Tax consultant Paul Hotchkiss, managing director of Hotchkiss Associates, gives his view on the recent Manx Budget

Alfred Cannan’s 2021 Budget was a very conservative budget recognising the need for a ’steady as she goes’ approach whilst many businesses seek to put themselves back into their pre-Covid-19 position.

Having said this whilst the reserves have been hit the mere fact that we have historic reserves invested and they have delivered gains from that investment has meant the overall reserve position has remained steady.

As an island we are incredibly lucky to be in this position and for the markets to look on our investments favourably.

We are also lucky that the Government has not had to resort to borrowing like many other countries (although a facility to do so existsâ?¦just in case).

Nevertheless, if markets move against us in the future then we may be in for further economic shortfalls like other countries are currently experiencing.

It cannot be denied that in the future harder decisions may need to be made but for now an element of calm persists.

Having said that Mr Cannan is not standing still and at this time of reflection he is also looking to develop the foundations for the future economy in the form of a Strategic Economic Framework assessment: this is a good thing.

The cynics may say this budget was delivered to a backdrop of a general election in September.

There is no doubt that this budget does not tackle any of the financial pressures the island could experience in the long term such as the public sector pension deficit or the impact of changes to the VAT sharing agreement.

However, it would be unwise to take these matters into consideration at this time: these matters are for another day, this budget is about recovery.

Having said that whilst for some businesses and individuals the budget on the whole perhaps lacks lustre, there are some matters that have caught our attention which are worth of mention.

No tax rises but a freeze to the personal allowance

In this Budget, no tax rises were announced and the National Insurance holiday scheme (which is aimed at attracting new people to take up employment and residence in the island) has been extended by a further year.

This is welcome news but Manx residents will not see an increase in the personal allowances or any increase in the thresholds used for national insurance purposes in the 2021/22 tax year.

This move will mean that most taxpayers end up paying slightly more tax next year. (The ones who are lucky enough to receive an inflationary pay rise from their employer).

National Insurance

Review

Many will wonder how the island will pick up the hefty tab caused by a global pandemic.

One clue was tucked away in Mr Cannan’s speech, a public consultation on National Insurance is to shortly be released and we expect that the certain matters may be examined as part of this process which may result in more NI being charged:

lCompanies that pay shareholders the minimum salary to qualify for NI but high dividends.

In future NI might be imposed on dividends.

l Companies that pay their shareholders differing levels of dividends on different classes of shares.

The tax office view is that shares with the only differentiator being dividend entitlement will be considered as being of the same class.

This may mean dividends will be treated as earnings for NI purposes.

lEqualising the contributions paid by the self-employed so that they are in line with those who are employed. Rishi Sunak warned to expect such a move in the UK when he provided financial assistance to the self-employed.

Extending the scope of the Economic Substance rules to partnerships

Currently only Isle of Man tax resident corporate taxpayers are in the scope of the Manx Economic Substance rules.

However, Mr Cannan announced in June that a new order will be brought to the Court to extend the scope of the rules to include partnerships (and LLC’s).

This would see the island ’harmonise’ the Economic Substance rules in line with jurisdictions such as British Virgin Islands who already apply their rules to partnerships. Further details of this measure are expected in the near future but one question will be whether Jersey and Guernsey also adopt this approach as to date all three crown dependencies have adopted the same legislation and guidance (ie taking a ’safety in numbers’ approach).

The future pressure that our 0/10% regime is likely to come under

In his Budget speech Mr Cannan recognised that the island’s 0/10% (zero corporate tax rate) regime is likely to come under close scrutiny from both the OECD and the EU who have both already made noises that have alerted the Isle of Man Government about the change in mood towards low tax jurisdictions. He said:

’also honourable members will be aware that recently Members of the European Parliament adopted a resolution to change how the European Union’s list of non-co-operative tax jurisdictions is established.

Although the vote to adopt the resolution has no legal impact it will add further political pressure on the European Union Commission and European Union Member States.

The Assessor is also closely monitoring the ongoing work of the OECD (Organisation for Economic Co-operation and Development), developing new international standards, such as the work designed to address the challenges arising from the digitalisation of the economy. This concerns new rules to determine taxing rights between jurisdictions for digitally-intensive multinational business and introduces the concept of a global minimum effective tax rate.

Mr President these changes to international tax standards are complex and time-consuming; however, I remain confident that the island will continue to adapt to meet these international challenges. This will also form a core plank of our economic framework assessment.’

The island’s 0/10% regime was introduced on April 6, 2006 and it is becoming increasingly obvious that there will be significant pressure applied to the island to possibly revisit the rate of corporate income tax .

Strategic economic framework

It is also noted that the Government is undertaking a ’strategic economic framework assessment’.

Mr Cannan said: ’The Economic Recovery Group has commissioned a new Strategic Economic Framework to provide the platform to drive forward the island’s economy over the next 5 to 10 years. This core piece of economic analysis and assessment will let us truly understand how each part of the island’s economy functions and interacts with Government and other sectors.

’The point of this strategy will be to be bold, to look across a wide range of opportunities and identify the opportunities where the Isle of Man can take advantage, or even lead the way on. It will draw on experts across a range of sectors, bringing views and analysis to help the island find its place for the next five to 10 years and beyond.

’This framework is being developed so that future administrations can understand the economic levers available to them and make informed decisions on the choice of policy options available, ensuring the island has good, well-paying jobs that are the bedrock of our economy and finances. There will be proper engagement with a wide range of businesses and individuals and I expect this process to commence within weeks.’

This is welcomed and eminently sensible given the potential pressures we face: we need an economy for the future to meet today’s needs not one embedded in the past.