‘You have a responsibility to pay your taxes’ (Theresa May, July 2016)
Five weeks to go until the election.
The commitment to tackling (aggressive) tax avoidance has been in the UK news again this week. The UK Treasury is proposing very tough fines for accountants and advisers who help people bend the rules to gain a tax advantage never intended by parliament.
In July, the new British Prime Minister, Theresa May, pledged to crack down on tax avoidance, saying ‘tax is the price we pay for living in a civilised society... It doesn't matter to me whether you're Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to fellow citizens and you have a responsibility to pay your taxes’.
Now I want to make very clear that I support the Isle of Man’s low rates of taxation and, if elected to the House of Keys next month, I will fight to retain these. It is the role of government to create the right environment for businesses (and people) to flourish. The level of personal income tax in the Isle of Man is very competitive with an upper limit of 20%. In the UK, income over £43,000 attracts a tax rate of 40% and this climbs to 45% for higher earners. Most of the Island’s companies have a tax rate of 0% compared with 20% in the UK. Business leaders need to be confident that our tax rates will remain stable at their current levels and I am committed to that.
But I do agree with Theresa May’s sentiments. We pay our taxes to provide pensions, infrastructure, police, firefighters, doctors, nurses, teachers and a range of other public services. We cannot have quality services if government does not receive adequate funding from our taxes. We cannot expect to prevent depopulation and attract workers if we do not have quality services. We have a responsibility to pay taxes. In the Isle of Man, we have very competitive tax rates to attract inward investment – but these taxes need to be paid. The UK Treasury estimates tax losses due to tax avoidance of around £3 billion per year. Some commentators think it is nearer £10 billion. We do not have a government estimate of the revenue lost due to tax planning in the Isle of Man.
In February this year, Treasury Minister Eddie Teare included the following comments during his budget speech in Tynwald: ‘I am advised by the Assessor that she is now frequently seeing tax planning around our Zero-10 regime. I do not consider this to be acceptable and I have asked the Assessor, when working with the private sector on proposals for a new tax strategy, to include devising simple ways to tackle this and other unfair behaviour.’
Now the Treasury Minister was not suggesting that this tax planning is currently illegal. This is about using legal loopholes to avoid liability to tax. Our Zero-10 regime (with most companies paying 0% tax) creates tax avoidance opportunities for Island residents that are simply not available in the UK.
On 24 June a Manx government press release announced that £4 million of undeclared income had been uncovered through the Island’s network of Tax Information Exchange Agreements. This is likely to lead to payments of additional tax and penalties. The Treasury Minister was quoted as saying: ‘It is right that everyone should pay a fair share towards the running of the Island’s public services and infrastructure’.
On 18 July this year, Mr Teare made the following comments on the Manx Radio Sunday Opinion programme: ‘One of the problems we have really is that at the moment people are managing their financial affairs to minimise their national health insurance contributions and also their tax liability. I have asked the Assessor of Income Tax in the last budget to have a look at this to see whether we need to alter the legislation to ensure that everybody makes a fair payment.’ I fully support Mr Teare’s comments and recognise his suggestion that legislation may be needed.
A former Assessor of Income Tax, Mark Solly, has raised issues of tax avoidance within the Isle of Man on many occasions. On 12 February last year, Mr Solly was quoted by Isle of Man Newspapers as saying that, ‘…the zero rate of company tax enables some residents, no matter how wealthy, who can channel their incomes into their companies, to pay no income tax at all… for the most part, only workers, small savers and pensioners are now required to pay Manx resident income tax calculated at 20 per cent.’
Mr Solly’s calculation of the amount of tax revenue lost to the Treasury was £125 million per year – and that did not include National Insurance losses. This enormous figure may be too high but it does add weight to the idea that we need to take steps to ensure that our taxation system is both fair and fit for the purpose of raising funds to pay for public services.
There are other taxation issues too. In his February budget speech Mr Teare raised the 'unfairness' of 'individuals who could reduce the amount of National Insurance they pay by paying dividends rather than a salary'. He concluded that 'more should be done' to address this. Another issue was highlighted by the extension of the 10% corporate income tax rate to major retailers, which appears to have brought lower tax returns than expected. How many company branches in the Isle of Man, retailers and others, earn profits here that are returned to UK parent companies where they pay 20% UK corporation tax? How much tax revenue is being generated for the UK, and other jurisdictions, from business taking place in the Isle of Man? We cannot afford to let this continue.
The best way to ensure that the Island’s tax rates can remain unchanged is to ensure that tax at the existing low levels is paid in full.
The Island’s current public tax strategy ends this year and the Assessor, when working on a new strategy, has been asked to place more emphasis on the fairness of our taxation system. Mr Solly has advocated the setting up of a 'high-powered Commission' to review options and make recommendations.
If elected next month I will seek to ensure that the new tax strategy is based on a thorough review of taxation with the aim of tackling the sort of tax and National Insurance planning condemned as unacceptable by Minister Teare, securing greater fairness and ensuring that we all make appropriate contributions to public services.
I call on other candidates to make the same commitment.
The economy has to work for everyone.