Arthur Lancaster, Director of Tax, Ernst & Young Isle of Man
(Transcript of speech at Isle of Man Government Roadshows in Leeds and London 17th 18th May 2000)
I would like to talk about some of the opportunities for businesses looking to set up in the Isle of Man. I will focus on two key issues:
WHY A BUSINESS SHOULD CONSIDER SETTING UP IN THE ISLE OF MAN,
HOW TO GO ABOUT DOING THIS FROM A PRACTICAL POINT OF VIEW.
But before I start I thought it would be useful to mention some businesses who are already operating successfully in the Isle of Man.
- As you can tell from the Isle of Man delegation present here many of the UK’s financial institutions have a presence in the Isle of Man and we are undoubtedly a world leader in the International Life Insurance sector.
- Perhaps less well known is the Island’s thriving Ship Management business. Most of Shell’s fleet is now managed from the Isle of Man, along with many others.
- But as well as Financial Services and related sectors the Isle of Man is home to many Light Manufacturing businesses…for example:
- The name may not be immediately known to you but Strix make the electrical switches which go into every kettle in the world and I can guarantee that everyone in the audience will own a product made by the company. Strix has also just won its third Queen’s Award for Industry.
- The Isle of Man is probably not the first place you would associate with diamonds, but De Beers have a successful industrial diamond manufacturing unit in the Island’s Freeport - an excellent example of how the Isle of Man can be used as a base for manufacturing and distributing small, high value goods.
It is important to realise that the Isle of Man is open to all businesses, not just the finance sector.
Why move to the Isle of Man?
The most obvious reason for business is tax.
The Isle of Man offers a very favourable tax regime for international businesses operated from the Island.
Provided that the company is owned by non-Isle of Man residents and its income is from non-Isle of Man sources it may file as an International Business Company or an Exempt Company.
An International Company pays a variable rate of tax between 0.5% and 35%, with a minimum tax charge of £1,200 per annum.
An Exempt Company pays a flat annual fee of £400 and no other taxes on its income and is not subject to any withholding taxes on distributions.
Why should a company choose to pay more that the £1,200 fee? The reason is that a minimum level of taxation in the Isle of Man may be necessary to avoid taxation in the domestic jurisdiction of the owners of the company - although, unfortunately this will no longer work for parent companies.
A FAVOURABLE TAX REGIME FOR DOMESTIC BUSINESS
The Isle of Man also has a favourable tax regime for domestic business.
- The standard tax rates are 14% on the first £125,000 of profits and 20% on the excess.
- And there are 100% first year allowances on plant and machinery and industrial buildings which can significantly reduce the effective tax rate.
- In addition there is an unrestricted deduction for interest paid on loans from Isle of Man lenders.
- And finally the Isle of Man has no tax on Capital Gains.
FINANCIAL INCENTIVES FOR BUSINESSES
In addition to a favourable tax regime the Isle of Man offers a number of other financial incentives for businesses setting up on the Island:
- The Department of Industry will offer grants of up to 40% on capital expenditure and certain categories of revenue expenditure, including set-up costs, rent, marketing and training.
- The effective relief on capital expenditure may be up to 60% as you still get a 20% tax deduction for capital allowances on plant and machinery purchased with the aid of grants. Favourable loans will also be made to cover these types of expenditure
- As an alternative to the grants and loans it is possible to apply for a five year tax holiday.
- The Isle of Man has also launched a number of special initiatives to encourage investment in particular sectors - the latest is aimed to attract Medical Device Manufacturers to the Island.
- As well as grants and other reliefs outlined above the companies will have an immediate tax deduction for research and development expenditure and will be able to pay royalties free from any withholding tax.
Every business needs people to run it. It won’t come as a great surprise to hear that the isle of Man has a much more favourable tax regime than the UK.
Each individual has a personal allowance of £7,500. The next £10,000 of income is taxed at 14% and the balance is taxed at 20%.
For employees moving to the Island, firms can offer a tax free relocation package of up to £10,000.
Individuals also have no Capital Gains Taxes or Gift or Estate Taxes. And, like companies, there is an unrestricted tax deduction for interest on loans, such as a mortgage or overdraft with Isle of Man lenders.
If you want to see how much better off you could be in the Isle of Man you can work it out with our TaxOmeter, the interactive Income Tax calculator which is on our website. TaxOmeter will calculate and compare Income Tax liabilities for the UK, the Isle of Man and the Republic of Ireland.
As an aside, all the IT contractors who are going to suffer from the introduction of the new IR35 rules might do worse than to consider a move to the Isle of Man.
TAKING UP RESIDENCE IN THE ISLE OF MAN
If, having visited or website, you are inspired to move to the Island the good news is that provided that you are a British citizen, or have a right of abode in the UK, you can do so immediately without any of the immigration or property controls which you will encounter with other offshore territories.
If you do need to make an application for immigration the requirements are the same as for the UK and the applications are processed through the Home Office. At present, provided you have a job offer or valuable business skills the Island operates an "open door" policy and there are not normally any difficulties obtaining residence.
Unless you have been in the Isle of Man for five years you will require a work permit. However, for most jobs these are a formality at present.
Like everywhere in the UK property prices on the Island have gone up recently but we are still in the same price range as the north west and, unlike the Channel Islands, there are no restrictions or conditions imposed on property ownership.
Finally, having moved to the Isle of Man from London a little over three years ago, I can personally vouch for the fact that the quality of life is excellent.
For businesses modern office and warehouse space is available at competitive rates.
There is a well educated and trained workforce - plus as we have seen it is easy to bring in new staff.
On the training side a new International Business School will be opening on the Island later this year specifically focusing on international finance and E-Commerce.
Manx Telecom is a subsidiary of BT and uses the Isle of Man as a test-bed for its latest technology which means we enjoy excellent, state of the art, communications facilities.
And there are daily flights to all major UK airports, including Heathrow and London City.
CONTROLLED FOREIGN COMPANIES AND EXEMPT COMPANIES
Before I get carried away with the offshore tax opportunities for businesses, you do need to take account of the UK tax legislation which imposes a number of restrictions.
You will be relieved to hear that an in-depth discussion on UK tax rules is not included in this talk. However, I will mention a few key issues to bear in mind if you are seeking to avoid or minimise UL tax.
Firstly, the management and control of the offshore business must be outside the UK.
In addition the UK has detailed tax rules known as the Controlled Foreign Companies Legislation which taxes the profits of foreign subsidiaries on their UK parent unless they meet certain tests.
The most important of these tests is known as the exempt activities test. This requires the subsidiary to have its own employees and premises and carry on a trading, rather than investment business.
For companies looking to obtain exempt company status the Isle of Man is an ideal location because of the possibility of setting up genuine business operations at reasonable cost in a low tax jurisdiction close to the UK.
Finally, where there are any intra-group transactions you need to be aware under the UK transfer pricing rules that these must be on arms length terms.
Turning to specific opportunities…
It is already becoming clear that the Internet will open up the advantages of being offshore to many new businesses.
The basic point is that the Internet opens your business to the whole world - but why simply run that business from the same place as your existing business? The Internet also gives you the power to locate that new business in the Isle of Man.
This gives rise to two key tax opportunities - firstly to minimise your UK tax liabilities and secondly, and perhaps more important for UK based companies, is to avoid a tax presence in other high tax jurisdictions overseas.
For once the international tax authorities are working in our favour. The OECD has set out its view of the circumstances in which Internet operations should be taxable in a particular country.
The basic rule is that you are only taxable where you have a server which authorises transactions. Accordingly it is possible to have the servers which handle the start, or home, page and marketing and other material sited in the UK, or whichever country is most appropriate, but the transaction page is run through a server located in the Isle of Man. This should mean that the profits will be located in the Isle of Man.
UK parent companies may still need to have real employees and offices overseas to escape the CFC legislation - but there are clearly many tax planning opportunities.
The Isle of Man offers a comprehensive range of internet related services:
- Secure servers and web hosting.
- Web site design.
- Network security systems.
- Advanced telecoms - including two new fibre optic cables currently being laid to the UK and Ireland which will ensure that the bandwidth and resilience is greater than other offshore jurisdictions.
On the financial side:
- Multi-currency credit card clearances and fulfilment services are available.
On the regulatory side:
- The Electronic Transactions Bill will enable businesses and individuals to use electronic signatures to satisfy their legal obligations. This gives E-Commerce businesses and their customers a firm base from which to transact business.
Many companies are already making use of these advantages including F-Sharp - the worlds first stand-alone Internet Bank. At the other end of the scale my colleagues have advised a private business selling CD’s and video’s in the US with a distribution centre in the US, a call centre in Canada and web hosting in the Isle of Man - all run by 1 ½ people sitting in the Isle of Man. The result is that all the profits may be tax free.
Shipping is a major business in the Isle of Man. We mow have the largest Red Ensign Shipping Register - comfortably exceeding the UK!
In brief the advantages of locating in the Isle of Man are:
- No annual tonnage fee.
- Flexible manning requirements.
- A favourable regime for tax paying ship ownership companies with 100% capital allowances and any claw back of CA’s on a sale is deferred if the proceeds are reinvested in new ships within five years.
In addition to the main register there is also a yacht register with similar commercial benefits.
The Isle of Man has a major presence in the Captive Insurance market.
Although recent UK CFC changes have reduced the tax effectiveness of many existing arrangements, there are still many opportunities, particularly if the insurance company can be structured to meet the CFC exempt activities test I mentioned earlier. Examples of this include high street companies selling extended warranties and other insurance products which enanbles them to accrue significant profits in a low tax jurisdiction.
On a slightly different note the Isle of Man hopes to be able to announce shortly that Manx LLC’s can be used as corporate investment vehicles for Lloyds members who are looking for limited liability. Lloyds itself has confirmed LLC’s are acceptable and we are just waiting for the approval of the Inland Revenue.
One of the most unlikely success stories in the Isle of Man in recent years has been our Film Industry which has seen an increasing number of films and TV programmes produced on the Island.
The Isle of Man Film Commission will provide:
- Up to 25% of the budget as direct equity.
- Production credits up to £350,000.
The principal conditions are that:
- The film must be partly filmed on the Isle of Man.
- 20% of the below-the-line budget spent on the Island.
- Must be finance with a completion bond.
Many of you will have seen the film "Waking Ned" which has been used to promote tourism in Ireland - but was in fact filmed entirely on location in the Isle of Man!
For those of you young at heart look out for "Thomas and the Magic Railroad" which is based on the Thomas the Tank Engine stories which is due for release in the summer and was filmed on location on the island.
One major difference between the Isle of Man and other low tax jurisdictions is that we are part of the UK for VAT purposes.
This can give rise to a number of advantages. At a basic level there is the opportunity for UK inward investors to arrange for VAT registration, without the risk of a taxable presence in the UK.
The Isle of Man is also an ideal location for what are known as VAT triangulation arrangements under which goods invoiced by one EU country to another, but physically delivered direct from a third, need only pay VAT once.
In addition there are customs planning opportunities using the Isle of Man. Goods bought by an Isle of Man company and sold to the UK need only pay input duty on the price paid by the Isle of Man company and not the price paid by the UK importer. The advantage of doing this through the Isle of Man is that the profits can be tax free.
I want to briefly mention the Isle of Man as a location for holding intellectual property.
In today’s world protection of a company’s intellectual property is essential - it may be the only asset they have in an E-Commerce start-up or they may have invested millions in research and development.
Either way the Isle of Man is a secure, tax neutral jurisdiction in which to hold intellectual property and clients have the protection of most of the UK intellectual property conventions to which we are a party, unlike any other low tax jurisdiction.
The most important business sector in the Isle of Man is finance.
The key advantage which the Isle of Man has is that we are open for business so that its is possible for small to large scale operations to be established simply and quickly. This will enable you to become part of one of the world’s leading international finance centres.
The content of this article is intended only to provide general guidelines related to this particular matter. For your specific circumstances, full specialist advice is recommended.