CUSTOMS and Excise bosses have rejected claims that the UK Government is 'subsidising' the Isle of Man.
Critics argue that the Isle of Man receives more back from the VAT sharing arrangement it has with the UK than it puts in — effectively providing a subsidy from the UK government.
The Tax Justice Network, which has spearheaded the campaign to close tax havens and reform offshore jurisdictions, claims this so-called 'subsidy' amounted to some 221 million last year.
But figures produced by Customs and Excise show this not to be the case — and that in fact the Isle of Man has made a net contribution in each of the last two years.
In 2007-08 the Island's share of VAT receipts was about 339m but the Island collected and so contributed some 420m to the pool.
In 2008-09 the Island's share of VAT is currently determined to be 338m and while our local collection is yet to be finalised it will again be expected to be in excess of that figure.
Under the agreement, formerly known as the Common Purse but now called the Customs and Excise Revenue Sharing agreement, VAT receipts collected in the Isle of Man and the UK are pooled and then shared out to an agreed formula.
That formula was changed in 2007 at the instigation of the UK to a less complicated method based on the relative economic growth of the two countries.
Not all indirect taxes are pooled. Air passenger duty, lottery tax and betting duty, for instance, don't go in the pool and, with fuel duty, the Island keeps what it collects.
Charles Cou, deputy collector in the Customs and Excise Division of Treasury, said: 'The fact is that the current sharing mechanism based on relative growth in national income between the IoM and UK is judged by both governments — and confirmed following a thorough review — to provide a fair and equitable share of the revenues as they relate to consumption of goods and services in the two territories.
'The Island together with the United Kingdom form a single VAT and customs area which provides that any individual businesses may only be registered in either the Island or the UK and not both.
'The fact that many businesses wish to register here for VAT and so deal with Isle of Man Customs and Excise rather than perhaps HM Revenue and Customs, possibly due to the high quality of service we provide, simply means that we physically collect and or refund the VAT they declare.
'In broader economic terms it can also be seen that the Isle of Man is not being subsidised by the UK but rather contributes to the economy of the UK.' Mr Cou pointed out many VAT-registered businesses based in the Isle of Man supply goods and services that are consumed off-Island — so that VAT is paid in the UK but collected here.
Moreover, very few goods and services bought here are actually manufactured or produced in the Isle of Man and, while the VAT on the final consumption is paid by the Island's consumers, it is physically collected and declared by the provider in the UK, hence the need for a VAT sharing mechanism.
'Thus it does not mean that the VAT we physically collect belongs to the Island or represents what our share should be and this is also the case for the United Kingdom,' said Mr Cou.
And he said that, as is the case in the UK tax profile, the lion's share of VAT collected was due to just a few traders based in the Island.
He said the UK had wanted to change the old mechanism because it believed it no longer adequately reflected current economic and technological developments in both territories, was too complex and may be prone to unexpected distortions.
Insisting there was no subsidy, he said: 'It's just not the case. Why on earth would the UK agree to a totally reviewed and updated mechanism that provided any form of subsidy to the Isle of Man or conversely one where we agreed to the Island subsidising the UK?'
He said the VAT sharing arrangement gave the Island stability as it provided a steady and more predictable revenue stream.
However, recession in the UK, plus the 2.5 per cent cut in the VAT rate, had the effect of reducing the revenue stream, an outcome which would have been the same under both the old and current sharing mechanisms.
Treasury officials were due to meet this week to discuss the impact falling VAT receipts will have in the Isle of Man.
VAT arrangements have been in place between the IoM and UK since the Revenue Returns Act of 1894. The 'Common Purse Agreement' was introduced in 1957.