Kevin Cowley, tax partner, partner, PwC Isle of Man, looks at the UK Budget.

In the recent Isle of Man Budget, Treasury Minister Alfred Cannan delivered a message of ‘stability and resilience’.

He confirmed continuing government support to sustain the Isle of Man economy, an economy which has struggled but still managed to deliver sustained periods of strong productivity.

He confirmed taxes in the island would be left alone for the time being; now not being the time to seek to revenue raise.

The UK economy though, has had a much tougher time over the last 12 months and UK finances are in a perilous state with borrowing levels at record peacetime levels. The big question was how would UK Chancellor Rishi Sunak react in his 2021 UK Budget? The Chancellor set out three key Budget objectives;

Protect the economy;

Support the (economic) recovery; and

Repair public finances.

While not mutually exclusive, the tension between the first two of these aims and the latter is clear. This didn’t dampen the Chancellor’s spirits though, as he claimed that the measures announced will see the UK economy back to pre-Covid levels by July 2022. The plan to achieve this is one of give (now) and take (later).

In the immediate term, as well as confirmation of continuing financial support for Covid impacted businesses and employees, there were some short term tax boosts announced, most notably:

An extension of the current Stamp Duty Land Tax (SDLT) holiday for properties valued at less than £500,000. Set to end on March 31, 2021, this relief was extended in full until June 30, 2021, with a phased return to ‘normal’ levels by September 30, 2021;

Confirmation that the pre-election promise of a ‘triple lock’, guaranteeing no increases to income tax, national insurance and VAT, would be honoured;

No changes to Inheritance Tax (IHT), squashing the rumours of a widespread overhaul; and

An extension to both the VAT reduced rate introduced for the tourism and hospitality sectors and the VAT deferral scheme announced this time last year. Any VAT deferred last year can now be paid in instalments rather than a single payment due at the end of this month.

welcome updates

From an Isle of Man perspective these were mostly welcome updates. In particular, the Isle of Man VAT system mirrors that of the UK and so the positive changes announced along with the confirmation on the main VAT rate, were very welcome news for Isle of Man businesses and consumers.

In addition, many Isle of Man residents already have, or are seeking to acquire, interests in UK property which could be impacted by any SDLT and IHT changes.

So far so good. But payback, with steps to restore the Government’s finances, will follow once the UK economy has re-established itself.

As noted, with an expectation of pre-Covid economic levels restored by July 2022, the key tax change was a significant jump in the UK’s Corporation Tax rate deferred until April 2023.

The current 19% rate will jump to 25% for companies with profits in excess of £250,000. The 19% rate will remain for small businesses though, defined in this case as those with profits below £50,000.

This latter point will be significant for Isle of Man companies invested in UK rental property. Provided annual rental profits are below £50,000 then the current low rate of UK corporation tax will continue to apply to those profits.

There was also a confirmation from the Chancellor that although headline rates for income tax and capital gains tax will not be touched, his hands being effectively tied under the triple lock as noted above, he was going to freeze the bands and allowances for these taxes for the next five years.

In practice, as wages and asset prices increase with inflation, keeping bands and allowances static means more people will pay taxes at higher rates.

For example, the freezing of the income tax free personal allowance alone could mean a 40% taxpayer paying an additional £400 of tax a year by 2026, assuming modest wage growth of 2% a year.

Whether the Chancellor has genuinely managed to ‘square the circle’ in promoting growth whilst boosting government finances will remain to be seen.

The key will be to stimulate economic activity and growth in the UK and if that is achieved, it will be good news for the Isle of Man as our own economy continues to be heavily influenced by that of the UK. There are certainly interesting times ahead.