Island based tax expert Paul Hotchkiss, explains why he believes it is time for innovation on tax.

The Isle of Man’s current tax system has not changed significantly since introduction in 1918 when we inherited the then UK tax system and tweaked it.

It has served us well and currently it satisfies the EU and it is no longer considered ‘harmful’.

Good news but the global view on business taxation is constantly evolving so more challenges may come.

The island also operates a VAT sharing agreement with the UK. This arrangement sees provisional sums agreed which are then subject to later adjustment.

This is a five-year process.

If VAT rates go down less VAT overall in the pot means less to share.

Tax changes elsewhere therefore have an impact on the island.

The pre-Covid picture

Pre-Covid-19, our tax system was arguably fragile both internationally and domestically. However, the island has thrived year on year but not without its challenges.

The impact of Covid-19

The island still has substantial reserves; however, these reserves have now been hit by the impact of Covid. Replenishment of reserves requires new businesses and the retention of existing businesses. This is a big ask in a competitive global economy where tax advantage, rightly or wrongly, is often central in decision making.

Turning to solutions

Do we need to consider a new system? Of course, the Isle of Man needs revenue and to continue to be attractive.

Does this come from the current tax system or new taxes? The natural reaction is to tinker with what we have, but before we make a decision, we need to articulate a clear vision of the future setting out what we are trying to achieve.

A five to 10 year plan articulating that future, setting out the businesses we want to attract, retain and the level of growth and expenditure needed to meet the vision. Then set taxes to achieve the vision. 

So what options are available to us?

Some countries have been creative in tax policy: Estonia, and Georgia for example.

A unique approach for the island is something we should strive for. The answer does not need to rest with a form of corporate tax either. There are various approaches we could take: financial transactions tax, progressive consumption tax and expenditure-based tax are options.

Conclusion

We have a fantastic opportunity to redesign our economy. However, a clear uncluttered vision is necessary to get public and political buy-in. We have little idea what other countries will do to their own tax systems that may impact us but the Isle of Man may be in their sights. We ignore this at our peril.  

With global pressures on taxation policy businesses are more likely to choose countries with stable and acceptable tax systems over countries where their systems are constantly under pressure.

Do we want to be seen as progressive, innovative and attractive?

Or will we be seen as mediocre, spending our time fending off challenges from other countries as we find our USP?

It is time to innovate and bury the gremlins of the

past.