The Treasury says it has ‘a range of plans’ in place for a potential reduction in tax revenue should Liz Truss win next week’s Tory leadership contest and follow through on her pledge to cut VAT by 5%.

Such a cut would hit the Manx government hard. Most tax revenue comes from VAT – and a 5% cut in VAT would mean the government would lose millions of pounds in revenue almost overnight.

Under a revenue-sharing agreement, the Isle of Man charges the same VAT – but the VAT rate is set in Westminster with no input from Tynwald.

Treasury Minister Dr Alex Allinson told the Manx Independent: ‘There are a range of plans to meet such eventualities, but sudden reductions in revenue without the ability to respond through savings in expenditure would need to be met by utilising reserves.

‘It would be difficult for me to comment on the policies pursued by the next UK prime minister, but these will need to be analysed and factored in to our calculations for next year’s budget’.

The agreement prevents the need for customs barriers between the UK and the island. Duties on goods and services consumed in the island can be collected in the UK, and vice-versa for those consumed in the UK which can be collected here.

Guernsey and Jersey set their own purchase taxes.

The island’s tax revenue was last dealt a severe blow in 2009 and 2011, when the UK government revised the Customs revenue sharing arrangement twice.

It resulted in a loss of £200m in VAT revenue, which represented a third of government income at the time.

The island’s share of revenue from the deal with the UK fell from a high of £464m in 2006-07 to a low of £252m in 2012-13.

Since then, VAT income did rise to near pre-2009 levels. In 2019-20 VAT income was £402m. However in the financial year 2020-21, this fell to £296m.

The government says that income from the Final Expenditure Revenue Sharing Arrangements (FERSA) had been lower than what was budgeted due to ‘potential adjustments resulting from Covid-19’.

It says that the impact of the pandemic on income tax and VAT receipts had resulted in the government’s financial position being £72.4m worse than what was budgeted for.