Special Edition Don’t Panic

Tax Talk
Special Edition
Manx Budget 2016
Don’t Panic
How you react to some of the figures in the Governments
revamped ‘Pink Book’ will depend a lot on your
personality. The pessimists might think like Private
Frazer and come to the conclusion that ‘We’re all doomed’,
and others amongst you might be having a ‘Don’t Panic’
moment like Lance Corporal Jones. Mr Teare thankfully
however, seems to have taken a more considered view,
perhaps in line with the unflappable Captain Mainwaring,
when he told Tynwald during his budget speech that
‘There is no need to panic’. He quietly and calmly
reassured us all that the island’s fiscal strength, growing
economy and the actions that have been taken so far to
reduce the deficit allow the government time to address
the issues strategically. He put forward changes that he
hopes will move the Isle of Man into a position whereby,
over the next six years, reserves can remain intact. He did
however warn Tynwald that there are two significant risks
to achieving his strategy which cannot be ignored. The
first is that the plan assumes that the Government’s
income from direct and indirect taxation grows at a rate
faster than inflation. The second issue is a successful
resolution (from the Government’s perspective) to
discussions around the future of the public sector pension
scheme. Mr Teare stressed that the current scheme, and
the financial commitments of the Government, that come
with it, are unsustainable in even the medium term.
Income Tax Penalties
Hot on the heels of our last edition of Tax Talk we are
pleased to bring you a special edition which is entirely
dedicated to the Isle of Man Budget.
Last week Mr Teare delivered his fifth and final budget of
this administration, with its three main objectives being
to ensure ‘Strong Foundations for the future’. He also
reiterated last year’s message of fairness.
As usual, if you would like to know more about any of the
items featured please call or email Kevin, Andrew or Phil
– details below.
In this Edition:
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Don’t Panic
Income Tax Penalties
Rates and Allowances
National Insurance
Manx Treasury Bond
Pensions
VAT
Bringing jobs to the Isle of Man
The Pink Book gives details of the Governments income
and, considering Mr Teare’s warning above, does contain
some interesting figures.
Income from Customs and Excise and various
miscellaneous sources is on budget, with the NI operating
account being slighty ahead. The big worry however are
Income Tax Receipts. Company Income Tax receipts look
like they will fall short of budget by a massive 21.5%, and
Resident Income Tax income falling short by just over 2%.
In monetary terms the shortfall from these two sources is
over £8,000,000.
Mr Teare reported that the Assessor is now frequently
seeing tax planning around the zero ten regime which
presumably, in part at least, accounts for the shortfall in
the budgeted receipts. He does not consider this to be fair
and has asked the Assessor to consult on changes to the
current system that will tackle this behaviour.
Any legislative changes that follow this consultation will be
effective from the date of the 2016 budget meaning that
there is now little point in taxpayers rushing into any
changes before the legislation is passed. The stable door
appears to have been firmly shut.
He has also announced that the Assessor will be given the
power to charge a penalty in cases where a taxpayer is
found to have avoided tax contrary to the provisions of
Schedule 1 of the Income Tax Act 1980. In addition to the
actual tax payable, the Assessor’s new powers mean that
she will be able to charge a penalty of 60% of the tax. The
Practice Note (PN190/16) that was published on budget
day is quite clear in quoting the 60% rate, there is no ‘up
to 60%’ and there is no mention of mitigation of the
penalty where the tax payer co-operates.
Rates and Allowances
There isn’t much to report on tax rates and allowances this
year other than that Mr Teare was unfortunately unable to
afford to increase the personal allowance as much as he
had indicated in last year’s budget, nor to entirely
eliminate the 10% personal income tax rate. Instead he
has moved towards his aim by increasing the personal
allowance by £1,000 and reducing the 10% rate band by
£2,000 which should take 2,000 individuals on the lowest
incomes out of the tax net.
It is interesting to note that the Age Allowance and the
Personal Allowance Credit, both of which were reduced in
the 2015 budget and which it was announced at the time
would be abolished altogether in 2016, have been kept in
place for at least another year. His intention is still to
remove aspects of the benefits system from the tax system
but for one reason or another the benefits system cannot
accommodate these changes at present and so, for the
time being, they are to be retained.
National Insurance
The 2015 budget saw Mr Teare saying that he was going to
consider abolishing the age limit on paying NIC’s. The
2016 budget has coincided with the publication of the
consultation responses and Mr Teare has now confirmed
that he is not going to be looking at this further for the
time being.
The 2016 budget has brought about a small numerical
change to the Primary and Secondary NIC thresholds so
that they are now at the same level. This closes a loophole
which in the past has been used by owners of owner
managed businesses who have historically paid themselves
a salary which fell between the two thresholds meaning
that they qualified for state contributory benefits but did
not actually have to make an NIC contribution as their
earning were too low.
Mr Teare is however asking the Assessor to review these
types of situations, where individuals are receiving
dividends rather than salary. These individuals are paying
a smaller amount of NIC than other individuals with the
same overall level of income but who are not in a position
to receive dividends rather than salary. He doesn’t
consider it fair that such individuals can benefit from a
system into which they have not contributed.
This is definitely a step towards the fairness for all
taxpayers that Mr Teare seeks.
Manx Treasury Bond
One of the items which Mr Teare mentioned in his budget
was that the Government are considering issuing a Manx
Treasury Bond targeted at particular infrastructure
projects. Although at first sight this news should have no
place in a publication dedicated to Tax news, it is relevant
in that it was confirmed by Mr Teare that,
‘A local bond will help to retain money in the local market
and boost the economy by interest being spent and taxed
locally’.
Perhaps in his deliberations on the subject he might
consider a small additional incentive to investors by
making the interest tax free?
Pensions
Private pensions
As predicted, following discussions with the working
group set up to review the matter of pensions freedom, Mr
Teare has announced an increase in the amount an
individual can ‘cash-in’ from their pension fund and in
addition he has reduced the age limit for doing so to 55.
There is also to be a change in the tax treatment of these
lump sum payments from 6 April 2016 and the sum will be
treated as taxable when received and ITIP deductions
made by the scheme administrator.
The practice note (PN191/16) issued to describe the
changes gives the advice ‘When considering whether to
take a lump sum payment from a pension sheme, the
member may wish to seek professional advice.’ This is a
sentiment we would wholeheartedly agree with!
State pensions
As well as tweaking the rules for private pensions, it was
announced that individuals reaching state pension age on
or after 6 April 2016 will no longer be able to defer
claiming their Isle of Man State pension. Those
individuals who, in the past, decided to defer receiving
their pension were compensated with a higher rate of
pension in the years in which it was received. Mr Teare
said in his speech that the rate of return
‘is far in excess of what they might expect to receive from
depositing their cash in a bank or building society’.
In addition to this, as the choice was really only available
to those individuals well off enough not to have to draw
their state pension immediately, it could hardly be
described as a fair system, hence it’s abolition.
this is the first increase since 1992, once you have
factored inflation (RPI) into the calculations then the
increase is probably slightly behind where it should be.
VAT
As usual there are no changes to VAT in the Isle of Man
budget due to the reciprocal arrangement in place with the
UK so we will have to wait until the UK budget in March
for any VAT news.
There are however two items worth briefly mentioning.
The first is that we are still eagerly anticipating an
announcement in the very near future regarding the latest
negotiations with HMRC over the VAT revenue sharing
arrangement. These negotiations are of crucial
importance to the Island’s financial security. The second
is that Mr Teare mentioned in his budget speech that the
usage of Online VAT services has continued to grow with
around 80% of all VAT returns and European Sales List
lines being electronically filed. Perhaps next year he will
make electronic filing compulsory in the same way that
Company Income Tax Returns are.
Bringing jobs to the Isle of Man
Growing the economy is the first of the Governments three
key priorities and enterprise development is seen as key to
this.
To encourage this Mr Teare has announced the
introduction of a Land Development Tax Holiday which
means, where certain conditions are met, a company can
apply for exemption from income tax for up to 5 years on
‘relevant’ profits. These include
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Profits on new commercial developments or
improvements to existing commercial
developments;
Rental income received on a new commercial
development or improvement to an existing
commercial development
However, both of the above must provide ‘additional
productive employment’ in the Island.
Residential property is excluded as is any business that
is beneficially owned by a tax capped individual.
Practice Note PN192/16 gives full details of the
qualifying conditions and how to apply for the holiday.
It refers throughout to a ‘company’ applying for the
holiday but we can confirm that the legislation itself does
not specify that only companies are eligible.
In addition to this boost to employment in the Island Mr
Teare has tried to make it easy for employees relocating
to the Isle of Man to take up these ‘additional productive
employments’ by doubling the tax free relocation
allowance from £10,000 to £20,000. This might sound
remarkably generous but if you take into account that
Your Isle of Man Contacts:
No
Kevin Cowley
Tax Partner
PwC (Isle of Man)
+44 (0)1624 689689
[email protected]
Andrew Cardwell
Tax Director
PwC (Isle of Man)
+44 (0)1624 689689
[email protected]
Phil Morris
Tax Senior Manager
PwC (Isle of Man)
+44 (0)1624 689689
[email protected]
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