LAST week the Chancellor Alistair Darling unilaterally abrogated a customs and tax-sharing agreement with the Isle of Man (called the "Common Purse"), which has been in place since the early 17th century.
In doing so, Darling slashed £140 million off the Isle of Man's £572m annual budget – a brutal cut of 24 per cent in public spending for the Crown dependency's 78,000 inhabitants.
The previous week, the UK government also scrapped a reciprocal he
althcare arrangement with the Isle of Man and the Channel Islands. When visiting mainland Britain, their citizens will now have to have to pay for many NHS services they have previously received free. As a result of this one-sided action, the 300,000 UK residents who visit the Isle of Man each year will have to take out health insurance. What is the Chancellor up to – apart from piloting the sort of swingeing cuts we will all experience after the general election? The answer has to do with so-called tax havens.
Next month, the finance ministers of the G20 countries meet in St Andrews to discuss how to improve global financial regulation.
Top of their list – ostensibly – is how to stop certain small countries and jurisdictions providing flags of convenience, which allow international banking operations to evade proper regulation. (Not to mention the desire of cash-strapped treasuries in the bigger countries to stop potential revenues disappearing overseas in tax-avoidance schemes.)
As chair of the G20, Britain is anxious to show it is being tough on tax havens – hence the showdown with the Isle of Man.
Many will think these moves justified, even if they seem a little like imperial bullying. The Treasury claims that the British taxpayer subsidises the Isle of Man – which has a higher per capita income than the mainland – by some £230m a year.
The Treasury says that this overt subsidy has enabled the island to set its local corporation tax to zero for non-bank companies and only 10 per cent for financial institutions. This low-tax regime attracts banks that otherwise would locate in the City of London and pay taxes to the UK Exchequer.
Put that way, no-one could disagree. However, there are some qualifications. In the first place, the Manx parliament, the Tynwald, actively disputes the Treasury's claim that Britain financially subsidises the Isle of Man.
Under the Common Purse agreement, the UK and Isle of Man pay VAT and customs and excise duties into a notional single "pool" and take out each according to an agreed formula. What this means in practice is that the Treasury sets and collects the taxes and gives the Isle of Man a share (minus a charge for providing the island's defence).
The formula for dividing the revenues is complicated and hinges on how much income derives from UK visitors to the island. As with the calculation of tax income and public expenditure in Scotland, there is much gestimation and room for argument.
Suffice it to say, the Manx believe they generate a lot more in VAT than the Treasury makes allowance for and actually subsidise the mainland.
The Manx also argue that if the Treasury scraps the Common Purse agreement, then the UK economy will only suffer because the Isle of Man will be free to set all its own taxes and customs duties. Imagine if the Isle of Man sets its VAT much lower than the UK? Visitors will flock to the island not just for a holiday but also to buy cars, televisions and other big-ticket items. What will that do for Scottish car dealers?
Again, in a tax free-for-all, the Manx could also remove the present UK VAT on internet gambling, which the Isle of Man's chief minister, Tony Brown, thinks could bring in between £50m to £100m – money lost to the UK Treasury.
But surely it is worth playing hard ball with the Manx to improve banking regulation? Actually, the Isle of Man has gone out of its way to accommodate global rules on financial transparency and good governance.
Isle of Man finance director John Spellman points out that the island has recently signed a tax information exchange agreement with the UK as proof of its commitment to financial transparency.
It is hard to see what Darling will gain from tearing up long-standing agreements with the Isle of Man, apart from a collapse in mutual trust and the danger of provoking genuine tax competition.
