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Douglas, ISLE OF MAN - The latest UK budget has
now been released and not surprisingly it has some potential
ramifications for offshore jurisdictions such as the Isle of
Man.
Spending cuts rather than tax rises will be the UK
government's favoured means of addressing the deficit, with
around 77% of the deficit reduction anticipated to come from cuts
in spending.
UK Chancellor George Osborne's "tough but fair"
Budget includes increases in both VAT and capital gains tax, a
freeze on public sector pay for most workers and a major reform of
welfare benefits and will have a big impact on:
Individuals
pensions and savings
trusts
businesses
VAT and indirect tax
The Chancellor laid the blame for the tough measures firmly at
the door of the previous Labour Government, repeatedly referring to
the changes as "unavoidable" in order to create "a
new balanced economy". In contrast to countries like Greece,
this will seem to analysts as a direct and decisive attack on the
country's eye-watering deficit by 2015/16 as he seeks to raise
an additional £40 billion.
There was some good news, notably the re-linking of pensions to
earnings and the surprise increase in capital gains tax
entrepreneurs' relief threshold from £2 million to
£5 million. The Chancellor also announced plans to reform the
corporation tax system with lower rates, simpler rules and greater
certainty to enable companies to invest, attract foreign investment
and boost growth. In the meantime, the standard rate of corporation
tax will be reduced progressively over the next five years to 24%
by 2014. For smaller business, there will be a reduction to 20%
from April 2011. Worries of a potential increase in Capital Gains
Tax to 40% prior to the budget have also proven to been eased, with
a comparatively modest increase to 28% for only high earners.
The Chancellor stated that "the failures of the banks
imposed a huge cost on society", adding that banks should make
a more appropriate contribution reflecting the many risks they take
and announcing the introduction of a bank levy from January
2011.
So what does it mean for the Isle of Man?
Initially, the most significant outcome from the emergency
budget will arise from the increase in VAT to 20%. Shoppers in the
high street will notice price increases from 4 January 2011 and
unless retailers absorb part of the added cost to the consumer, we
can expect to see high street prices to increase by approximately
2%.
While this is bad news for consumers, the Isle of Man Treasury
will be welcoming the change.
The Treasury's largest single source of income is VAT and
the increase in the rate of VAT means a much needed boost in
Government income forecasted as an additional £25 million per
annum.. Unfortunately, this increase in government revenue will not
be enough to fill the entire gap left by the recent re-structuring
of the UK/IOM VAT-sharing agreement so the Isle of Man Government
still may be forced likewise to make cuts of its own.
And while the hike in Capital Gains tax to 28% for high earners
may not directly affect the Isle of Man, it could be the additional
push that wealthy individuals in the UK need to consider relocating
to a low-tax jurisdiction (in case the 50% top rate of UK income
tax wasn't enough already), again potentially boosting
government receipts. Capital gains are not taxable in the Isle of
Man which can mean huge savings for anyone relocating to the
Island.
If a mass exodus of wealthy UK individuals to the Isle of Man
does occur, this may help ease the effects of the increased VAT
rates for local Manx businesses. While increased retail prices may
deter some consumers from purchases, an influx of wealthy
individuals means more disposable funds available on the Island to
be spent in the high street.
Other changes to the UK economy arising from the budget could
well have a knock on effect on the Isle of Man. Certainly it is
almost impossible to determine the net effect of all the changes
but it would appear that the changes are well-balanced from an Isle
of Man perspective and potentially beneficial to the Island's
economic stability overall once again showing that the Isle of Man
is part of a fiscally responsible British Isles.
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