VAT grab: Craine confirms it’s £75m

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TREASURY Minister Anne Craine has confirmed the £75 million VAT grab from the UK.

The figure, as predicted in the Isle of Man Examiner, will come on top of £114m from the first VAT bombshell.

Mrs Craine revealed that if the Manx Government did not reach an agreement, the UK Treasury was prepared to terminate the customs agreement.

The new revenue sharing formula looks at individual economic sectors, and whether or not they are VAT exempt, rather than being based on total national income as previously agreed.

Taking into account negotiated transitional payments, moving to the new formula will mean reductions in projected annual revenue of £30 million in the current 2011/12 financial year, £50 million in 2012/13 and £75 million thereafter.

In the current financial year budgeted total net spending on public services is £533 million. The Manx Government is already working through a budget rebalancing strategy to deal with a £114 million shortfall in projected annual income following the last revision of the revenue sharing arrangement in 2009.

Here is Mrs Craine’s statement in full:

At the outset I can confirm that the Customs and Excise Agreement between the Isle of Man and United Kingdom Governments has been secured.

To achieve this result it has been necessary to agree to a revised Revenue Sharing Arrangement which is part of the overall Agreement.

The Isle of Man Government firmly believes that the retention of the Agreement is important to the long term economic and financial interests of the Island and I am confident that the Agreement will continue to serve the Island and its people well.

The Revenue Sharing Arrangement within the Customs and Excise Agreement was last amended in October 2009, with the previous amendment being two years prior to that. Adoption of the 2009 Arrangement required revision to bring the Island’s method of calculating its Gross National Income, or G.N.I., into step with that of the United Kingdom.

In early October 2010, HM Treasury advised the Isle of Man Government that it wished the Revenue Sharing Arrangement to be further amended and to enter into negotiations on the details of such amendment.

The reason given was that HM Treasury no longer accepted that the arrangements delivered to the United Kingdom a fair and equitable sharing of V.A.T. and other duties.

HM Treasury took the view that the structures of our economies were so fundamentally different that the continued apportioning of indirect tax revenues on the basis of aggregate national income was no longer acceptable.

HM Treasury made it clear that unless a new sharing arrangement could be agreed, it was ready to give notice to terminate the Customs and Excise Agreement. As I made clear earlier, that would not be in the Island’s overall best interests.

The Isle of Man Government did not accept that the existing basis for the Revenue Sharing Arrangement was so seriously flawed, that it required amendment. However, the Isle of Man Government acknowledged that this was the firmly held view of the United Kingdom Government and as such the Island accepted the need to enter into negotiations for the amendment of the Revenue Sharing Arrangement, in order to secure the continuation of the Customs and Excise Agreement.

Since last October Government has been in extended negotiation with HM Treasury on all aspects of the Revenue Sharing Arrangement. Also during this period the opportunity has been taken to have meaningful discussions, expressing our views and concerns, with the Deputy Prime Minister Nick Clegg, Lord McNally of the Ministry of Justice as well as Minister David Gauke, the Exchequer Secretary to HM Treasury.

Following almost 10 months of detailed and robust negotiations, a new formula, known as the Tax Base Measurement Method, or T.B.M.M., has been agreed.

The new T.B.M.M. sharing formula still focuses on the Island’s economic activity as the foundation of the Isle of Man share of the common duties. Where it differs from recent sharing formulae is in looking at our economy in terms of national income on a sector-by-sector basis rather than in totality. The reasoning behind this new approach is that in order to produce an Isle of Man share that is deemed “fair” by the United Kingdom Government, there is a need to recognise that different sectors have different exposure to V.A.T. and hence different capacities to generate V.A.T. revenues. If the Isle of Man was just a scaled down version, a microcosm of the United Kingdom economy, this distinction would not matter. But our respective economies are different in structure. Most importantly for the purpose of the new approach, we are proportionately more structured towards V.A.T. exempt activity than the UK.

Rather than relate the Isle of Man share of V.A.T. and other duties to a total measure of our national income, for example G.D.P.(Gross Domestic Product) or G.N.I., the TBMM recognises the different V.A.T. contributions arising from different economic activity and so calculates the Isle of Man share on a sector-by-sector basis and then adds these together to produce the Isle of Man total revenue share. At present the absence of certain key Isle of Man data means that the initial T.B.M.M. formula will by necessity use UK equivalent figures in parts. Work such as full household and business expenditure surveys will be initiated as a priority to enable the use of Isle of Man figures in the future and this work will take place over the next 2 years. Ultimately the Isle of Man will have the choice of whether to then switch from using United Kingdom data to Isle of Man data.

In essence, under the previous formulae the Island’s V.A.T. share increased on the basis of the overall growth in our national income, regardless of whether the sectors generating that growth were V.A.T. exempt or not. The new formula, by calculating the V.A.T. share on a sector by sector basis, takes into account whether or not a sector is V.A.T. exempt and so only generates additional V.A.T. revenues when V.A.T. is chargeable on sales.

Similarly the Island’s share of the other duties, will also reflect these changes.

An immediate issue for us all is the financial implications of the new Arrangement. Whilst these can only be estimates at this stage and the final impact will depend on our future economic performance, I will try to present the likely impact as simply as possible.

The new Arrangement will result in a reduction in the Isle of Man share of V.A.T. and shared duties of £75 million per year. The U.K. has agreed to make transitional payments to the Isle of Man in this and next year of £45 million and £25 million respectively. This means that in simple terms the new Arrangement will reduce our shared revenue by £30 million this year, £50 million in 2012-13 and £75 million a year thereafter.

This is a significant and most unwelcome reduction in our revenues, particularly on top of the reductions resulting from the last revision to the Revenue Sharing Arrangement. In effect it is a further 14% reduction in our annual income.

Government’s success in obtaining agreement for transitional payments of £45 million and £25 million in the current and following year, will allow for a measured and managed change. However, Government has no intention of trying to mask the fact that this change will mean challenging times for the Island into the future, and further it will require tough decisions to be made by the next Tynwald and Government.

We must remember that we do have a strong economy, we have the buffer of reserves to draw upon where necessary and we have a continued determination for the Island to develop and prosper.

Government fully appreciates that the initial reaction to this revision and its financial implications for the Island will be one of concern, anger and may well create some uncertainty. So I will set out clearly and plainly, why we have agreed to the new TBMM Revenue Sharing Arrangement.

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

The Customs Agreement itself provides for the Island’s continuance as part of the E.U. V.A.T. territory and so continues to offer us many opportunities which are not open to competing international business centres.

The continuation of the Customs and Excise Agreement benefits Island business, residents and Government. Without the Agreement:

business would suffer increased administration, compliance and cash flow costs as they would need to separately register and file indirect tax returns and customs declarations in both territories as trade with the United Kingdom would become imports and exports.

we would suffer the increased costs of setting up customs barriers to identify revenues on imports that would otherwise be lost whether that be through mail order, internet purchases or residents on shopping trips to the United Kingdom.

residents would be faced with the probability of customs barriers when they travelled and the possibility of double taxation on their purchases from the United Kingdom unless they carefully followed and complied with the United Kingdom’s retail export scheme.

These are just a few of the implications of not having the Customs and Excise Agreement -- it is a river that runs deep.

Turning to the financial implications, the broad strategy for rebalancing the Budget, as set in last year’s Pink Book remains valid, although in future Budgets the relative balance between spending reductions, taxation revenues and use of Reserves will need to be adjusted.

Clearly there will need to be continued and even more rigorously applied downward pressure on public spending, including consideration of the future scope of Government.

It is too early to be precise as to how this will be achieved and over what period. That will require the refinement of Government’s policies and have to form part of ongoing Budget considerations with Departments and other public sector bodies.

However, it will be Government’s ambition to continue to do this within the broad principles we have previously set out, namely to protect where possible front line services and the more vulnerable in our society.

It is understood that in a situation like this, it is natural that the thought and talk of abrogation might arise. But let me emphasise, that Government is satisfied that the Island’s immediate and long term economic interests are best served by the continuation of the Customs and Excise Agreement with the United Kingdom, and those interests have been protected by the acceptance of the new Revenue Sharing Arrangement, even with the significant reduction in revenues that it brings.

There will be those who say that Government has not fought hard enough, that we should have refused to accept any revision of the Revenue Sharing Arrangement, or that more robust political lobbying in the United Kingdom could have improved our position. To those I would say, the Isle of Man Government has negotiated robustly in a much harsher economic and financial world than most people on the Island have experienced. The world has changed; we have to get real. The present financial situation within the United Kingdom is serious and their Government is substantially reducing Department budgets and fund allocations to Local Authorities. To expect sympathetic or preferential treatment from the UK Government, especially in the current economic climate would be naive.

What Government has done is to work hard over the best part of a year to get the best deal realistically available for the Island and to secure a stable foundation from which to rebalance our public finances. We have the resource and determination to plan, invest, and manage both our economic development and to sustain our core public services.

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

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

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