Isle of Man Budget 2020 | Tax Talk

Overview

The theme of Minister Cannan's fourth Budget delivered on Tuesday was a continuation of the five year plan, namely the implementation of solid fiscal management designed to tackle a number of short to medium-term challenges that the Island faces: the structural deficit, optimising annual receipts whilst controlling expenditure, and encouraging economic growth.

He highlighted an improvement in the expected budget surplus for 2019/20, from a budgeted £2m to a probable £11.1m surplus, generated principally by better than expected tax receipts.

The provisional budgets for 2020/21-2022/23 suggest increased surpluses in the earlier years, moving towards break-even by 2023/24, albeit there is continued reliance on transfers from reserves to plug what would otherwise be annual deficits.

The public sector pensions deficit remains a longer term concern - quantified at around £40m per annum - although good news regarding the Island’s VAT and duty sharing agreement with the UK may go some way to alleviating the issue.

A new five year capital expenditure plan for 2020/21 to 2024/25 commits £541m to a variety of projects. Significant spending in 2020/21 and 2021/22 in particular will deplete the capital account to a projected level of around £15.5m by 2024.

In international matters, The Treasury Minister reported that the Isle of Man had implemented all the OECD’s BEPS initiatives and had successfully dealt with seven external reviews covering a wide range of matters. It seems unlikely that the international pressures will abate over the coming years, but the Isle of Man is committed to ensuring that its reputation is upheld, irrespective of what international initiatives might follow.

Rates & Allowances

There was a further uplift in the personal allowance, from £14,000 to £14,250, the fifth consecutive year of increase. The theme of taking more taxpayers out of the charge to income tax continues with a 50% increase in the tax-free allowance since 2015/16.

Otherwise, income tax rates, bandings and allowances remained unchanged from 2019/20.

View Isle of Man Tax Rates 2019/20

National Insurance Contributions (‘NIC’)

Increases in both the secondary threshold and the upper earnings limit for Class 1 national insurance contributions (‘NIC’), the income banding on which employees suffer NIC at the 11% rate, provides further relief for low to middle income earners, whilst the higher-paid are slightly worse off. The Class 1 banding changes are replicated within the Class 4 NIC lower and upper earnings limits for self-employed individuals.

Tax Incentives

The annual tax cap amount has increased to £200,000 per annum for 2020/21 (2019/20: £175,000).

The tax cap election requires that the taxpayer commits to five tax years of the fixed annual sum, although a newly introduced rule in 2020/21 allows it to be fixed for ten years, the benefit being that the taxpayer fixes the annual amount due from the outset, when the election is made, and is not impacted by future increases in the annual amount due.

An initiative which was introduced back in 2003, known as the Key Employee Concession (‘KEC’), which was part of a number of initiatives designed to attract new business to the Island, is now codified. The KEC allows those key employees who are involved in the relocation of businesses to the Isle of Man – those which are strategically important for the Island’s economy - to be taxed on Manx source income only for their first three years on the Island.

The VAT Revenue Sharing Arrangement

In his speech, the Treasury Minister referenced recent discussions with HM Treasury regarding the VAT Revenue Sharing Arrangement.

There have been various revisions to the VAT Revenue Sharing Arrangement over the last decade or more, resulting in a reduction in the Isle of Man’s share of VAT and duties. The current arrangement, known as the Final Expenditure Revenue Sharing Arrangement (or ‘FERSA’), has been in place since 2013/14.

The calculations under FERSA are designed to identify the irrecoverable VAT and duty incurred on final expenditure on goods and services purchased, used or enjoyed in the Island, including those acquired online; that is, the amount of VAT and duty that is ultimately suffered by residents of the Island.

In the years since 2013/14, FERSA has allocated a provisional share of VAT and duty revenues, calculated on the base data and indexed at 4.5% per annum until the date of the latest survey, which was carried out over the course of 2018/19. The aim of the recent survey was to obtain comprehensive and reliable data for use in discussions with HM Treasury.

The Treasury Minister reported that the most recent calculations have been agreed with HM Treasury and are broadly in line with the previous methodology employed. This has allowed for the release of a £44m provision which had previously been made in the event of an unfavourable outcome.

And Finally…

…Treasury continues to peddle the idea that we would all be better off cycling to and from work. Employers are now able to provide employees with bicycles and related safety equipment up to a value of £1,200 without the employee incurring a benefit-in-kind charge.