This would not make the system any simpler for an individual to comply with but could in fact have the opposite effect.  If this approach was cost neutral, it could work provided that the married couples‟ allowance remains. However, there would be concerns that some individuals may be adversely affected including home owners with mortgages.  Would support the retention of the existing taxation allowances and reliefs and believe that certain income groups would lose out if they were to be replaced by revised personal allowances.  There are sound social policy reasons for permitting mortgage interest tax relief, particularly given the high cost of entry to the market for first-time buyers. It is considered important for such relief to continue, even if it is now confined to 10% relief and capped at the lower levels recently introduced. None of the other remaining tax reliefs appears to be material in aggregate terms. However, for the individuals concerned, the relief will be important (e.g. maintenance payments) and it does seem fair that relief should be given on such payments where they are not ultimately for the benefit of the individual concerned.  It would not be unfair. It would make the system simpler to comply with, simpler to administer and harder to avoid or evade tax. The one reservation relates to mortgage interest relief. This is attractive to younger taxpayers - the people the IOM wants to attract - rather than elderly home owners. The change does not necessarily need to be cost-neutral. If the Government needs to raise revenue, this would be a legitimate way of doing so.  The removal of all tax reliefs apart from the personal allowance would make the tax system simpler. However, there are other considerations that need to be taken into account when considering the abolition of reliefs, such as: the purpose of the initial introduction of those reliefs; whether that purpose is achieved by those reliefs; and whether the relief from taxation is the best mechanism to provide the incentive to achieve that purpose or if there is an alternative means of providing incentive. However, in light of the above, it is recommended that relief for pension contributions be retained.  This would not be fair because it would impact on certain people more than others - for example it would adversely affects single income households with children. Having an allowance for each child could redress this, to provide a minimal level of support to families. Also, charity-giving would be taxed and this should actually be encouraged. Similarly, relief on pensions encourages investment. Other forms of relief such as loan interest relief may be less important assuming that it does not cause undue hardship to those payers.  The removal of allowances would not necessarily make the system fairer but it would certainly be simpler.


Page 12


 There is concern as to what is meant by „cost-neutral‟ and for whom. It is not clear how a fair tax system could be introduced which allowed for an across-the-board increase in personal allowances or a reduction in tax rates. Consideration needs to be given to the purpose of certain reliefs and the effect of removing them on certain sectors e.g. removal of tax relief for mortgage interest paid to the detriment of the already struggling housing market. It would be sensible to revisit why certain specific reliefs were introduced in the first place and question if the reasoning is still relevant and appropriate.  From a practical point of view, the substitution of the various allowances with an increase in the universal personal allowance would reduce the burden of locating and reviewing evidence or otherwise proving eligibility for allowances and would also eliminate situations where allowances that ought to be due are not, for one reason or another, claimed. This includes the assumption that „allowances and reliefs‟ does not include relief in respect of pension contributions, which should continue to be available.  Whilst changes could be cost-neutral overall, it would not be possible for it to be costneutral as regards individual taxpayers, so there would be many winners and many losers.  Many allowances and reliefs are given for reasons of social or economic policy. Additional allowances are given to reflect the additional living costs that are necessarily incurred by certain sections of the community due to their circumstances or age. Were those allowances to be withdrawn, the scope of the benefits system is likely to have to be widened in order not to disadvantage at least some of those who no longer have the allowance in question, whilst the cost-neutral target would mean that extra allowances were received by others who did not need them.  Mortgage interest relief has been given to encourage the housing market. Withdrawal of this would affect the housing market, as well as adversely impacting on those who had already committed themselves to a mortgage.  It would simplify the administration of the tax system but would have no impact on fairness.  Mortgage relief is crucial. At the minute interest rates are low. If interest rates were to increase individuals would be desperate to get relief for their mortgage interest. It would be a big negative if this allowance were to be removed.  The original need of the relief should be identified and if there is still this need, the relief should be kept.  Reliefs and allowances tend to stimulate certain types of economic activity. Removing them will remove this stimulus which may lead to a reduction in economic activity and prosperity. Equally, increasing personal allowances and or reducing tax rates will lead to a net increase in economic activity and prosperity. Assessing the net impact on economic activity and prosperity will inform us what the optimal action is.  The basic personal allowance is universal. Simply increasing the personal allowance allows a higher rate taxpayer to save tax at a higher rate than a lower rate taxpayer. In other words, the rich get richer at a higher marginal rate than the poorer do. If specific allowances such as the Blind Person‟s Allowance are removed as part of increasing the general personal allowance in a cost-neutral basis, it effectively means that Issue Date: 26 October 2012

Page 13


the former recipient of the Blind Person‟s Allowance has shared their allowance with the population as a whole. Tailored relief is given for a specific reason, i.e. to encourage the elderly to pay for private medical insurance, thus releasing some strain from the Department of Health. If the Government believed that they were focusing tax relief into areas where the Government purse and budgets were not under pressure then perhaps they could consider removing tax relief for these specific areas. In essence, rather than remove all forms of relief, perhaps the Government should consider why the relief was given in the first instance and whether that purpose still exists.

Question 5

Is it better to support potentially vulnerable groups who currently receive additional tax allowances, such as the elderly, blind, disabled and single parents, through the benefits system rather than the tax system? Comments received:  These groups should be supported through the benefits system rather than the tax system.  Perhaps these allowances should be removed and support given through the benefits system.  Age allowance should be abolished as it is not well targeted and does little to support those on low incomes. The winter fuel allowance should be subject to income tax.  Why are single mothers considered to be 'vulnerable people'? The Department of Social Care‟s (DSC) benefits system unfortunately rewards and encourages young people to become unmarried mothers given the benefits freely provided to them. The state should support vulnerable people but not encourage single motherhood and those not in employment, education or training.  The vulnerable should be supported through the benefits system. However, as ITD has a database containing the income of each resident taxpayer this information should be made available to DSC to ensure that the benefits system is not abused.  This raises the prospect of squeezing those who have been referred to as the hard pressed „middle‟ to an even greater degree and would involve the additional cost to the Government of means-testing all claimants. In particular, the elderly would suffer. Pensioners already suffer from low rates of interest on any savings that they may have and annuities on private pensions have plummeted. Unlike those still in work, pensioners cannot look forward to periodic pay rises to compensate for inflation.  It is better that the Government never sees the money and does not provide support through the benefits system. At present, the individuals do not pay the money over, and therefore there is no administration to the process. If this support is moved to a benefits based system, the individuals involved will have less money in their pocket as they have paid the tax over, and then they would receive this money back through the benefits system. This introduces an unnecessary complexity.


Page 14


 It is better to support potentially vulnerable groups such as the elderly, blind, disabled and single parents through the benefits system rather than the tax system.  Whichever is easiest to administer. There should be one assessment for each person giving a needs value and a single payment.  The benefits system is the appropriate place for this. In that way the assistance can be tailored to the income need. It does not necessarily follow that someone who is elderly or a single parent is in need of assistance or is vulnerable.  While such a change seems fair and better, alterations in the way age allowance works are likely to be unpopular.  Agreed as regards those in receipt of the single parent and co-habiting couples‟ allowance, and the personal allowance credit, but retain the other allowances. Those in need should be dealt with under the benefits system.  Undoubtedly, given that the benefits system already contains well-targeted help for persons with disabilities and lone parents, especially for those on low incomes. Having such dual provision is financially wasteful and adds unnecessary complexity to the tax system.  Allowances and reliefs for the „elderly, blind, disabled and single parents‟ should be provided through the benefits system - „to each according to his or her needs‟. As such allowances and benefits are in the nature of income in the hands of the recipients, they should be liable to income tax.  Not all of these groups are necessarily vulnerable. For example, some elderly and single parents may well be perfectly well off and no more vulnerable than other people not in those groups. It is important that the tax system does not provide reliefs just because of such a perception. A means-tested benefit may then be more appropriate based on a person‟s income/assets.  The focus of taxation is completely different to the support of vulnerable people through benefits and they should be separate.  The tax system is for raising revenue and it should do so without prejudice. The benefits system is for spending that revenue and it should do so where there is a need.  It is reasonable to provide support to vulnerable persons through a benefits system rather than the tax system and this would make the tax system simpler to comply with and simpler to administer. The primary concern here would be the communication of any changes to those impacted.  It makes sense to support those who need extra support from the benefits system, including those who are unemployed. For those who are earning and paying their own way, tax allowances seem a better way to go.

 Would favour support for the vulnerable through the benefits system rather than the tax

system on the basis of "to each according to need". However, this must not result in increased administration by the DSC leading to additional staff being required.


Page 15


 There is merit in separating tax collection from a political objective to provide income support. Assuming benefits can be effectively means-tested, it makes sense that the same means-testing be applied throughout; where support is also provided through the tax system, this may lead to anomalies, as taxable income may not necessarily reflect a person‟s „means‟ or, on the other hand, may be so low as to render the allowances useless.

 It depends on individual circumstances. For example, people who are blind and rich should not necessarily receive as much help as the blind who are poor.  The benefits system increases dependency on the state. The state should provide a safety net and help individuals to maintain their independence, liberty and prosperity. Individuals, families, carers and friends could be rewarded through the tax system for supporting or taking care of their loved ones.  These groups may already be supported through the benefits system. It is better to support them through the benefits system as opposed to relying on the tax system, but some care would be needed to ensure that there was an adequate benefits system in place, which picked up all of those groups, before the tax benefits were removed.

Question 6

Is it better to support the less well off who currently receive the personal allowance credit (PAC) through the benefits system rather than the tax system? Comments received:  The PAC system is an anomaly which should be administered through the benefits system.  It is better to look at the full position of an individual rather than just their “income”.  It is better to support the less well off through the benefits system rather than the tax system.  While such a change seems fair and better, the cost and complexity of administration may simply be being moved from ITD to DSC.  Access to social benefits should be through a single agency, the tax system should not be used as a means of calculating benefits as it is a duplication of effort.  PAC changes have not been particularly equitable. The system can leave some people with marginal low income worse off than those just below the threshold as they will not only be taxed but lose out on receipt of a PAC. In addition, taxpayer estates can receive a PAC where the estate income falls below the threshold so in these cases the credit is not going to the intended recipient. It would be fairer and simpler to scrap the system and increase the personal allowance which would have the added benefit of removing more people from the tax system.  The PAC is hugely expensive costing almost £7 million in the 2010/11 tax year. It is badly targeted, has undergone constant modification to try to make it work more in line with its policy intention and is unnecessary since social security benefits provide much better targeted financial support to persons in real need on low incomes. The purpose of any Issue Date: 26 October 2012

Page 16


tax-free person allowance is to exempt part, or all, of a person‟s income from tax - a nontaxpayer should not benefit from the same allowance unless social security benefit and income tax provision are combined into a true “negative income tax”.  The tax system is for raising revenue and it should do so without prejudice. The benefits system is for spending that revenue and it should do so where there is a need.  The PAC, although intended to be allocated to the “less well off”, can actually be relevant where those who could be considered “well off” draw little income in a tax year, despite having significant capital assets. On that basis, the relief is not always achieving its purpose and so could be better administered through the benefits system where that anomaly may not occur.  They either get a tax credit from the tax process or a benefit payment for the benefit system; either way, it is a necessary hand-out for groups who need it.  A review of PACs should be undertaken and moved to a means-tested basis as opposed to one purely based on income.  Experience has shown that some groups do not claim the benefits to which they are entitled. Therefore, thought needs to be given to ensuring that benefits are actually delivered to all those who satisfy the criteria for receiving them.  The problem with the PAC is that it is paid to those who have low taxable incomes, not those who have low assets. It should be abolished, with the funds saved being made available to be paid out through benefits to those who need them. It is also likely that those benefits would be made available at the time they were needed, whereas the PAC is paid out rather later.  Benefits tend to entrap people and create dependence. Therefore support via the tax system is by far the better route.  A new benefit-lead PAC system should identify those individuals who are were not necessarily in the current benefits system, such as hard working but lower paid employees. In other words, it would not simply be wise to increase existing benefits, such as the jobseeker‟s allowance, because people may currently be outside the benefits system, may not be highly paid, and should be equally entitled to the PAC.

Question 7

Should the current system based on a personal allowance level followed by bands of income taxed at 10% then 20%, with a final tax cap of £120,000 per year be maintained, or should other approaches be considered: e.g. a „flat tax‟ rate, or additional rates of tax on different bands of income? Comments received:  The low rates of personal taxation that the IOM has to offer remain absolutely fundamental to the overall offering to the financial services sector.  Raising the tax threshold sounds good politically, but there are concerns as to manipulation of visible incomes to ensure that people stay below the threshold. Issue Date: 26 October 2012

Page 17


 The current tax rates should be preserved for simplicity and to protect the IOM‟s position as a good place to live for wealthy individuals and entrepreneurs.  Any increase in tax rates for individuals should not be at the expense of cutting personal allowances and if these were increased sufficiently, could cover certain 'benefits' rather than paying them out.  A 'flat tax' rate of 20% for individuals may be beneficial to Treasury.  The tax cap is inherently unfair, particularly since it results in an effective tax rate of only 3.77% for those persons affected by the cap. It has only marginally changed the number of 'very high net worth' people residing in the IOM.  The tax cap should be reduced to £100,000 for an individual and £150,000 for a jointly assessed couple to encourage more couples to become IOM residents. The IOM should actively promote this policy particularly in the light of increasing tax rates in many European jurisdictions.  The income bands should be retained but the personal allowance should be increased to the UK Government‟s current target of £10,000.  Keep the system simple and possibly reduce to one tax band.  Personal allowances, a tax cap and a „flat tax‟ rate are favoured.  These issues are fundamental to the well-being of many ordinary residents who do not earn even a fraction of income that relates to the tax cap currently applying. The personal allowance currently granted in the IOM is already close to that now available in the UK. Indeed, the UK is proposing to raise the personal allowance even further to a point where it will exceed that now applying in the IOM. The UK basic rate has been lowered to 20% and thus there is a narrowing of personal taxation differential between the UK and the IOM for basic rate tax payers. The higher cost of living in the IOM affects middle earners and low earners to a disproportionate degree as it is essential items such as food and energy costs that far outstrip those of the UK. Unless personal allowances are raised substantially to compensate for the loss of the standard rate of tax and the imposition of a „higher‟ rate on all individuals, there would be financial pressure on all but the wealthiest in the population.  There should be some increase in personal taxation without damaging our attractiveness. This could involve keeping the lower rate of 10%, making the 20% rate an intermediate rate and introduce a higher top rate (e.g. 25%) for people earning higher incomes (e.g. £35,000 to £125,000).  Retain the status quo - it provides the optimum solution for those benefiting most from low tax to pay most but with allowance for the “extra” value high net worth individuals‟ contribution to the economy.  Maintain the current system. Additional rates and different bands increases complexity - it does not reduce it.  Increase the tax cap to, say, £200,000, because:


Page 18


 a lower figure results in less tax being collected in total from the pre-existing very wealthy residents;  the economic recession is hitting hardest those taxpayers in the 20% tax bracket, who are shouldering most of the additional tax burden, and it should be more fairly spread amongst those with the broadest shoulders.  The bands starting at 10% then jumping to 20% are too broad. Although less simple, but perfectly comprehendible, why not start at 0% instead of a personal allowance and go through steps of 5%, 10%, 15% and 20%?  Retain the 10% and 20% rates, but increase the tax cap to £150,000. Do not charge additional rates of tax on different bands of income which would be discriminatory, more complex to operate and could lead to unfairness.  The current system seems simple and well understood; although a flat rate of tax would also be fine, as long as it was at a sufficiently low level. Adding additional tax bands goes against the aim to have a simple system. Raising the top rate of personal income tax to 20% and the tax cap to £120,000 is already of concern, and any further increases will be counter-productive for our economy. The more taxes increase, the less attractive the IOM appears. There are already significant disadvantages in running a business here; not least finding good and skilled staff, good suppliers, the cost of shipping etc., so any further disincentives would be unhelpful. Consideration should be given to lowering the tax cap to attract more businesses to the IOM.  The tax cap should be scrapped. Treasury should negotiate tax payments with these individuals to keep them here and encourage more to take up residence. A „flat tax‟ rate should be introduced, for instance 15%. If introduced, the point at which people have to pay tax must rise and be reviewed annually.  Consideration should be given to the introduction of a „flat tax‟ rate system without a tax cap.  The current lower 10% and higher 20% rates of income tax are too low if the IOM Government‟s ongoing shortfalls in revenue are to be met. Realistic increases in both rates are probably likely to be needed and are likely to be in excess of 2%. Time will tell whether additional rates of income tax have to be introduced such as a new rate between the current lower and higher rates and one above the higher rate. Any move to a „flat tax‟ would inevitably have a regressive effect - the poorer would have to pay more and the rich less if current taxation revenue were to be maintained.  The current system of two income tax bands is perfectly satisfactory. The tax cap is not favoured particularly given the absence of inheritance tax and capital gains tax which should be sufficient to attract wealthier individuals to our shores.  The reduced rate of 10% is in the nature of a personal allowance and its continuation should be reviewed together with the other personal allowances. The tax cap is unfair and assists the avoidance of income tax across a wide spectrum of income.  The strategy for the tax cap has failed to date because it has not been properly promoted off-Island. Therefore, it is seen as unfair in certain quarters and its promotion should be reconsidered. Issue Date: 26 October 2012

Page 19


 Increase the tax cap to £150,000.  The existing tax bands need to be retained and a flat rate of tax would be opposed. There do need to be some changes that make sure everyone has to pay their fair share of tax. At present, the existing arrangements benefit the rich at the expense of everyone else. Tax capping should be abolished and tax should be paid according to the relative percentage rate. Evidence would also suggest that over the past few years the incomes of high net worth individuals has increased at a far greater rate than the incomes of the general population. They are more than able to pay a higher tax bill and make their fair contribution to the economic and social welfare of the IOM.  The current system of taxation with three tax rates (0%/10%/20%), overlaid with a tax cap, is not inappropriate. The introduction of additional tax bands would over-complicate the system, particularly given the small gap between the 10% lower rate and the 20% higher rate and the overlay of the tax cap. There is some logic in having a „flat tax‟ rate applicable to all income in excess of a personal allowance. This would enable an increase in the level of personal allowance, which would help the lower paid. However, there is also logic in the current progressive system of taxation. On balance, both approaches have merit.  There is merit in a „flat tax‟ system. There would be no allowances or reliefs of any kind, not even a personal allowance. Manx state benefits, including child benefit and old age pensions, would be exempt from tax. All other income would be subject to tax at a flat rate (of, say, 12 to 15%). The tax cap should be retained but it is being abused in two ways that were not intended when it was introduced. Changes could be made to prevent such abuse:  tax-capped individuals in receipt of Manx source dividends with an attaching 10% tax credit are able to claim repayment of some or all of that tax credit. The net result is that the total income tax paid on income subject to the 10% corporate rate is less than 10%. The law could be changed to make all tax credits attaching to Manx source dividends non-refundable.  Some individuals manage their affairs so that they have little or no income and pay little or no tax for a number of years. They then receive large amounts of income in a single tax year, pay the tax cap and then revert to having little or no income for the next few years. The extent to which the system can be abused in this way will increase substantially following the removal of the ARI. To counter such abuse, anti-avoidance measures could be introduced. One possibility, for example, would be a system under which an individual‟s tax cap for a particular year is increased by the excess of the statutory tax cap for the three previous years over the tax actually paid by the individual in respect of those three previous years. In order to preserve the verity of the marketing position that the tax cap really is the maximum income tax payable by an individual for a tax year, any additional tax collected under these provisions could be by additional assessment for income tax for those earlier years.  Having a personal allowance and two tax band rates with a tax cap is quite a simple system. Therefore, would any further simplification make the IOM tax regime simpler to comply with or administer? The competitive position of the IOM should be maintained. The question of whether to retain the tax cap should be considered against the value provided to the economy through additional tax revenues resulting from their employment of others or high value spending by those who qualify for the tax cap, Issue Date: 26 October 2012

Page 20


whether there would be a reduction in the net economic benefit were the tax cap to be removed, and also the perception of the IOM as a jurisdiction for entrepreneurs to relocate to compared to other jurisdictions where there is a tax cap in place.  The current system is fine. A flat rate of tax would impact on those with lower incomes the most as it would have to be averaged with the higher band to maintain income and additional rates on different bands adding complexity to the system.  These should be abolished and replaced with a zero rate and flat rate. Under a low flat rate tax regime the tax cap would be less essential to attract the wealthy and its abolition under such a regime would make the issue less divisive.  The IOM offers residents attractive low taxes. It is recommended that the threshold for the 10% tax be lowered so that a wider group of people make a contribution to benefits via income tax. This will not bring in much more income but it will make people realise that there are associated costs to any benefits they receive.  The present system should be retained. In particular, a „flat tax‟ would not be socially acceptable since it is by its very nature regressive, and it is critical to retain the ability to attract high net worth individuals to the IOM together with their business connections and spending powers.  The tax cap should be maintained at all costs but there will be a level at which it will become unattractive to the taxpayer and therefore increasing this year on year is not sustainable. Provided the message could be conveyed externally that the IOM is freezing its cap for the next, say, 3 years, people can plan their affairs with certainty and be an attractive proposition for some. The IOM must continue to attract entrepreneurs who will bring employment and innovation which is vital to our suite of offerings. It is these individuals who drive up the standards and quality of existing businesses and promote/encourage competition, which is not only healthy but vital for our long term success. The loss to our economy of losing a tax capped individual would be significant in terms of their overall economic contribution.  The current two bands of 10% and 20% are simple enough to understand and consideration should not be given to a „flat tax‟ rate or additional rates of tax on different bands of income. The latter would have the adverse effect of over complicating the system.  The tax cap of £120,000 is totally unacceptable in any system of progressive taxation. The 71 individuals currently gaining benefit under the tax cap have a combined income of £217 million, but are paying only £8 million in income tax at a rate of 3.77% - whereas everyone else is paying at a rate of up to 20% on total income. At the time this was introduced, the IOM had income to spare and could arguably attempt to encourage an inflow of wealthy entrepreneurs – this inflow has not happened, and it is no longer affordable.  The public understands the existing system of a personal allowance, and the tax bands of 10% and 20%, accepting the logic of the system. The IOM may well wish to maintain the rate of 20% as a maximum rate to preserve its international profile, but can only do so if its people enjoy and accept the level of public services which can then be funded. The Government has a concurrent consultation on the provision of Social Care, which raises the probability of means-testing and the reduction or loss of some or all universal benefits and this is likely to be deeply unpopular with the public. In such a scenario, it is Issue Date: 26 October 2012

Page 21


unreasonable to negate the possibility of inheritance taxes and death duties, positive rates of company taxation, or the introduction of capital gains taxes. There may well be a case for the introduction of a new maximum rate band of 25% on incomes of over £100,000 in order to raise tax revenues and enable Government services to be maintained.  Within the context of the changing demographics and the need to re-balance the level of benefits, consideration should be given to the introduction of a financial incentive in the tax system to encourage savings. Only if individuals have sufficient savings, or are making savings for their old age, will the Government avoid a "poverty trap" in the future. As it stands, there is little or no incentive to save - high inflation and low interest rates have severely impacted the income expectations of many pensioners in the past 5 years. By general acknowledgement, we are not saving enough for old age. Therefore, the introduction of relief of a nil tax rate for the first £4,000 of savings interest would provide enormous benefit to many struggling on pensions, or retirement incomes, and provide an incentive to save in the long term.  The current system is attractive in its simplicity, especially in the context of wealthy individuals looking for a location to settle and to invest, where they have certainty over their personal tax affairs. In terms of fairness, it is then a political matter to ensure that the economic benefits of attracting such individuals are tangible and that those benefits to the Isle of Man are understood by the people. Any decision whether to adopt a new tax system requires not only a comparison of the various options with each other but also consideration of the potential disadvantages of changing the system, being the costs associated with implementation and, importantly, the impact upon international perception, in terms of which the stability of a well established and unchanging tax system is considered to be an advantage.  The current system is relatively straightforward and generally understood. A „flat tax‟ would probably suffer from political problems - difficulties would be expected in raising the standard rate of income tax to a level higher than the basic rate of income tax in the UK, as it will make it harder to recruit staff from the UK to the IOM. Similarly, it would be necessary to increase the personal allowance so as not to be less than that in the UK. The tax cap should be retained but consideration should be given to raising it.  The tax cap has not achieved its aim of attracting high net worth individuals. It is perceived as being unfair in what is effectively a progressive tax regime. There was no certainty when it was introduced that high net worth individuals would be attracted and, similarly, there is no certainty that they would leave if the measure was rescinded.  The current system should be retained but the benefits of the tax cap should be rigorously tested. It is not apparent that the tax cap has led to very much investment in the IOM or, indeed, significant local employment opportunities.  The current system is an appropriate compromise - it raises revenue and is not complicated.  The current system is supported, apart from the tax cap. It encourages entrepreneurs but also leads to distortions within the system.  The tax cap is in place to encourage rich business-owners to come to the IOM and it should remain in place. If it were to be removed it would create bad public perception Issue Date: 26 October 2012

Page 22


and make the IOM less competitive. Wealthier businesses are needed in order to create employment and without the tax cap there would be no enticement and additional income and revenue would not be generated. The only way to determine how the tax cap has affected the IOM would be to have something to compare it to, but as this information does not exist, there is no detrimental proof to show that it has resulted in lost revenue.  Our current external and national tax strategy is in a position with very little maneuverability but we are faced with unbelievable challenges in order to sustain our own well-being. Our national tax structure faces severe external scrutiny and it would cause irreversible damage to our economy if it were to increase.  A flat rate of tax sounds attractive as it provides certainty and simplicity. However, the small amount of added simplicity which it could provide would likely come with a number of concerns and may be ineffective in practice. Consideration would need to be given to whether a flat rate would encompass income tax and NI and in the later case the further issue of employees‟ and employers‟ contributions needs to be considered. The problems with having a flat rate of tax would include:  the public perception of a „flat tax‟ would likely be negative. Most are likely to see it as an increase in tax for the poor to save tax for the rich, or the poor subsidising the rich. That public perception would be very hard to manage.  The international perception would also likely be negative. Any „flat tax‟ is likely to be higher than at least the starting rates of tax in most other countries.  If the rate were to include NI, that would entail breaking the existing reciprocal agreement with the UK.  Incorporating steps of graduated tax would be attractive if it was tax neutral. The problems with incorporating a graduated increase would be:  the issue of public perception would be difficult to manage.  Introducing an intermediary 15% income tax rate would seem like an obvious „halfway house‟ in the current system, but it would mean that some taxpayers who were paying 10% would thereafter pay 15%. It is doubtful whether the Government could introduce a 15% rate which only brought down the marginal rate of some current 20% taxpayers, i.e. their saving would presumably need to be balanced by an increase in the tax-take from 10% taxpayers.

 Adding an intermediary or graduated tax step would add to the complication of the current system.

 Consideration needs to be given as to whether or not the tax cap has had a beneficial influence on the IOM. The number of cases has remained relatively static over the years, but it is not known whether this is because former capped individuals have left the cap to be replaced by new resident individuals. The issue of perception, but also competitiveness, would be important with the tax cap. There are a number of jurisdictions around the world which have tax caps of one kind or another, whether or not they are marketed as such, and some are set at lower rates than an individual would enjoy in the IOM. Issue Date: 26 October 2012

Page 23


However, irrespective of whether or not many individuals have been attracted to the IOM purely because of the tax cap is relatively immaterial. If the IOM did not have a tax cap, wealthy individuals would just look elsewhere and for these reasons it has to remain part of the current tax strategy.  Rework the tax cap so instead of simply having a maximum total tax liability of £120,000, this should be expressed as a cap on the current 20% band i.e. a single person with income of £619,200 would benefit from the cap currently so the 20% band is £19,800 to £619,200 and then 0% band is £619,200 upwards. £500,000 is a more sensible and fair upper band i.e. £101,980 cap in the current speak which is approximately what it was when first introduced.  Consideration should be given as to whether 0% should be the lower rate band. Paying tax is a civil duty and there is not a convincing argument that very low earners should be exempt from this. Whilst acknowledging that the income for Treasury would be negligible and that additional administration costs could be costly, a lower tax rate of, say, 5% would be fairer for all.

Question 8

Do you think that the Assessor of Income Tax should collect details of interest paid to and paid by Manx residents from banks etc. in the Isle of Man so that such information would not need to be entered on tax returns, and if so, would you object if the banks etc. also held tax reference or national insurance numbers? Comments received:  A good idea but taxing bank interest at source would make more sense.  Banks should make returns of income to the Assessor with copies sent to taxpayers as well.  As much tax as possible should be collected using existing mechanisms.  The Assessor should collect details of interest paid to and paid by Manx residents from banks etc. However, strong objection to banks holding national insurance and tax reference number details as this is personal data which should not be viewed or held by non-Government employees.  Definitely and with no reservations regarding personal information - they require so much more just to do business with them.  Do not agree with this. Much of the data received from banks could be inaccurate, and the banks already hold a lot of personal data. Many residents will bank on and off Island as the deposit protection available in the UK is vastly better than that available in the IOM and therefore there will be a need to manually input details in any case.  Interest details should not be supplied by the banks, nor should the banks hold tax reference or NI details. The figures would still have to be checked by individuals. State pension details are supplied by the DSC to the Assessor and are confusing as they do not tally with the sums paid because they are apportioned according to the date paid and tax year end.


Page 24


 No objection to the banks providing this information to the Assessor - in fact they already do provide details to ITD of interest paid to customers. In order to be more accurate it would seem sensible for bank customers to provide their tax reference numbers to banks to make this effective.  Although it sounds in some ways easier to have the banks report interest paid and received by IOM residents, there are data protection concerns. There have been a number of high profile data leaks by various institutions in recent years, so the level of trust in additional institutions holding personal data is low.  Information regarding interest payments should be obtained from banks, if necessary requiring tax and NI references to be held by banks.  It is surely wrong that the banks and the Assessor should be able to determine the liabilities to tax of individuals without reference to the individuals concerned. The potential for mistake, misunderstandings and general grief for the individuals concerned is immeasurable.  Whilst insurance companies do not make payments of interest to IOM policyholders on a regular basis, there can be the occasionally need to do so particularly in some cases of late payment of claims. If a requirement was introduced which required reporting of individual one-off payments of interest this would be difficult and time consuming. It would be difficult to identify on, say, an annual basis, which payments needed to be reported, and potentially any policy which is owned by a person who now, or in the future, resides in the IOM could be affected. The introduction of such a change would require considerable system changes and additional administration incurring considerable expense to business, bearing in mind that the amounts of interest paid to individual policyholders would, in most cases, be very low. If such a requirement was to be introduced a de minimis limit which would exclude one-off, low payments would be welcomed.  Individuals should continue to receive details of their annual interest received and paid and be responsible for disclosure to the Assessor. There have been instances where people have received incorrect statements for both interest paid and received and they are in a better position to query these with banks than the Treasury would be. If Treasury wish to check details on a sample or random basis then that mechanism already exists.  No objection to banks holding such taxpayer information.  Fiscal privacy is a thing of the past. European Union Savings Directive (EUSD), Foreign Account Tax Compliance Act (FATCA) and the global economic downturn have consigned it to history. The IOM has committed itself to leading rather than being dragged along by this trend. If this proposal would make compliance and administration simpler, and avoidance and evasion harder, then it should be implemented. If it is, the Assessor should send each taxpayer a statement of the taxable income and expenditure information he has collected from third parties in order that the taxpayer can identify if and when any mistakes have been made.  Where it is possible to obtain information from banks to pre-populate online tax returns or verify information provided on tax returns, it would increase the simplicity of compliance but could make the system more complex to administer. Therefore, a cost Issue Date: 26 October 2012

Page 25


benefit analysis would need to be undertaken to establish if making this change is efficient use of revenue.  No objection to this. However, an issue will remain where IOM residents have funds held elsewhere (particularly the UK) in which case this information will still need to be included on their tax returns. Therefore, this proposal should be seen as an aid to correct completion of the tax return and not a solution to not needing to provide the information which may then lead to the question of whether the cost of setting this up outweighs the savings.  Everyone should submit an annual tax return with details of interest paid to and paid by Manx residents being entered - supported for audit purposes by returns from banks. Given the regular loss of personal data, the proposition that banks etc., should hold tax references and/or NI numbers is not supported.

 Banks must never be allowed access to tax reference or NI numbers as we must guard

against identity theft. Aside from the privacy issues this raises, it is an important discipline that every taxpayer complete all details required on their tax return so they recognise that they are contributing to the costs of Government.

 This would not be generally accepted by the taxpaying public, largely due to a lack of confidence in the banking system.  This would reduce the compliance burden for individuals. However, there is a balance to be struck between reducing the compliance burden and ensuring that each individual is mindful of their responsibility to monitor their own affairs and retain records to evidence the income they have received. The risk is that such a measure could be interpreted as a lightening of approach and hence clear communication to taxpayers is important. In terms of holding tax references and NI numbers, this would increase the requirements for Know Your Customer documentation but, particularly given other regulatory changes requiring banks to hold more detailed client information, this should not raise any practical issues. Banks will need some time to ensure they have the systems to gather and hold this information.  It is likely that banks hold much of the information that would be required anyway. However, in considering the information being provided by the banks being used to prepopulate entries on tax returns this is fraught with difficulties. Two examples are as follows:  accounts for children, where the bank insists on having the parent‟s name on the account but the money is unquestionably that of the child; or  where an elderly person puts a son or daughter as joint party to an account for convenience, whilst the account remains that of the elderly person.  No objection to this as it helps to catch fraudulent behavior.  If banks can guarantee to hold tax references in a safe manner, some suspicion and worries may be eased and there may be less concern with them having the details and references in the first instance.


Page 26


 In theory, this suggestion would simplify the taxpayer‟s preparation of their tax return. It may be that some taxpayers do not fully understand that they can currently receive tax relief in respect of interest paid on a loan from an IOM provider or that interest earned on deposits is taxable. To that extent, ITD receiving the information directly could ensure that more accurate and complete entries are recorded in a taxpayer‟s record.  This issue may be a minor simplification or a minor reduction in the work a taxpayer undertakes when preparing their annual tax return compared to potential downsides of financial institutions being relied upon to convey the information to the tax authority. Issues may include:  the need for a mechanism for banks to supply their customers with the debit and credit interest figures each year so that those customers have the opportunity to check and, if necessary, correct the information with both the bank and ITD. This defeats the purpose of providing a simplified system.  The possibility that the automatic supply of information from banks to ITD, including the sharing of their tax references with the bank, may lead to some individuals opting not to hold their deposits with IOM institutions.  Perceived additional data security concerns or data protection issues.  Individuals submitting their tax returns before the supply of data by the banks and the effect this could have on the timing of the issue of assessments and tax refunds.

Question 9

Should there be  independent taxation for all;  the freedom to choose to transfer unutilised tax allowances and reliefs between spouses and civil partners; or  a continuation of joint taxation for married couples and civil partners? Comments received:  Retain the current system as changes will encourage unnecessary transferring of income, reducing simplicity of the system.  As joint taxation in whatever form facilitates tax administration it might be retained with automatic transfer of unutilised allowances.  There should be a joint taxation system as it is impossible to disentangle married couples‟ affairs.  Independent taxation should be a choice.  Joint taxation for married couples should continue - but with the option not to if any one partner chooses that option.  The way joint taxation is calculated on assessments seems to create unnecessary work and the need to unravel the assessment to check that the figures presented on the return have been correctly assessed. Where a couple have their income „jointly assessed‟ and Issue Date: 26 October 2012

Page 27


their allowances automatically transferred, it is immaterial whether the income is for self, spouse, or joint. For example, income from joint shareholdings are divided and added to income received from individual self or spouse holdings. This makes unnecessary work for ITD and results in an assessment whose overall figures match the figures on the return anyway.  Joint taxation for married couples and civil partners works very well and gives taxpayers the option, and this should continue.  Independent taxation for all. It is probably not the state‟s job to promote the formation of marriage/civil partnerships through the tax system. The availability of joint taxation/transferable allowances has a cost to IOM Government revenue which it can little afford. As full-time work becomes more common in married couples/civil partnerships, fewer will benefit from these tax advantages anyway. Independent taxation also avoids complications in cases of marriage or separation.  Married couples and civil partners should be free to choose whether to be taxed jointly or as individuals.  Introduce the freedom to choose to transfer unutilised tax allowances and reliefs between spouses and civil partners.  Would not be in favour of any changes to the way in which personal allowances can be transferred/shared for married couples. The tax system actually supports families in its current state, and allows, or at least helps, young parents to have one member who stops work to bring up their children and continue to operate as a one income family. Having a full-time parent can, in some cases, benefit the child and society as a whole.  Married couples and civil partners should be able to elect for independent taxation on an opt-in basis, with the default otherwise being joint taxation.  The current system is very kind to single-income married couples or civil partnerships; perhaps too kind. A system of transferable allowances could result in the dominant partner bullying the other into giving up his or her allowances when it does not make economic sense to do so. Perhaps the right solution is to continue with the current system, whereby a couple can choose whether to be assessed separately or jointly, but to gradually reduce the allowances and reliefs given to jointly assessed couples below twice those available to individuals assessed separately.  There should be flexibility within a tax system, to a certain extent, in order to allow persons to administer their tax affairs in line with the way they administer their personal finances. The date for election for joint taxation should be a date after the end of the tax year so that an informed decision can be made of whether to elect for joint taxation once the annual income is known.  The ability to claim a partner‟s allowance, particularly for those households with a single parent working, must be safeguarded as this is only fair to those who make sacrifices in order to provide for the family and indeed lessen the burden on Government in providing for those children.  Continue the joint taxation for couples, although the freedom to transfer unutilised tax allowances would have the same effect in most cases. Strong disagreement with independent taxation for all because it devalues the family and is unfair on those making Issue Date: 26 October 2012

Page 28


sacrifices to bring up children. Suggest the introduction of the ability to claim an allowance for each child.  The freedom to choose to transfer unutilised tax allowances and reliefs between spouses and civil partners is the preferred option as this allows maximum flexibility for individuals to manage their affairs according to their personal circumstances.  There is little reason to depart from the current system, including the provisions applying to co-habiting couples. Independent taxation for all will serve to increase Treasury revenues, as allowances and lower rate bands will be wasted unless there are elaborate transfer provisions in force.  There should be a change in the time limit for a couple to claim to be jointly assessed for a year. The current time limit means that a decision has to be made before the end of the year: that is, before all the facts that may affect their decision, are known. The time limit should be no earlier than the end of the year in question, and preferably at least no earlier than the deadline for the submission of tax returns for that year.  There should be a choice. The tax system must reflect individual choices, otherwise there would be discrepancies.  Independent taxation makes sense, but there should be a way to have a choice between the two options.  Transfer of allowances could be extended beyond couples to include dependents, and others that an individual might support such as elderly relatives.  Some jointly assessed couples do undoubtedly benefit financially from the option of being assessed jointly and they would be greatly disadvantaged if that option was removed. If the intention is to try to create a fairer and simpler system with an improved competitive position, then removing the joint taxation option would not necessarily achieve this. In the case of wealthy individuals, whether one spouse‟s unutilised personal allowance and lower rate tax band are available to the other spouse will make only a small difference to their decision to relocate to the IOM. However, for less wealthy people who may still be considering relocating, that relatively small benefit could be an important factor as part of their wider consideration. Simply creating an independent taxation system would not necessarily create a fairer and simplified tax system. Under the current tax return system, it would lead to more returns being required. It could also lead to errors, mistakes and confusion where there are jointly owned assets. In effect, independent taxation is not going to create an easier to administer or fairer system. Whilst considering the issue of joint assessment, any strategy needs to consider the question of whether couples in stable long-term relationships (traditionally referred to as „common-law‟ spouses) should also benefit from the ability to be jointly assessed for tax purposes. This could be a cost in real terms to the Government, but if the intention is to introduce a fairer tax system, this topic should be further discussed or consulted upon.


Page 29


Question 10

Should the use of online tax services by individuals be made compulsory, and if not, how can people be encouraged to use them? Comments received:  Although people may be computer literate they may feel that some things are so important that they prefer to use a paper method.  It would not be fair to make it compulsory for individuals to file online tax returns.  Some people are not, or never will be, computer literate, so it is not a good idea to force this upon them.  Encourage people to use online services by offering a concession e.g. reduction in overall tax payable or additional time to file a tax return.  Online tax services should, on no account, be made compulsory.  Do not make online returns compulsory for individuals or small businesses; they may not have the equipment, the skill, or the inclination to do so.  Not everybody has internet access or knows how to use it, especially the elderly. Possibly encourage use by offering a tax credit/rebate of £100/£200 for online tax return submissions.  There will always be those who cannot or will not use technology but perhaps a financial incentive could be offered to make it worthwhile.  This should not be a matter of compulsion. To do so would be a step too far and would be a cause of distress for older tax payers who do not use an accountant.  The use of online tax services by individuals should not be made compulsory at present as not everyone has the ability either to use or to access a computer.  Alternatively, there should be a charge for manual completion.  Not compulsory - many people do not have or like computers. People could be encouraged by a better online system. Incentivise the online system by offering a reduction against the tax bill - say £20.  Do not make online returns compulsory. Complex tax returns with many sources of income and attached schedules are time consuming to prepare on paper. To complete this online would be a nightmare, resulting in security risks and introducing the probability of mistakes which would take ITD far more time to review.  The use of online tax services should NOT be compulsory. People should be encouraged to use them by having a much later deadline for submission, say 5 January rather than 5 October. The online submission should incorporate pay and file, to retain the tax payable date of 5 January. The online system should show in the tax calculation the tax already paid on account, so that accurate liabilities due are included in the calculation, which should also make clear the payable dates. Issue Date: 26 October 2012

Page 30


 It should not be compulsory because some people do not have access to/ability to use online facilities. Younger and more sophisticated computer users would probably prefer online submission. Others could possibly be encouraged by means of a monetary incentive or vouchers in the first year of use.  Rather than compulsory online usage, which would penalise those people not online by choice, circumstance or ability, an extended deadline of, say, 6 February for online returns could be introduced to assist those people with complicated tax affairs.  This is an outrageous suggestion as it could lead to those without internet access being guilty of the offence of failing to submit their tax return; many of those who do have such access still have concerns regarding the security of information.  People should not be compelled to use online services. The Assessor of Income Tax is in a monopoly position. People do not have the option to change to another comparable service provider who does not demand that they use online tax services. A financial incentive in the form of a tax credit may encourage people to use them.  The submission date should be moved forward to 6 July for paper returns but remain at 6 October for online submissions to encourage submission by this method.  It would be inappropriate to compel the elderly and other individuals to use only online services. The approach of offering extended reporting deadlines for online returns and earlier deadlines for manual returns has logic to it.  Encouragement should come first, compulsion should come later. Encouragement can be by:  having a later filing deadline for online returns than for paper returns; and  in a few years time, starting to charge a processing fee for paper returns. It might also be appropriate to make the registration process for online filing less onerous and move from an opt-in system to an opt-out system for online filing. Instead of sending people a paper tax return together with details of how to register to file online, Treasury could send out a letter with details of how to file online and a number people can call if they want a paper return instead.  In order to encourage use of the online tax system, the default position could be to use online filing, with an election to receive a paper return being included on the last paper return issued before the default online filing is introduced, and on all subsequent paper and online returns.  People should not be compelled to use online tax services. The Assessor is the servant of the people not a dictator and some people will never use computers.  The use of online tax services should be made compulsory. Peer pressure and the advance of technology generally will inevitably increase the usage of online filing etc. with close to 100% coverage being achieved within 5 to 10 years. However, some acceleration of this could be achieved by offering a tax discount (maybe 5%, up to a maximum of £500), to those who file online by a certain date.


Page 31


 A phased approach should be considered as clear cost efficiencies can be realised. Provision of „drop-in‟ centres should be considered to assist those without computer access or with difficulties using technology. A small tax credit or other low-cost „reward‟ should be offered for first time online filers.  In an ideal world it would be compulsory; however, there would be issues with this being unfair for those less computer literate or with disabilities that make use of a computer harder. Moving to an online option being the default option with an election to use a paper-based form and/or still come into ITD for assistance would make sense. Encouraging people to use online tax services can be done by continued awareness campaigns. While, ideally, people could be incentivised to use them, for example by a fee on paperbased returns, for accessibility reasons this would be unfair to those who struggle with online services. A middle road method might be for online services to be mandatory unless an opt-out is sought for which a reason has to be provided. That way people are nudged down that road and even if any reason given is accepted it means a conscious decision not to use online services has to be made which should maximise take-up. Tighter criteria for optouts can always be introduced later after reviewing this.  The compulsory use of online services for individuals may raise practical issues and concerns, not least as it requires access to a computer and computer literacy. There are some demographics – in particular the elderly (less than 30% of those over 65 access the internet daily) – for whom this might be an issue. For this reason online filing should not be made compulsory for all individuals. This would accord with the position in the UK, where there is encouragement, but not compulsion, to submit personal income tax returns online. It may be possible to take a different approach for businesses, though.  The use of online services by individuals should not be compulsory. People could be encouraged to use online services by some form of financial incentive - this could also encourage agents to use online services for their clients with any incentive offsetting the cost of using the agent. A later deadline could apply for returns filed online - perhaps 6 January, as the tax could be calculated at the same time.  The system could be privatised and cash incentives provided.  Should be compulsory or, alternatively, there should be a charge for manual completion.  A simple financial incentive to use online services would work as would an additional surcharge for hard copy reporting.  Whilst online filing should not be made compulsory it should be encouraged to save processing time at the tax office and give the taxpayer an early acknowledgment to their final tax liability or repayment. Electronic filing, followed by immediate processing and issue of an assessment should mean that turnaround time and any resulting tax refund is issued in a far shorter period of time. Extending the deadline for the filing of an electronic tax return (perhaps to 6 December) as opposed to the filing deadline for a paper tax return would probably be a successful encouragement. This would likely come at a cost as the tax office may not collect as many late filing penalties. Perhaps if taxpayers were registered to file online by 6 October Issue Date: 26 October 2012

Page 32


but filed by 6 December a tax filing penalty could be avoided, but if no registration for online services was received by 6 October and a return filed after that date, a taxpayer could anticipate a late filing penalty. Extending the filing deadline may also create a cash flow disadvantage as it would delay ITD‟s ability to issue tax assessments (which would require settlement within 30 days thereafter). The alternative option is to introduce a self-assessment tax system, with a set payment date of, say, 6 January in the year following the end of the tax year, but that could create an unfair disadvantage to unrepresented taxpayers.

Question 11

Should the current tax return deadline of 6 October be maintained or changed to an earlier or later date; and should the deadline be the same for paper and online return submissions? Comments received:  Delays occur because of the inefficiency of some organisations to provide supporting documentation to accompany a tax return such as certificates of interest paid/received.  The deadline could be shortened to 6 July; most records would be received by then to enable a tax return to be completed.  Do not change the filing deadline to an earlier date.  Align the tax year with the calendar year, with a tax return deadline of 31 March.  A deadline is needed and the current one seems reasonable.  If most tax is collected at source, including taxpayers paying tax on untaxed income by direct debit on a monthly basis, it may not be necessary for the vast majority of taxpayers to submit returns.  Remove the annual request on tax returns for information that never changes such as name, date of birth or national insurance number.  The current tax return deadline of 6 October should be maintained.  This date is fine and the date should be the same for both forms of submission.  Maintain deadline. Keep paper and online the same - to change adds complexity rather than reduce it.  The current deadline should be retained for paper returns. Online returns should have a deadline of 5 January, but with a pay and file system so that the tax continues to be payable by 5 January.  It should be earlier by two months for paper and one month for online.  The current tax return deadline of 6 October is quite early. Therefore, changing it to a later date would be helpful.


Page 33


 Retain the present deadline which is considered to be a reasonable timescale to enable individuals to acquire all the evidence.  The 6 October deadline is too soon after the tax year end for all but the simplest of cases to reliably submit tax returns. Many residents rely on third party information to complete their return (mortgage providers, banks and building societies, other tax authorities, etc.) and much of this information has not been received by 6 October. The introduction of an extended deadline of, say, 6 February would assist those people with complicated tax affairs and tax agents who are under undue pressure to submit all their clients‟ tax returns in the first 6 months of the tax year.  A deadline of 6 October is reasonable as a standard to reflect the time it takes individuals to receive investment and other information needed for tax returns. It also recognises that many individuals may be away for a prolonged summer absence.  There is no reason to change the current deadline.  The response to this question is dependent on when the Government requires information from the tax returns in order to publish accurate information for accounting purposes. It is suggested that the date remain the same for paper returns but that the date for submission of online returns could be pushed out to give an extra 2 months for submission (i.e. submission deadline for online returns of 6 December after the end of the tax year to which it relates). This is on the basis that information from electronic returns should be easier to extract and process.  The current tax return deadline of 6 October should be maintained and should be the same for both paper and online tax return submissions. Once received, the Assessor should be required to issue an assessment within 3 months or face a penalty - similar to that imposed on taxpayers for acting tardily.  No objection to bringing the date forward by one month if that helps Government but would strongly object if, to encourage online return submissions, the date for paper return submissions was earlier.  If the tax year end date is to remain at 5 April, there is no particular merit in changing the tax return deadline from 6 October. The deadline for paper and online return submissions should be the same, or else confusion will reign. However, there may be some merit in changing the tax year end from the existing 5 April, which has no modern financial or social significance whatsoever other than being the same as the UK tax year end. A 30 June tax year end (as in Gibraltar) might be considered, with filings to be completed by 31 December.  Change the date for paper returns to be filed before the online version.  The current deadline is reasonable.  As a measure to encourage the use of online filing, consideration should be given to bringing forward the paper filing date.  The current deadline should certainly not be brought forward: this would not seem to serve anyone‟s interests. The deadline could be extended but not at the cost of any change to the default system set out in PN177/12. In principle, the online and paper return submission dates should be the same, but a longer submission date for online Issue Date: 26 October 2012

Page 34


returns has been used in the UK as an incentive to file online, and that may well be a sensible approach here too.  The current deadline should be changed to a month end date.  The deadline for online return submissions should be extended to 6 December. In the UK they have until the end of October for paper returns and until the end of January for online returns.  There is an opportunity to extend the filing deadline for online tax returns to, say, 6 December. Providing the tax return is processed electronically on receipt of the online return, the assessment could be available immediately and the taxpayer would still have sufficient time to pay any resulting tax liability by 6 January.

2.2

National insurance

Question 12

What does the Isle of Man gain from continuing the current reciprocal arrangements with the UK? Comments received:  There is nothing important enough to retain the current arrangements.  With regard to the NI fund, breaking the link with the UK would give Tynwald the ability to reconsider the funding of all public sector pensions on a fiscally responsible basis.  In respect of existing pension rights those with IOM pension rights accumulated under the current system but not yet in payment, including those who are no longer resident, might be allowed to transfer them to an IOM self-invested personal pension (SIPP), or to buy an open market annuity.  Maintain the principle of reciprocity with the UK. However, if the UK introduces the amalgamation of income tax and national insurance, this would pose problems in that an IOM headline rate of 31% would not be good for marketing purposes.  The reciprocal arrangement with the UK acts against our fiscal interest. There is no reason why the UK should not pay their pensioners now resident in the IOM in the same manner that they do for those who are resident in other countries. Likewise, Manx pensioners living in the UK should be paid directly by DSC, including the payment of the Manx supplement as an incentive, as their move to the UK reduces the burden on our economy.  Maybe this means it is easier to recruit from the UK and for some key posts, such as medical ones, this is very important.  Reciprocity with the UK makes it easier for Departments to transfer details and funding between the two jurisdictions. It means people moving between the two jurisdictions can continue to maintain their records for all purposes, and thus be entitled to full state retirement pensions if they have full contribution records. This would become more problematic and complex if reciprocity were abolished. Issue Date: 26 October 2012

Page 35


 Maintain the current arrangement as it facilitates the movement of individuals between the UK and IOM. This may be desirable, especially for students.  The UK trying to align income tax and NI is an interesting project and will definitely help to simplify taxes and make them more easily understood. There are obviously many aspects that need to be addressed before they can be aligned and the IOM needs to wait and see what the UK decides upon. NI is in many ways currently a hidden tax, especially employer contributions, which the employee may not be aware of, but which reduce the wage that the business can offer. It is also a tax that affects the lower paid disproportionately, as the national insurance threshold is very low, especially here where the income tax personal allowance is high.  The continuation of reciprocal arrangements provides the IOM with the benefits of labour mobility.  The benefits are substantial. For instance, persons moving from the UK to IOM and vice versa can have all contributions paid in one territory treated as having been paid in the other and so qualify for a wide range of social security benefits that they would not otherwise be entitled to. The IOM has had significant benefits in following the sophisticated UK social security model in relation to many benefits historically and often IOM initiatives have become hugely expensive and controversial such as the IOM pension supplement. The current reciprocal agreement is at least as good as any alternative and much better than others.  The current reciprocal arrangements surely provide a considerable saving of Tynwald‟s legislative time.  The current agreement improves the mobility of labour from one jurisdiction to the other.  There is considerable merit in having integrated/reciprocal NI arrangements with the UK at the present time as it does aid labour mobility between the territories. However, the direction in which the UK is potentially moving, including possible unification of income tax and NI, may not be appropriate for the IOM, in which case it is right to consider alternatives. If the UK does move to an integrated solution, the IOM should not follow. The IOM would be best served by continuation of the current NI system, albeit that the system could evolve to eliminate discrepancies (such as the Lower Earnings Limit being lower than the minimum wage equivalent). However, the situation should be based on evolution rather than revolution. Employer NI can be a very real tax on jobs and harmful to job creation which is why the present temporary NI incentive is such a positive and welcome initiative. It is important that any changes to the present NI system do not deter employers from taking on additional staff, including higher paid management. If the UK does in the end proceed with integration of tax and NI, then that provides the opportunity for the IOM to do something different. We should not take the lead and make changes before the UK does.  It is easier for people to understand.  The benefit for the IOM in respect of retaining reciprocal arrangements for NI is the attractiveness of the transferability of NI records for individuals who migrate between the IOM and UK.  It is not clear what the IOM gains from the current reciprocal arrangement with the UK, except for the general convenience of being effectively part of the same system. It Issue Date: 26 October 2012

Page 36


would appear that the current arrangements benefit only a small number of transient individuals and that the majority of the IOM population obtains no benefit whatsoever.  The IOM does not have any other reciprocal arrangements within the European Union and so the UK agreement aids the flow of people to and from these two countries and makes the process less burdensome administratively for those moving to and from the IOM and those responsible for dealing with them. The ability to move „freely‟ between the two countries is attractive and provides us with access to a wider pool of resource to service specialist areas of the economy.  The IOM gains from the fact that movement to and from the UK is easier for those more familiar with the system. Breaking these arrangements could have the potential for complexities arising over the state pension for those who either move to/from the UK or even those from the IOM who choose to retire abroad. With any move to break this arrangement the advantages of being able to set our own benefit system versus those that are still based on contributions or any other arrangements that the UK might include in such a renegotiation need to be balanced. Previous moves from the UK over the health agreement, VAT agreement etc. show that when these agreements are renegotiated (albeit those ones were at the UK‟s instigation) the UK is unlikely to have the IOM‟s interests or a sense of fairness at heart. Then again, when the UK are changing arrangements, if this forces the renegotiation of any of these agreements, there may be scope to look at gaining more independence in those areas to the extent that does not disrupt the benefits of those agreements.  The principal advantage of the reciprocal agreement is the transferability of social security records between jurisdictions, which is, of course, convenient for people moving to and from the UK. That said, the reciprocal agreement does not tend to feature among individuals‟ priorities, either in terms of advantages or drawbacks. Other factors – such as quality of life, cost of living and overall tax rates – are considerably more influential in terms of the IOM‟s attractiveness as a place to live and work.  The IOM would seem to gain in several ways:  there is considerable saving in legislative time, in that we are not having to draft our own legislation;  details and funding can be easily transferred between the IOM and the UK;  someone working in both jurisdictions during his working life gets one full pension, rather than getting part pensions from two jurisdictions.  The only tangible benefit from the current system appears to be that the UK provides the intellectual input - paperwork, guides, systems, etc. - which presumably saves the IOM Government some administrative expense.  It provides reassurance to staff who visit the UK on business, that they will not become UK tax resident inadvertently. It also protects from the risk that HMRC in the UK would ask that UK payroll tax is applied to Manx employees temporarily working in the UK.  An attempt at removing this would be damaging as it may portray a lack of transparency.  The current reciprocal arrangements provide certainty of treatment for those moving between the IOM and UK. Issue Date: 26 October 2012

Page 37


 There are some advantages with having the reciprocal agreement, mainly in the certainty and simplicity for an individual when moving employments between the UK and the IOM, keeping their pension and social security issues roughly the same. Consideration would need to be given to access to third party agreements with other countries if the current agreement with the UK was terminated.  Serious consideration should be given to whether or not the current reciprocal agreement brings benefits that cannot be achieved by other means. Cancelling this agreement would allow the Government full flexibility on all forms of direct taxation, allowing full management and independence to suit the needs of the IOM. This would bring significant competitive advantage over the UK and other countries.  Reform the system to suit the needs of the IOM, not simply follow the UK scheme. This would also give rise to competitive advantages over the UK in terms of attracting both companies and individuals to the IOM. Simplify the system of funding the benefits currently paid for by NI and make the form of charging appropriate to the form of benefit. Segregate the different types of benefits and consider who should fund these benefits and whether they should be administered by central Government or privately through Statutory Bodies, private firms or insurance companies, or simply removed.

Question 13

Does having a Manx national insurance scheme based on the UK scheme help or hinder the Isle of Man when trying to recruit employees and develop the economy? Comments received:  It is a hindrance and employees would rather pay one tax and that should be income tax.  A lower rate would benefit business/employers but could the cost be sustained?  There are no benefits or disadvantages to major employers whether or not they operate a UK based NI scheme - payroll software will be available for both at a price. However, smaller employers struggle with the complexities of the system and often decide against expansion rather than tackle these issues.  Hinder. NI is seen as a tax on jobs which you have to add to a wage before deciding if you should employ someone.  It adds to bureaucracy which should actually be reduced.  Without knowing any alternative, it is very hard to comment. The views of business and industry need to be taken into account. Any reduction in the rates of NI that some employees pay would mean others having to pay more if current levels of NI funded benefits are to be maintained. Consideration needs to be given to whether or not this is feasible or fair. The Treasury should consider introducing relaxations in the current Income Tax Instalment Payments (ITIP) and NI payment compliance which the UK introduced some time ago, i.e. employers with combined remittances of £1,500 per month should be allowed to pay the ITIP and NI contributions for their staff every quarter rather than monthly.  This probably helps at the current time but we should be wary of copying any UK changes unless they are clearly in the interests of the IOM. Issue Date: 26 October 2012

Page 38


 It helps in labour mobility, but the same could be said in having an IOM system which is based upon the traditional UK NI model – at least until such time as any new UK model gains acceptance and establishes itself as a role model. For this reason, no fundamental restructure of the present NI arrangements in the IOM should take place during the 2012-16 period covered by the consultation. If the UK does fundamentally alter its own arrangements during this time, the IOM can take the opportunity to make small changes, but a “wait and see” approach to wider scale changes would be the best strategy during this period.  It helps for two reasons:  individuals can move between jobs in the two jurisdictions without having to worry about flipping between different systems and what the implications are for their pension entitlement. This makes it easier for employers here to recruit people from the UK. It also makes it more likely that they will go back there when they no longer have a job here.  Employees on short-term assignments to the IOM from the UK and all of the countries with which the UK has a reciprocal agreement, or from the IOM to any of these countries, can remain within their home country schemes. This makes the administration a lot simpler for their employers.  Where local workers are not available to fill employment vacancies and recruitment is made from the UK, having an NI system which is understandable for potential employees is attractive. However, if an alternative system was simple, easy to administer for employers and was competitive with other jurisdictions, it would be unlikely to deter individuals or employers from relocating to the IOM.  The model for the IOM NI system is probably in itself not a significant factor when it comes to recruiting employees and developing the economy, but as a low tax regime the NI cost of operating a workforce is often overlooked.  There may be advantages for recruiting off-Island employees. However, that should not be a big barrier in itself as the IOM should always sell itself on its strengths. The bigger issue is the transferability of pensions and other entitlements as if that becomes complex or tends to lower people‟s earning potential in retirement, it may put off not only recruitment of staff with valued skills from outside the IOM, but also act as a disincentive to former IOM residents who have gone away to pursue opportunities and who then want to return home and give back to their homeland.  Reciprocal arrangements are helpful to both business and individuals.  The fact that UK-based businesses are familiar with the NI system does not confer as much advantage as one would expect. This is because of certain differences between the NI rules of the two regimes which are not well known or understood. By way of example, a common and significant issue for employers is the different treatment of share schemes in the IOM and UK which can cause considerable and costly issues for UKbased businesses trying to operate the same scheme across two jurisdictions. The options available in the UK are, on the whole, sensible and could be reproduced in the IOM as many share schemes are an important feature in staff recruitment, motivation and retention. Finally, the NI system would also benefit from the availability of more comprehensive guidance, including Statements of Practice on common issues, and a note detailing significant differences from the UK system. Issue Date: 26 October 2012

Page 39


 It is beneficial as UK residents can see the consistency between the two systems. If we were to introduce our own it may be disadvantageous/a deterrent.  The scheme does appear to help with recruiting employees from the UK as it is a relatively straight-forward procedure. If the current scheme were to be terminated, then a significant amount of time would be needed for the IOM to write its own rules and issue regular guidance.

Question 14

Should income tax and national insurance be more closely aligned in the Isle of Man? Comments received:  Income tax and NI should form a combined payment.  For employees there would be much merit in merging them for simplicity and openness. For employers this would effectively be a payroll tax and could be recast as such, also resulting in simplicity and openness.  The UK is proposing to introduce a combined income tax and NI rate. This is a good idea that would save thousands of pounds every year in staff costs and should therefore be adopted.  The introduction of a „flat tax‟ rate would reflect the combined payment of NI and tax on earnings, self-employed profits and investment income. Therefore, everyone would pay the same contribution.  NI has been another form of tax for many years. It has been politically expedient to persuade people that they are contributing to their health care and pension pot and most people now realise that this is not the case. Amalgamate the payment as soon as possible.  If it is decided to break away from the UK scheme, it should all be rolled into tax.  Await the outcome of the UK review and decision before trying to go it alone on the huge issue.  They should be merged.  It would depend on what the UK decides upon and how it was aligned.  NI is a tax and even though the taxpayer perceives it differently to income tax it goes into the same pot. NI should be combined into a „flat rate‟ tax with the consideration of ring-fencing a percentage of revenue per annum to the National Health Service. As pensioners do not pay NI the „flat rate‟ tax could drop to say 10% on individuals reaching the age of 70.  Income tax and NI systems should be more closely aligned but should remain distinct. There is a need to continue with a contribution-based NI system in order to permit the transfer of contributions when people leave or come to the IOM. The cap on NI payments could be removed; NI could be charged as a straight percentage of gross income (subject to the need to maintain reciprocity with the UK being recognised). Issue Date: 26 October 2012

Page 40


 Ultimately, they should be aligned - and it is probably inevitable that this will happen in the UK too. In view of the work currently being carried out by the UK Government, there is little point progressing the matter in the IOM until it is clear what they intend to do in relation to this matter.  No reason why not - after all NI is in the nature of a tax on income.  The purpose of the two taxes is different: NI payments are in part connected to entitlement to state benefits, including pensions. It would be fundamentally wrong to integrate with income tax.  Either we will or we will not continue our reciprocal arrangement with the UK. If we do, then the system will remain largely the same as in the UK. This being the case, it appears from the consultation information pack that additional Government revenue of approximately £15 million per annum could be raised simply by aligning our rates with those in the UK. If the Government is seeking to raise additional revenue, this would appear to be too good an opportunity to miss. This will, however, impose a further significant cost on both employers and employees and careful thought needs to be put into the extent this will affect an already difficult employment market.  If, in the longer term, we are to cease our reciprocal arrangement with the UK, we need to design our own NI scheme; a scheme that best suits the needs of the IOM Government and people. This should not be done by starting with the existing scheme and asking how it should be changed. It should be done by starting with a blank page and asking what we need. The first question that needs to be asked is - what is NI for? Is it:  a contributory insurance scheme where there is a clear relationship between the contributions made and the entitlements (over and above what would be provided by the benefits system) received; or  a secondary income tax? The current NI scheme was originally intended to be the former and is still thought of by many in that way. Its practical application today, however, is entirely the latter. Viewed as a secondary income tax, the NI system is very regressive. It taxes the rewards from labour quite highly, the rewards from enterprise a little and the rewards from capital not at all. It also collects a higher percentage of the total income of middle-income earners than it does of high-income earners. It is important to retain a contributory scheme, primarily so that the IOM can enter into reciprocal agreements with other countries and/or be grandfathered into the UK‟s reciprocal agreements if and when the current arrangements with the UK are terminated. Perhaps the right solution is to separate out the contributory element and the income tax element. The contributory element could be covered by a fixed weekly/monthly/annual contribution, payable by all individuals resident in the IOM. For children under the age of 16, the child benefit payable to the parent, guardian etc. would be increased by an amount equal to the child‟s contribution and the child‟s contribution would then be withheld at source from this enhanced benefit; leaving the children and their parents, guardians etc. no better or worse off than before. For individuals in receipt of IOM state Issue Date: 26 October 2012

Page 41


benefits or pension the same principle could apply; the state benefit or pension would be increased by an amount equal to the contribution and the contribution would then be deducted at source from the benefit or pension payment. The income tax element could then be covered by simply increasing the income tax rate, subject to the overriding constraint that, in order for the IOM to remain competitive, our highest rate of income tax must never exceed 20%. Ceasing the current arrangements with the UK and implementing our own NI system will be a massive step that will take years in the planning.  Greater alignment of the scope of NI and income tax on employment and selfemployment income would result in a simpler system.  NI is a tax in all but name and there is, therefore, some merit, in the interests of honesty and simplicity, in the suggestion that the income tax and NI contributions pool should be combined and NI, per se, abolished. However, this would necessitate an increase in personal tax rates to a maximum in excess of 30%, which would do nothing but harm to the IOM‟s image as a low tax jurisdiction. It is therefore difficult to see how alignment could go beyond a certain stage into complete integration.  It could prove to be a costly exercise in the short-term and one which the IOM may not be able to justify in the current economic environment.  On the IOM it must be recognised that for most employees NI is a far bigger burden than income tax and the favourable rate of income tax is important to many low and medium earners due to the additional costs of living. These often mean that those on lower or even average wages are no better off in the IOM than in the UK and could face hardship if the alignment made that position less favourable.  In principle, there would be advantages. Measures to simplify the system of employment taxes/social security, in particular the alignment of basis periods, assessable income and thresholds would be favoured. The aim should be to reduce the compliance burden for employers; the Government should recognise, though, that in the short-term there will be additional compliance requirements, and should aim to assist employers as far as possible with appropriate guidance and transitional measures. There are many other issues to consider in proposing changes to the social security system, including the scope of the contributions and the contributory principle.  There is some acceptance that NI is just another form of tax on an individual‟s income. That said, it only applies to part of an individual‟s income and, in the case of Class 1 contributions, part of these are paid by the individual‟s employer, so it is not easy to see how that element of contributions would be set against an individual‟s tax liability.  It is difficult to see how alignment could take place without adverse public relations consequences for the IOM. If NI were abolished as part of any alignment, the headline rate of personal tax would be too high for the IOM to be competitive as a business centre.  NI limits should be reviewed and changed as the current levels are so high. The company/employer should pay indefinitely, but for those at mid-management level there Issue Date: 26 October 2012

Page 42


is no taper-off. NI gives no allowance for expenses and should be tapered off at more realistic levels to those approaching the higher incomes. However, this system may be abused, so would require careful consideration.  It would be massively complicated and costly to achieve. It would be necessary to withdraw from the reciprocal agreement and this would not be practical.  The concept of self-insurance through payments into an insurance fund is an excellent one, but it is only really beneficial if the benefits are indeed linked to the insurance purchased. In contrast to general taxation and benefits that lead to dependence, reduced freedom and reduced prosperity overall, a self-insurance scheme can be very different. Individuals could choose the insurance package they wish and would pay a premium in accordance with the range of benefits they choose subject to certain compulsory minimums. Allowances might be introduced funded through general taxation in order to enable the less well off to maintain a minimum level of benefits, but also to retain the ability to top up and chose additional benefits packages. This could be run through a regulated private sector with genuine competition leading to continuous service and value enhancements over time.  The idea of a composite rate could appear to be the panacea in creating a simple tax system. However, it would be highly complicated to get to the position where an aligned system was possible. This would likely include some form of transitional period and probably a withdrawal from the existing NI reciprocal agreement. If the plan was to align the rate of income tax and NI for only earned income and to separately assess non-earned income to a lower rate of tax, then that could be more complex and lead to more taxpayers forming companies in the belief that they could undertake their duties through companies and draw dividends. It would, therefore, be necessary to enforce personal service company legislation in the IOM. There is also the question of how the employer‟s NI part of the current system would be dealt with in an aligned system. Employers incur NI on salaried employees whereas selfemployed taxpayers only incur Class 4 NI with no secondary NI. Any alignment would only be fair if different sources of income and different taxpayers incurred different combined rates, otherwise retired individuals would still effectively incur a form of higher tax/NI liability on their pension income. This would be a highly emotive, controversial and potentially more complex situation which may lead to a flat rate of tax, but different flat rates for different sources of income or for different categories of taxpayer.

Question 15

Should the scope of national insurance be widened to include other forms of income, for example benefits in kind, dividends from personally owned companies and pensions received before the state retirement age? Comments received:  Do not widen the scope of NI to include pensions received before state retirement pension age, particularly given that this keeps changing anyway.


Page 43


 Enlarging the scope to other income such as pensions, interest, dividends, etc. could prove disastrous.  This would result in increased complexity.  Widen the scope to include such income because the recipients of these other forms of income benefit from the same healthcare system as employees who are currently paying NI.  An individual can effectively reduce his NI liabilities by employing himself through a company on a minimal salary and then paying the rest via dividends, and it may be good to stop this practice. However, there are other situations which are not artificial for the reduction of NI, such as where the „personally owned company‟ employs other people and therefore contributes to Treasury through employer‟s NI as well as the benefit of employing people. This will disincentivise people from starting their own businesses and calls into question the treatment of losses for NI purposes.  Strongly opposed to charging NI on dividends from companies personally owned by Manx taxpayers as this goes totally against the objective of maintaining and improving the competitive position of the IOM. The current economic climate has highlighted that exporting companies, generating real wealth from operations such as manufacturing, can be extremely beneficial to an economy. However, there are significant costs (transportation, etc.) associated with being based on the IOM which mainland competitors do not have but the fair tax system forms a significant part of the whole package we have to offer and offsets some of the inherent disadvantages employers face when considering moving their business here. The proposal of assessing NI on dividends from personally owned companies would have a significant negative effect on that process and lead to different jurisdictions being chosen - to the detriment of all Manx residents. Rather than gaining extra revenue, this proposal could actually cause the IOM to lose a significant source of revenue and employment. The group of people who would be affected by this generally provide training and employment for local people, and by choosing to be Manx tax resident, already pay income tax on dividends. It should not be underestimated that shareholders have the means to easily conduct their business elsewhere, taking jobs and their tax with them. If this proposal comes into force, they and many others may take that option.  NI should be scrapped and merged into income tax.  If NI is to be retained, it should also cover dividends from personally owned companies but not the other items listed. It is very important that it doesn‟t cover pensions received before state age. That would be unfair. If you take a pension early, you get penalised heavily on actuarial charges. Taking NI off that reduced return would be unfair.  Do not agree:  NI is a tax on earned income and dividends are not earned income;  to include benefits in kind in NI calculations would lead to complications;


Page 44


 pensions are generally paid out of savings from earned income, and therefore to introduce an NI charge on a pension paid before the state retirement age would appear to be double charging the income to NI.  If NI was levied on dividends from personally owned companies, then this would complicate taxation. This would mean that the tax treatment of the same type of income would vary depending on the recipient, which goes against the aim of a simple taxation system. Also, “personally owned companies” would need to be carefully defined. If NI did apply to dividends from personally owned companies, this would increase the taxation on dividends from 20% (capped) to 43.8% including employer NI (most uncapped). This would not be competitive with alternative regimes and small ownermanaged companies would have to seriously consider whether they wanted to continue to run their business in the IOM.  Perhaps benefits in kind should be brought within the scope of NI, to ensure more fairness exists in the amount of contributions employees pay, but not dividends and private pensions, since this would mean disrupting the fundamental basis on which NI is charged. Anti-avoidance measures can be taken to prevent abuse, such as in the case of the introduction of legislation relating to personal service companies.  If it is envisaged extending NI to pension payments from personal or occupational pension schemes, together with a requirement that the NI be deducted by the insurer before payment, this would require substantial changes to systems which would again involve a high level of additional administration and system changes.  This should, in particular, apply to dividends from personally owned companies, as the practice of paying out enough income to cover the NI lower earnings limit of £5,564 and then paying out all remaining „earnings‟ as dividends without any NI being paid, whilst legal, is no longer acceptable in the current financial climate.  Treasury should ensure that any loopholes, whereby individuals who set up companies can avoid paying NI at the same level as employed persons, are closed either through changes to rules or general anti-avoidance measures.  There are some grounds for adjusting the present NI payments system, to make it fairer and to correct for some anomalies, but the changes asked in the question would be much too far, and manifestly impractical. How, for example, would one treat differently an NI tax on pensions, on the one hand, and no NI tax on income from other forms of preinvestment such as dividend and interest income from savings, withdrawals from life insurance bonds, etc? Adding NI tax to pensions would only lead to a decline in pension savings by IOM residents, which is counter-productive in terms of social policy. There are also massive differences between salary and shareholder dividends. Salary is guaranteed whereas dividends are the business owner‟s profits and are most certainly not guaranteed. It is right that they should be treated fundamentally differently. It would be unworkable to have a system for NI taxing dividends from some companies (e.g. ownermanaged businesses) and not others. Any attempts down this road would doubtless be countered by avoidance measures. There should be some ground for increasing NI revenue on owner-managers, but this must be done in a measured way. Any notion of subjecting pensions (pre-state pension age or otherwise) to NI should also note the fact that the IOM has a significant presence in the international pension sector, with individuals and others using here as a tax-neutral home for well over £1 billion of pension schemes. It would be very detrimental to the marketing position for such pensions Issue Date: 26 October 2012

Page 45


business if the IOM was to seriously contemplate, let alone introduce, NI on pensions. Even if it was possible to segment the system and only apply NI, for example, to pensions paid to IOM residents, competitor jurisdictions would have a field day with negative comments.  This makes sense, in principle, but pensions are an issue. If the individual has made contributions into their pension fund they will have already paid NI on the amount contributed. It would amount to double taxation if NI was charged again on the pension drawn out. The current NI treatment of pension scheme contributions is unbalanced. Both employee‟s and employer‟s Class 1 contributions are paid on earnings that an employee pays into a scheme but no NI at all is paid on the employer‟s contributions. This has two undesirable consequences:  it encourages pension arrangements which maximise the employer‟s contribution and minimises the employee‟s contribution. This promotes the view that people do not need to provide for their retirement, someone else will do it for them.  It has resulted in various NI avoidance arrangements including salary sacrifice schemes such as the „SMART pensions‟ that have been actively marketed in the IOM in recent years. Treasury might wish to consider trying to balance the situation. One way of doing this would be to reduce the tax base for Class 1 contributions by any pension scheme contributions withheld at source from an employee‟s remuneration. This would significantly reduce the total amount raised from NI. Another way of doing this would be to impose Class 1 NI on all employer pension scheme contributions at a rate equal to the sum of the employer‟s rate (currently 12.8%) and the employee‟s additional rate (currently 1%). This would impose a considerable additional burden on businesses operating here. Perhaps a compromise solution would be to introduce a wholly new tax (called something like „Economic Regeneration Contribution‟ or „ERC‟) that is imposed at a rate equal to the sum of the employer‟s NI rate and the employee‟s additional NI rate on all employer pension scheme contributions and distributions of IOM-source trading income by closely held IOM resident companies to resident individuals. To prevent this becoming an additional burden on business during difficult economic times, all or part of the total amount raised from this tax could be rebated to employers at the end of each tax year in direct proportion to the total ITIP, NI and ERC they have paid to Treasury during the year. The amount rebated to employers would depend on the IOM‟s economic growth rate. If growth is below 2 or 3%, it will all be rebated to employers but if growth is above 7 or 8%, it will all be retained by Government. If it is somewhere between the two, it will be split according to a sliding scale. If such a system were introduced, it might make sense to go on to hypothecate all ERC retained by the state to an Economic Regeneration Reserve Fund that can be used in times of hardship to provide targeted incentives and support to local industry.  Would expect that if there were an extension of the scope of application of NI to include additional types of income, the principles of scope of the taxation should be retained, i.e. it should only be applied to “employment income”. The example given of applying NI to dividends from personally owned companies would not be welcomed where the Issue Date: 26 October 2012

Page 46


shareholder is drawing a reasonable employment income from that company for their services as this would be extension beyond the current application of NI to “employment income”.  The scope of NI needs to be widened and the examples given are appropriate. It achieves the objective of raising money and makes everyone acknowledge that they must contribute before they can receive.  NI is essentially a tax and there may appear little justification to limiting its scope to employment income. However, the receipt of benefits depends on whether the “right” sort of contributions has been paid and hence it would not be appropriate to extend the scope of NI without a complete overhaul of the benefits system. On balance, it is probably preferable to maintain the status quo.  The scope should possibly be widened to discourage clear abuse of the system. Benefits in kind are not cash payments and NI being applied may result in a non-acceptable tax cost applied to a simple benefit designed to motivate and encourage an employee. Applying NI to dividends from personally owned companies may discourage start-ups and entrepreneurs from developing their own businesses and ideas.  For fairness, the same allowances provided for income tax should equally apply to NI. The alteration to the scope of benefits should form part of the larger debate of aligning income tax and NI as there may be a danger in introducing measures piecemeal and making an already complicated system still more cumbersome.  NI is a charge on earnings, and benefits in kind are a form of earnings. However, charging NI on benefits in kind would be a step back from simplicity, and would require extra administration work. These costs for the employer and Treasury should be measured against any likely income. Dividends are not earnings, and NI should not be charged on them. Pensions that are received before state retirement age are not earnings and NI may well have been paid on the salaries used to fund the pensions, so arguably this would amount to a double charge on the original salary.  It is a back door way to broaden the tax base. It is a way to introduce more NI which is just another tax.

 NI should be expanded to include benefits in kind. Individuals use personal service

companies to avoid being directly employed meaning that the employee and the employer avoid paying NI. In terms of IR35 (tax avoidance guidance), personal service company employees should pay tax on their salary, as it is their income. NI on pensions claimed before the age of 65 is not fair as most pensions are partially funded out of income received after NI and tax, so if it were to be taxed, it would mean being taxed twice and double taxation should not happen.

 It could be expanded to benefits in kind - employees‟ and/or employers‟ NI. Applying NI to dividends from genuine investment companies would be disadvantageous to the IOM‟s perceived standing in the financial world. It would not be fair to apply NI to pension income received before the state retirement age. Pension policies tend to be funded out of contributions paid from earned income, which would probably have already suffered NI, so this would be a form of double-NI. It is true that some element of a pension fund should have arisen from capital growth, but it would surely be too difficult to determine what proportion that was and it would presumably not be the Government‟s intention to apply NI to capital. Issue Date: 26 October 2012

Page 47


Question 16

Should self-employed people pay the same rate of national insurance as employees and be entitled to the same contributory benefits? Comments received:  This would establish fairness for all.  Employed and self employed people should pay the same rates of NI.  If NI was abolished, this would be a moot point. However, it does beg the question of further reliefs for entrepreneurs and for those willing to take more risks.  Definitely one tax based on income for all.  Self-employed people should be given the option to pay the same, and opt to be eligible, but it should not be compulsory.  At first sight it would appear fair for self-employed people to pay the same rate of NI as employees and to receive the same benefits, but practically it would either have to be paid in arrears because the taxable profits would not be known until after the end of the accounting year, or it could be paid on account monthly and amended later, just as the Class 4 liability is currently.  This should not be the case since the levels of contributions paid by the two types of earners are different and the cost of meeting benefits payable to employed earners is subsidised by employer‟s NI.  In a lot of cases the self-employed need future financial security and this could be provided if they paid the same rate of NI as employees and were then entitled to the same contributory benefits.  While this question is understandable it must be remembered that in any free market economy, the self-employed sector is one of the most powerful drivers of job creation and economic growth. It does not seem unreasonable to encourage this sector with this very small tax break.  This would need to be considered in light of the revenue it would raise against the cost of implementation and in light of whether there are other reasons for having introduced a lower rate of NI for self-employed persons. The cost of any change should also factor in whether the IOM would be less attractive to self-employed persons who may generate additional tax revenues through employing others and through VAT receipts.  It would depend on whether doing so is likely or not to provide such people with additional hardship compared with employees due to their employment circumstances and if it would harm innovation.  This option should be available to self-employed individuals, but should not be compulsory. As they take the risks and rewards of running their own businesses, so it should be their decision whether to opt into or out of contributory benefits.  Were the self-employed to pay the same rate of NI as employees they should become entitled to the same benefits. A comparison would need to be done of the likely extra Issue Date: 26 October 2012

Page 48


contributions against the likely extra benefits to be paid. One result would be that the self-employed should become entitled to jobseeker‟s allowance if they have no work, but that could come with an administrative burden, as a self-employed tradesman could arguably switch between self-employed and unemployed very frequently.  The NI collection method would probably be the same as that for Class 4 contributions at the moment, but it is unclear whether any equivalent of employer‟s contributions would be levied. Having to pay income tax and Class 2 and Class 4 contributions at a higher rate all at the same time could prove crippling for many.  Incentives are needed for self-employment. Increasing NI would discourage some from returning to work.  The equalisation of NI rates for employed and self-employed taxpayers would appear to be a good idea on the basis of fairness. If the two systems were to be completely aligned, a self-employed individual would need to pay a grossed up NI rate which encompassed both employee‟s and employer‟s rate. This would be a significant shift in the self-employed taxpayer‟s liability and unlikely to be popular. The more easily aligned and probably the easier option to appease self-employed individuals is aligning just the employee‟s NI rate to the self-employed rate and to keep employer‟s NI as a separate cost of employing someone. However, this could encourage more employers to seek to have their „employees‟ operate as self-employed taxpayers. It could also then become a tax on employment itself and discourage small businesses from expanding. The equally important issue to also consider is to what extent a self-employed individual would be able to receive benefits. If they paid an equivalent rate of NI, they could demand equal access to benefits and social security rights. There is no current mechanism to determine when a self-employed individual is not working and could therefore presumably be entitled to obtain the jobseeker‟s allowance.

2.3

Taxation of businesses

Question 17

Should the coverage of the 10% tax rate be widened: and if so to which business sectors? Comments received:  A 0% rate of tax is politically unsound, irrational and totally unfair as is the argument that they create wealth through their staff contributions. All corporate bodies trading in the IOM should be incorporated here and tax for all retailers should be 10% (similar to banks). Finance industry rates should commence at 3% to 5% or be based on a transaction levy and manufacturing companies could be exempt or low rated.  Would consider leaving the IOM if there is any adverse change in this area resulting in the loss of provision of employment, general spending and investment.  All IOM registered companies trading in the IOM should pay a competitive rate of tax say 5%.

 All business sectors should pay the same tax rate of 10%. Issue Date: 26 October 2012

Page 49


 The introduction of a „flat tax‟ rate of 20% would result in all profits being taxed at this rate and any subsequent distributions to shareholders would not be subject to any further tax.  Reduce the corporate rate to 5% and widen the scope to all financial services i.e. insurance, assurance, banking & fiduciary services. A 5% rate is still better than almost every other 'clean' jurisdiction.  Every resident company, whether trading or non-trading, should contribute to Government receipts. There is a very good argument for taxing companies at the same „flat tax‟ rate as individuals despite the marketing value of „0/10‟. Individual shareholders will ultimately be taxed at the same „flat tax‟ rate and any dividend paid would be given a tax credit meaning that there would be no additional tax requiring to be paid. Corporate tax could be assessed on estimated profits from commencement of trading and collected monthly by direct debit.  Widening coverage of the 10% rate could have unfortunate consequences. Extending coverage to insurance companies could damage captive business while to tax investment companies would have a detrimental effect on collective investment companies and corporate service provider business. Any widening of coverage could bring the same criticism which arose previously in respect of international and non-resident companies.  The abolition of the Attribution Regime for Individuals (ARI) has given rise to new problems in taxing the underlying income of IOM residents. If the company does not declare a dividend but makes payment out of a loan account, the taxing of income may be deferred indefinitely and for the removal of doubt the following legislation should be enacted: ‟any payment other than out of a credit available in a loan account shall be liable to IOM income tax on the recipient up to any untaxed but taxable balance in the profit and loss account: and that this should apply to any similar payments in a winding up‟.  The current arrangements are inequitable in favour of wealthier people who may have companies with large loan accounts or with income in excess of their needs. This suggestion could provide a simple remedy ensuring that income should be ultimately taxed without incurring complaints of a „stealth‟ Capital Gains Tax. A similar rule is applied in the UK on payments made out of accumulated income in discretionary trusts.  A better solution may be to impose a 10% withholding tax on all dividends, most of which could be offset against IOM income tax or under double taxation principles in the case of the subsidiaries of UK companies. The prize of capturing tax on UK traders could be worth some sacrifice of offshore business and appease the sense of injustice felt by local traders.  If the rate of corporate tax was increased from zero (even if the increase was small), this would have a huge negative effect on business and the loss of many clients to other jurisdictions where a zero rate of tax continued. To retain the IOM‟s competitive edge it is important to keep our rate of corporate tax to no more than our competitors.  Some form of taxation needs to be applied to foreign-owned companies who trade and take on profits from IOM residents. Perhaps this is a route to do this, but special local property rates for foreign beneficial ownership or a trader‟s licence fee could also be used.


Page 50


 It should be widened and should cover all regulated entities, as has been announced recently in another jurisdiction. There should also be some way to get a tax take from foreign companies trading in the IOM.  The 0% rate applied to the vast majority of companies has brought much business and prosperity to the IOM. However, such a rate attracts multinational companies to engage in transfer pricing - the artificial shifting of inter-group profits from a subsidiary in a developing country to an offshore subsidiary. Many such bodies have voiced this concern; estimates of the loss to the revenues of developing countries vary but $100bn per year would be a ball-park figure - comparable with the amount spent on aid globally each year. It is acknowledged that such manipulation of profits is legal, but a recent poll has judged the practice to be amoral and unacceptable. The technique, which may involve nothing more than an invoice from one subsidiary to another, is of course difficult to identify but one way forward is the practice of „country-by-country reporting‟, under which a company is required to disclose, say, turnover and profit for each country in which it has a subsidiary. This would at least expose such practices and permit further investigation by tax authorities. Steps towards such reporting requirements on the IOM or other means considered for tackling such abuses - would be a massive step forward for transparency and fairness, not to mention a reputational gain.  Clearly, the IOM needs to generate more income annually through taxation, particularly because of the loss of tax following the abolition of the ARI regime. To achieve this, the extension of the 10% band could be applied to regulated businesses, and also to all retailing trading companies or branches of overseas companies with a permanent establishment, i.e. a physical presence, in the IOM. In this way the profits of all businesses with a retail trade would be taxed. As overseas companies currently pay tax on profits arising for the IOM trade in their home country, this would not result in them paying any more tax, as double taxation relief would be available in the home country to virtually all such companies.  All UK companies operating in the IOM should pay all their taxes to the IOM Treasury. As operated at present, this puts local-based companies at a disadvantage with loss of revenue to the IOM.  All IOM-based trading operations/companies should be subject to taxation in the IOM. This would include company tax, NI and VAT. Dividends paid to IOM-based shareholders should be “franked income”, taxed through the company and not on individual distribution thereby removing the incentive to shelter profits. There is a need to protect the IOM‟s offshore businesses. Whatever route is taken it is important that income is not taxed twice, and that businesses which do not trade here are not subject to IOM tax.  With regard to 0/10, DPC and ARI, this remains inconsistent and, therefore, complicated. If acceptable, a small rate of company tax should be levied which would achieve both consistency and simplification. Some significant banks and companies have left irrespective of the 0/10 rate so it may not be that much of an incentive in practice. It is still largely un-documented what the replacement to ARI is. Advice is that it is basically a tax on income drawn from a company but this will result in a significant cash flow problem for Government when income is left in a company rather than being taxed when it arises.  The 10% rate should be extended to utility companies, telecommunication companies, those who operate passenger air and sea services to and from the IOM and companies who sell alcohol. Issue Date: 26 October 2012

Page 51


 It should be widened to all business sectors other than:  client companies of fiduciary service providers whose income receipts (other than bank interest) are derived from outside the IOM; and  profits/incomes of companies with permanent establishments in the IOM whose income receipts (other than bank interest) are derived from customers/sources outside the IOM. These categories of company are the only categories that „require‟ to be zero-rated. There is no point in the 10% rate. If income is liable in the hands of individuals or companies, it should be charged at 20%. If income is liable in the hands of branches or subsidiaries of UK companies, this should also be charged at the rate of 20%.  There may be certain sectors where individuals who own businesses which are taxed at zero are not declaring the appropriate levels of personal income (this may similarly be the case for self-employed persons). In the UK, targeted campaigns have been made by HMRC on certain sectors/groups that are deemed to be a higher risk of non-disclosure etc. with the resultant impact on the tax take.  The 10% tax band should be extended to far more companies than it is at present. Do not believe that this relatively low rate of tax would cause any companies to leave the IOM. We would still be competitive with many other jurisdictions.  The coverage of the 10% tax band should be widened as far as it is possible to do so without compromising the needs of the corporate and trust service provider sectors and their international clients. Increasing revenues from company income tax can play a very large role in closing the IOM‟s tax gap. The effect of moving a UK-owned IOM company from 0% to 10% tax would mean no increase in the overall taxation of their profits. It merely means some tax is payable in the IOM with the consequence of less tax payable in the UK. This on the face of it seems a logical result (whereas 0/10 in contrast is perverse, leading to full UK tax, rather than marginal tax, on IOM-sourced profits). The status quo is therefore largely indefensible. Most businesses should be placed into the 10% band. Insurance companies should also be part of the 10% group. Many of them will be UK-owned, leading to no overall increase in taxation for their shareholders. There are solid arguments that any IOM-regulated company should be part of the 10% tax group. Similar arguments apply to retailers. There are no disadvantages for locally-owned businesses in coming into a 10% tax band - this will, in fact, simplify tax planning. For the Treasury, it will also reduce the temptation for business owners to roll up profit within a company, and so lead to an increase in tax revenues.  Whether or not it should be widened at all depends on whether or not this will result in the whole 0/10 system being referred back to the European Union Code of Conduct Group. If it can be widened without such referral, it should be to the greatest extent possible without damaging our attraction as a tax-neutral jurisdiction in which to do international business. The ideal would be to have a territorial tax system with the 10% rate attaching to all IOM-source income. It may, however, not be practical or desirable from a business perspective to legislate for this so we would need to continue with the current system of imposing the 10% rate on income derived from certain specified business activities. If this is the case, then all of the following business sectors could be considered as possible targets for the 10% rate: Issue Date: 26 October 2012

Page 52


 income related to IOM land including all construction, extension, enhancement, refurbishment, repair and maintenance of land and buildings, hedges, fences and other structures thereon and plant, fixtures and fittings incorporated therein and all services in relation to land including those provided by surveyors, architects, estate agents and auctioneers;  income from regulated activity; i.e. any business activity carried on based on a licence issued by the Financial Supervision Commission (e.g. corporate services, trust services, fund management and third party fund administration), except banking income which is already covered by the 10% regime;  income from the supply of goods, including fuel and electricity, in the IOM, including retail, wholesale and trade supply businesses;  income from services provided by quasi-retail high street businesses such as hairdressers and beauty salons;  income from the hospitality business in the IOM, including all hotels, guest houses, restaurants, pubs, bars, cafes, take-away outlets, burger vans and outside catering businesses;  income from the collection, distribution, delivery and disposal of goods, including fuel and electricity, in the IOM, including the provision of postal services and refuse collection and disposal services. There are other industrial sectors that could also be considered for inclusion in the 10% tax band including insurance and e-gaming. There is, however, a persuasive counter argument that these sectors are already disadvantaged by operating in the IOM (as compared with the Channel Islands) by VAT and imposing a 10% income tax rate would damage our competitive position in these sectors. Provision of telecommunication services in the IOM has been specifically excluded in the above list as this may have a negative impact on the e-gaming industry.  Although widening the coverage of the 10% tax rate band would not significantly impact the tax liabilities of banks, a blanket corporate tax rate may negatively impact the IOM‟s economy through a reduction in underlying client business.  IOM business taxation should remain competitive against other similar jurisdictions. It is not possible to recommend additional sectors which should be subject to a 10% rate of tax without understanding the economic effect of those changes. It is recommended that the ITD review the economic impact of changes to the business tax system before committing to extending the scope of the 10% tax rate.  Applied to all sectors with the exception of:

 the incomes of client companies of fiduciary service providers whose income receipts (other than bank interest) are derived from outside the IOM;

 profits/incomes of companies with permanent establishments in the IOM whose income receipts (other than bank interest) are derived from customers/sources outside the IOM such as in the case of the previous Tax Exempt Companies.


Page 53


Furthermore, the 10% tax rate band should be increased to be identical to the income tax flat rate which should be introduced for individuals.  All industry sectors which are based in the IOM purely to service the local marketplace (otherwise than, for example, for tax reasons) should be included within the positive tax band, which is at present 10%. This would, therefore, include the retail sector, utilities, telecommunications, etc. Such businesses exist in the IOM not because there are tax benefits from doing so, but because there is a local market for their goods and services, and therefore a positive rate of tax will simply constitute a cost to their doing business here. It is unlikely to cause them to leave the IOM. In particular, a number of such businesses have no local shareholders and ultimately profits made locally are currently enjoyed completely free of IOM tax. The opportunity to generate significant tax revenues is, therefore, being lost. Indeed, a positive rate of tax could be extended from 10% to 15%, or even 20%, without this being counterproductive in terms of tax revenues raised. The only matter to safeguard against is whether such a move would cause the EU Code of Conduct Group to revisit the acceptability or otherwise of the 0/10 tax regime. As such, there may be a limit to how wide the category of positive taxpaying sectors could be made. In Jersey and Guernsey the 10% taxpaying category is much wider than in the IOM, so there must be some scope to extending it beyond the present banking and property industry sectors.  A balance needs to be struck between fairness and commerciality and the IOM needs to be wary of discrimination between certain business sectors which could discourage investment, such as large overseas parent companies of local subsidiaries which bring employment and associated benefits.  As far as possible, there should be no distinction as regards tax liability between individuals, whether employees, pensioners, or company owners and shareholders. As such, the income of individuals and the profits of companies should be taxed at comparable rates, not shielded under the 0/10 regime, and potentially, if large enough, with the benefit of a tax cap of £120,000. The current situation pins the majority of income tax liability squarely on employees and pensioners and leaves company owners and shareholders free to exploit some large holes in the system. That is unfair and inequitable, and in the current financial circumstances, unacceptable. We should be trying to identify the particular classes and sources of income/profits that are best excluded from IOM income tax in the interest of the local economy and of employment, and of finding the means to do so within acceptable international criteria - rather than the general 0/10 regime, which creates unfairness for the local population.  This is ultimately an economic question, which should be informed by the expected economic impact on the IOM of various options. It will also be important to consider this issue against the background of tax systems in other jurisdictions, which currently have broader 0/10 systems than the IOM has, and of any proposed changes in those territories. The existence of broader 0/10 regimes in the Channel Islands indicates that there should be scope to increase the coverage of the 10% rate somewhat without falling foul of the EU Code of Conduct Group so long as 10% does not become a generally applicable rate of tax. The question is whether the exchequer benefits of doing so would outweigh the potential economic losses if business were to move away from the IOM as a result.  The first choice of companies to pay 10% income tax are retailers, including branches of foreign companies that have a physical presence here, followed by regulated businesses. After that, the scope could be widened much more broadly, but not so as to cause Issue Date: 26 October 2012

Page 54


difficulties with the CSP industry. The overall scope of the coverage is something that would need the judgement of those who have their finger on the international pulse.  From the perspective of captive insurance companies, it is imperative that the 0% rate be preserved. The captive insurance industry has been built on the back of a tax exempt/0% tax environment. Whilst, given the prevalence of controlled foreign company and similar tax rules around the world, it is fair to say that for some captive insurers the introduction of a relatively low positive rate of tax might be tax neutral to their corporate group as a whole, for other organisations the imposition of such a tax charge would represent a real cost. The IOM is most often in competition with other 0% tax captive locations such as Guernsey and Bermuda in terms of attracting new business, rather than EU jurisdictions which do impose a positive rate of tax. The extension of the 10% tax rate to captive insurance companies would result in the immediate loss of some existing captives but would also significantly hamper the ability to attract new business.  Many IOM-based captive managers are part of large worldwide groups and as such these groups will typically have captive management operations in a number of other jurisdictions, including Guernsey. Guernsey continues to have a 0% tax regime for captive managers and is generally regarded as the IOM‟s most significant competitor when it comes to decisions regarding the location of captives. The introduction of a positive tax rate in the IOM may well be regarded as a detractor when large groups compare their IOM-based businesses with other similar locations.  There are a large number of UK retailers operating in the IOM and other than taxes relating to employment make no contribution to local infrastructure. Their profits effectively count towards the UK share of the Common Purse and their VAT is paid to the UK. The current positive rate of tax should be expanded to include all businesses serving the local market but locally-controlled businesses should be exempt from this. Multiplier benefits created by local businesses are very significant whilst they are largely non-existent with non-resident businesses. Local businesses are at a competitive disadvantage competing in an arena where off-Island businesses can offset their transport/marketing costs, central overheads, etc. against a UK positive rate of corporation tax. If the 0/10 regime is to be preserved at all costs, then consideration should be given to some form of licence fee, headcount taxation or some other means to make non-resident retailers contribute.  The coverage of the 10% tax could be widened, but only if measures were taken to protect IOM businesses from adverse implications of the change. If the 10% tax rate were widened to retail, then non-Island-based multiple retailers whose total tax cost would not increase through double taxation relief, should be taxed. However, IOM retailers are struggling and any significant increases in tax costs or cash flow could have unfortunate consequences. Perhaps a scheme could be devised whereby all retailers are taxed at 10% but a tax credit or similar is given to the shareholders of the retailer which can be used as an allowance against any income of the taxpayer. Alternatively, a Department of Economic Development retail support scheme could be implemented for IOM-based retailers which counterbalances the tax paid.


Page 55


 The manufacturing sector, which provides diversity of employment, is being heavily hit by the worldwide recession so should remain taxed at 0%.  The 10% rate could be widened but should not jeopardise our current position. We must abide by the EU Code of Conduct and should not just apply the 10% rate to any business sector as this would be added to the price of the service provided.  Businesses that really want to put roots down in the IOM and will provide long-term economic benefits should be encouraged and rewarded with very low tax rates. Companies which provide little in the way of long-term benefit should be taxed highly. To achieve this, company profits should be taxed in proportion to their local economic contribution - ideally both their direct and indirect contribution. For example, a company that generates an annual profit of £100,000 but delivers in excess of £1million of local economic benefit should be subject to a low or nil tax rate. By contrast, a company with the same annual profit but which delivers less than £20,000 of local economic benefit should be highly taxed. On this basis, the 10% bank rate looks low as most banks have a high profit to economic contribution ratio. Against this, there is clearly an indirect benefit to the economy from having these banks here. By contrast, the 10% tax on Manx land and property seems misjudged as the profit to economic contribution on land and property ordinarily should be low and we should be encouraging investment in, and development of, the Manx property infrastructure. The wider financial services industry is comprised of both „home grown‟ businesses and multinational outposts. The former tend to have a low profit to economic contribution ratio and should be taxed at a zero or low rate. The latter tend to have high profit to economic contribution ratios and should therefore be taxed at a higher rate. The e-gaming industry has an exceptionally high profit to economic benefit ratio. In other words the economic benefit is very low relative to the profits that the company enjoys from being based here. This is mitigated by the fact that absolute economic benefit to the IOM is still high. Examples of potential tax bands applied on this basis are as follows: Ratio of Profit to Economic Contribution

Absolute Economic Contribution

Tax Rate

50%

or