Isle of Man costs UK at least £1.5 billion a year

Isle of Man costs UK at least £1.5 billion a year

by Richard Murphy

IoMtoday, published by the Isle of man press carries the following story:

CUSTOMS and Excise bosses have rejected claims that the UK Government is ’subsidising’ the Isle of Man.

Critics argue that the Isle of Man receives more back from the VAT sharing arrangement it has with the UK than it puts in — effectively providing a subsidy from the UK government.

The Tax Justice Network, which has spearheaded the campaign to close tax havens and reform offshore jurisdictions, claims this so-called ’subsidy’ amounted to some £221 million last year.

But figures produced by Customs and Excise show this not to be the case — and that in fact the Isle of Man has made a net contribution in each of the last two years.

In 2007-08 the Island’s share of VAT receipts was about £339m but the Island collected and so contributed some £420m to the pool.

I am, of course, the source of this criticism of the Isle of Man. Please follow the link to see exactly why I say the UK provides a heavy subsidy to the Isle of Man - something that is never denied when I am in discussion with officials in London by the way.

But now we have new data which suggests that in fact the IoM collects more VAT than it receives back from the Common Purse agreement (again, follow above link for explanation). We do at least agree on the figure of £339 million – but it is now claimed that this is an underestimate of VAT collections on the Isle of Man.

Let’s consider this for a minute. Do so remembering these facts (updated since I last wrote): that the Gross Domestic Product of the Isle of Man is now £1.8 billion according to the latest data I can find from the IoM government. Even the CIA do not seem to have more up to date data than that. That for the UK is £1,460 billion, in contrast (computed for March 2009, from data here).

In 2008/09 the Isle of Man expects to collect £339 million in VAT - 59% of its total government income of £574 million. This is 18.8% of IoM GDP.

In the UK the identical VAT system (for all practical purposes) collects £83 billion a year - or 5.6% of GDP.

That means the IoM, which has reason to have a much lower VAT collection rate because of the very large size of its exempt VAT outputs in the financial services sector collects 13.2% more of its GDP in VAT than the UK does using an identical (indeed, shared) system.

From that I impute that over £230 million of the VAT receipt in the Isle of Man is subsidy and not derived from real economic activity. The Isle of Man press quote a lower slightly earlier estimate. The ball park remains the same.

Note also that the population of the Isle of Man is 76,500. That of the UK is 61.1 million. That makes IoM GDP per head about £23,529. That in the UK is, by chance, £23,701. According to the CIA this is about right. They say Isle of Man GDP per head is $35,000 pa and that in the UK is $36,600. Remarkable consistency there then.

But, apparently each of those people in the Isle of Man pays net £5,490 of VAT according to the latest Isle of Man data that £420 million a year of VAT is collected. That requires them at 15% VAT rate to spend £36,600 a year each on VAT chargeable goods (priced net of VAT, or £42,090 in total). In contrast in the UK each person pays net £1,347 each – requiring spending of £8,982 a head each (£10,329 gross) on VAT chargeable items.

Now I have to say that the UK data appears entirely plausible; take food, taxes, rents and mortgages and so on out of account and I think that level of spend per head looks plausible. There is a sanity check inherent in this data.

And I have to say this: to suggest that each person in the Isle of Man spends 178% of their annual income on VAT chargeable items a year is just plain straightforwardly utterly implausible. I hate to say this: but at face value the IoM data is simply wrong. How can people spend 178% of their income on VAT chargeable goods in the IoM? They can’t: that is obvious

So what are the explanations. They appear to be:

1) The IoM data is wrong. It doesn’t appear to be far out on GDP: there’s a sanity check on that. So it must be the VAT data that is wrong. I find it incredible that the £420 million figure is right. I have a strong suspicion that is gross for a start i.e. before claims for repayment from traders for input tax.

2) I’m right: easily the most plausible explanation. It is well known that the Common Purse was meant to subsidise the IoM. Why is it still not doing so?

3) The IoM has attracted a massively artificial tax base and these activities are not in any event taking place in the island, the VAT supplies are simply being ‘booked’ from there in classic tax haven fashion. They are actually, in that case, made in the UK but the profits are artificially booked in the IoM. In that case it remains the case that the UK is still subsidising the IoM with VAT because this would mean the VAT was always due in the UK in the first place and would have been collected here if, for example, the IoM operated VAT as does any other distance seller.

4) If option 3 is right there is another factor to consider: not only is there a VAT subsidy there is a corporation tax loss too. Let’s assume, generously, that the VAT profile of the IoM is the same as the UK, when we know it should actually collect less because of the profile of the financial services sector. And let’s assume the £420 million figure is right for a minute. In that case the implied VAT to GDP ratio is 23.3%. It should be 5.6%. That implies an excess rate of 17.7%. In this case that means about £320 million of excess VAT is collected. This is net, I’ll assume, of trader claims for input so a good approximation to profit – which is not being earned by staff in the IoM as we have already allowed for their normal rate of return in the calculation and so must not do so again. That means at a 15% VAT rate some £2.1 billion of excess profit must be declared in the IoM to justify this level of VAT on turnover that is not actually located there in reality. Let’s reasonably assume that this should be subject to 28% tax in the UK where the supplies must be taking place for the charge to arise. This sum of £2.1 billion is probably not taxed at all in the IoM. That’s a tax loss to the UK of £588 million.

So now we can say that the new data revealed by the Isle of Man proves first of all that the VAT subsidy of over £230 million from the UK government to the Isle of Man is undoubtedly real – because the VAT claimed to arise there cannot possibly relate to economic activity really located in the island, and that the corporation tax loss arsing from the artificial relocation of that VAT turnover to the Isle of Man is costing the UK not less than £588 million a year.

In other words in the case of just two UK taxes VAT and corporation tax – abuse promoted by the government of the Isle of Man costs the people of the UK a combined minimum of about £820 million a year.

But then we must add on the cost from the Isle of Man refusing to exchange data as it should under the European Union Savings Tax Directive. Directly this refusal costs at least £27 billion a year. Extrapolated, quite reasonably, using the methodology in the link, and the loss to the UK from income tax abuse through Isle of Man based structures is likely to be not less than £700 million a year.

Add this together and the total loss to the UK from allowing the Isle of Man to operate as a tax haven – an activity we directly subsidise – is not less than £1.5 million a year.

So much for the Isle of Man’s government claim that it pays its way. Anything further from the truth is very hard to imagine.