MANX INCOME TAX PAST AND PRESENT
CONTENTS
- Introduction
- Income Tax Acts
- Temporary Taxation Orders
- The Quality of the Legislation
- Extra Statutory Concessions
6. What next?
7. The Impact of Manx Resident Income Tax in the Past
8. The Impact of Manx Resident Income Tax in the Present
9. The Tax Free Facility
10. A Harmful Tax Practice
11. ‘We will get the tax when they pay a dividend.’
12. What next?
Notes for Talk
to
Members of Liberal Vannin
Prior to their Annual General Meeting
at
The Manx Blind Welfare Society, Corrin Court, Onchan, on Sunday 25th March, 2018
MANX INCOME TAX PAST AND PRESENT
Introduction
Mr Chairman, Mrs Beecroft, Lady and Gentlemen –
Before I start, I would like to flag up the fact that my subject today is a big subject and that certain aspects of it may well not get the attention that they deserve in this brief talk.
And then, for the record, I would also like to flag up the fact that I first raised the subject of the arrival of the Tax Free Facility upon the then proposed abolition of the Attribution Regime for Individuals (‘the ARI’) with all MHKs in 2011, before the General Election of that year.
The response from the Treasury Minister of the day was that ‘We will get the tax when they pay a dividend.’ I understand that her successor was disposed to offer the same response.
The fact is that, with the abolition of the ARI, the individuals residing in the Isle of Man who probably can best afford to pay ‘the tax’ are able to choose if or when they wish to pay.
… and now, in 2018, we have some figures which give a clue of the likely headline cost of the Tax Free Facility.
… and so to my thoughts on ‘Manx Income Tax Past and Present’ – a riveting subject for a Sunday morning!
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The Income Tax Acts
Income tax was first introduced in the Isle of Man in 1918 to meet the cost of the Government subsidy for flour and thereby reduce the cost of bread in the Island.
Unsurprisingly, the Income Tax Act 1918 of Tynwald which introduced the tax in the Isle of Man was described in its preamble as being ‘An Act to provide for a tax on incomes’.
The Income Tax Act 1918 was followed by a succession of Income Tax Acts which served to extend and amend the provisions of the Act.
In 1939, Tynwald introduced a surtax on incomes exceeding £2,000 to provide the means for increasing the Island’s contribution towards national defence.
This was done by means of the enactment of the Income Tax (Sur-tax and Appropriation) Act 1939 which is described in its preamble as being ‘An Act to impose sur-tax and to appropriate the income tax fund for certain purposes’.
In 1946, the then existing income tax legislation was consolidated in the Income Tax Act 1946 which was described in its preamble as being ‘An Act to consolidate the Income Tax Acts.’
The Income Tax Act 1946 was, in turn, followed by a succession of Income Tax Acts which served to extend and amend the provisions of the Act.
The surtax was abolished with effect from 6th April, 1961, by the Income Tax (No. 2) Act 1960 which is described in its preamble as being ‘An Act to repeal the provisions of the Income Tax Acts, 1946 to 1960, relative to the imposition of surtax and to amend the provisions of the Income Tax Act, 1960.’
In 1970, the then existing income tax legislation was consolidated in the Income Tax Act 1970 which is described in its preamble as being ‘An Act to consolidate the Income Tax Acts.’
Over the past nearly half century, the Income Tax Act 1970 has, in its turn, been extended and amended by a succession of Income Tax Acts and Temporary Taxation Orders.
Our income tax legislation is now a huge dump of random, poorly drafted provisions – frankly, it is a mess.
If ever a body of law requires sorting out and consolidation, it is the law that is presently contained in the Island’s Income Tax Acts.
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Temporary Taxation Orders
The introduction of heavyweight income tax legislation which bears upon the rights, duties and liabilities of individuals and companies was, prior to 1995, clearly understood to be a matter for primary legislation.
In the ordinary course, the enactment of such primary legislation is the subject of an elaborate and rigorous process involving the drafting, printing and publication of a Bill, followed by three readings and a detailed examination of its clauses in the House of Keys, the same in the Legislative Council, signature by Members of Tynwald and finally the grant of Royal Assent.
The whole of the process is designed to enable such primary legislation to be well-advertised to the public, properly scrutinised, debated and sometimes amended by the House of Keys and the Legislative Council.
The wording of all legislation, whether primary or secondary, should, of course, be clear and unambiguous. It should not be open to interpretation, reinterpretation and misinterpretation to suit the whims of the bureaucracy which operates it or anyone else for that matter.
While I believe that income tax continues is being a matter for primary legislation, the usual and proper processes leading to its introduction, amendment or repeal are now simply circumvented (dare I say ‘avoided’) by means of Temporary Taxation Orders.
The ability to introduce such primary legislation by Temporary Taxation Order was introduced by the Income Tax Act 1995.
In the ordinary course, a Temporary Taxation Order is likely to be drafted behind closed doors in the Treasury and, in all probability, reviewed by the Attorney General.
Before its introduction to Tynwald, Members may well be briefed in private by the interested parties seeking the legislation – no need for any public debate then!
The draft Order is then presented to Tynwald for approval.
The draft Order cannot be amended. Members are simply invited to vote for it or against it, If, as expected, the Members vote for it, its provisions become a part of the primary law.
Anything up to a year later, when an Income Tax Bill comes along, the provisions of the Order are featured in a Schedule whose contents are there simply to be ‘confirmed’.
I am unaware of the contents of any Temporary Taxation Order being questioned in the Keys or Council when they have reappeared a year later in a Schedule to an Income Tax Bill.
After all, they are already an established part of the law – aren’t they?
The repeated use of Temporary Taxation Orders to place heavyweight income tax legislation on the Statute Book has the look to me of an abuse of process and ought to be stopped or, at the very least, curbed.
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The Quality of the Legislation
The quality of much of the income tax legislation is poor, but then what more should you expect from legislation that is drafted behind closed doors and passed without question?
One of the best examples of this is featured in Section 2PA of the Income Tax Act 1970, which was introduced by the Income Tax (Corporate Taxpayers) (Temporary Taxation) Order 2006 and, at most, covers little more than a single page.
This section came to the fore at the time of the abolition of the Attribution Regime for Individuals in 2012 (for ‘the ARI’ see sections 8 and 9 below).
Even the Assessor of the time does not seem to have understood it when he issued his Practice Note 174/12 dated 21st February, 2012.
In this Practice Note, the Assessor claimed that ‘There appears to be some misunderstanding about the meaning of the term “distribution”’ and went on to claim that the term ‘“income distribution” … is defined unambiguously in subsection (5)’ of Section 2PA of the Act.
In his attempt to correct the ‘misunderstanding’, he declared certain ‘distributions’, whether of capital or of income or both, to be liable to income tax in the hands of the Manx resident individuals who received or benefited from them. How wrong, it appears, he was!
The issue of this Practice Note PN 174/12 caused outrage in that part of the finance sector that received it and that understood it. The Practice Note PN 174/12 was quickly withdrawn and new spins devised for the meanings of Section 2PA of the Act.
These new spins are now contained in –
– the ‘new’ Practice Note PN 174/12 dated 22nd June, 2012, which comprises four pages; and
– Guidance Notes GN 49 dated 6th April, 2017, which comprise fifty-five pages,
both authored by ‘the Assessor’: that is to say some fifty-nine pages of ‘Assessor made law’ which will probably never be seen by Members of Tynwald.
These documents describe the various ways in which the Assessor is now likely to treat ‘distributions’, many of which are nowhere to be found among the provisions of Section 2PA.
Administrative procedures introduced to implement such primary legislation may well be the subjects of Practice Notes and even Guidance Notes issued by the Assessor, but they should not override the provisions of the primary legislation.
The writing and rewriting of the primary legislation should be left to Tynwald.
In any event, it is difficult to see how the Assessor could possibly succeed in the case of an appeal when ‘the law’ that she is seeking to uphold is such an uncertain mess.
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Extra Statutory Concessions
Exceptionally, a minor unintended consequence of a provision in an Income Tax Act may quite properly be the subject of an Extra Statutory Concession made by the Assessor.
It follows, however, that any such ‘minor unintended consequence’ should be corrected by Act of Tynwald as soon as possible thereafter.
The rewriting of primary legislation by means of the issue of voluminous Practice Notes and Guidance Notes by an officer of the government should never be the answer!
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What next?
In the light of the above, my first suggestion for the Members of Liberal Vannin in respect of the Income Tax Acts is that they seek the appointment of a body to –
– review the current income tax legislation; and
– prepare an Income Tax Bill which serves to consolidate the existing legislation.
My second suggestion is that the consolidated Income Tax Bill be accorded the proper legislative process by Tynwald, that is to say publication in Bill form before it goes forward for –
– three readings and clauses in the House of Keys;
– three readings and clauses in the Legislative Council;
– signature by the Members of Tynwald;
to be followed by –
– the Royal Assent.
Sadly, the problem with the first suggestion and, by extension, the second suggestion is that the current income tax legislation is in such a mess that any worthwhile review of it is likely to cost a small fortune – a sad reflection on our claim to be a leading international centre!
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The Impact of Manx Resident Income Tax in the Past
There was a time before 2006 when Manx resident income tax was charged on the taxable incomes of both –
– individuals residing in the Isle of Man calculated at rates rising to 20%; and
– companies residing in the Island calculated at the rate of 20%.
As such, there was an equal treatment for Manx resident income tax purposes for –
– individuals who did not and had no need to own companies (principally, say, employees and pensioners); and
– individuals who owned companies (principally, say, local business people and individuals with portfolios of investments) in which they were able to accumulate part or all of their incomes.
In 1981, Tynwald passed the Exempt Insurance Companies Act 1981 which enabled the Government Treasurer, after consultation with the Assessor, to confer exemption from Manx resident income tax on companies carrying on insurance business in the Island.
In 1984, Tynwald passed the Income Tax (Exempt Companies) Act 1984 which enabled companies that –
-
were owned outside the Island;
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derived the income receipts from sources outside the Island; and
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did not carry on businesses such as manufacturing, retailing etc., in the Island,
to claim exemption from Manx income tax.
For the most part, these two Acts of Tynwald had no bearing upon the personal tax affairs of ordinary individuals residing in the Island who owned companies in which they were able to accumulate part or all of their incomes.
The companies to which these two Acts were intended to apply were companies which were beneficially owned by individuals and/or companies NOT residing in the Island.
It was the exemption of these companies from Manx resident income tax that was held to be a harmful tax practice and that led to the introduction of the zero rate for ALL companies residing in the Isle of Man.
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The Impact of Manx Resident Income Tax to the Present
In 1999, the European Code Group took the view that six Manx taxation measures, including the exempt company regime, were ‘harmful’ and, in 2002, the Isle of Man Government undertook to abolish these measures and introduce a compliant regime to replace them.
In April, 2006, the Isle of Man Government introduced its zero/ten regime of income taxation on the understanding that it was compliant with international standards and the ECG’s Code for Business Taxation (‘the Code’).
The new regime was supported by the Distributable Profits Charge (‘the DPC’) which sought to recover some of the ‘lost’ income tax receipts from individuals residing in the Island who owned or partly owned companies whose tax liability was calculated at the zero rate.
In October, 2007, the ECG found that the DPC was not in conformity with the principles of the Code.
The Isle of Man Government immediately announced the abolition of the DPC and the introduction of its replacement known as the Attribution Regime for Individuals (‘the ARI’) which also sought to recover some of the ‘lost’ income tax receipts from individual Manx resident shareholders in zero-rated companies: that is to say to retain a level playing field for both –
– individuals who did not and had no need to own companies (principally, say, employees and pensioners); and
– individuals who owned companies (principally, say, local business people and individuals with portfolios of investments) in which they were able to accumulate part or all of their incomes.
In due time, the ECG determined that the ARI was a harmful taxation measure.
And so, in her Budget Speech to Tynwald on 15th February, 2011, the Minister for the Treasury announced ‘the abolition of the attribution regime for individuals for accounting periods beginning after 6 April 2012’ and this was duly done by Temporary Taxation Order.
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The Tax Free Facility
The abolition of the ARI in 2012 means that there is no longer equal treatment for
– on the one hand for individuals who do not and have not any need to own companies (principally, say, employees and pensioners); and
– on the other hand for individuals who own companies (principally, say, local business people and individuals with portfolios of investments) and who accumulate part or all of their incomes in their companies.
The former are told how much income tax to pay, the latter can choose how much, if any, they wish to pay.
The latter pay NO income tax on such of their income as is accumulated in their companies due to such income being charged to income tax at the zero rate.
I have presumed to call this latter fact of Manx income tax life ‘the Tax Free Facility’.
So far, the Government has been silent about the Tax Free Facility and its likely cost. However, taking what we know, it is possible to construct a likely headline cost and hope that government will fill in the gaps before too long.
In the year ended 31st March, 2015, there were 8029 companies which were owned or partly owned by individual persons residing in the Isle of Man. These companies enjoyed taxable incomes amounting to £1,227million.
Stating the obvious, income tax calculated at the zero rate results in NO Manx income tax having to be paid by these companies.
If income tax had been calculated at the rate of 20%, it would surely have resulted in these companies having to pay Manx income tax amounting to some £245million.
In the year ended 31st March, 2016, there were 8048 companies which were owned or partly owned by individual persons residing in the Isle of Man. These companies enjoyed taxable incomes amounting to £871million.
Once again, stating the obvious, income tax calculated at the zero rate results in a NO Manx income tax having to be paid by these companies.
If income tax had been calculated at the rate of 20%, it would surely have resulted in these companies having to pay Manx income tax amounting to some £174million.
Evidently, the figures for the year ended 31st March, 2017, will not be available before June, 2018.
Given that there are some 8,000 companies which are owned or partly owned by individual persons residing in the Isle of Man, and that they enjoy taxable incomes amounting to some £1billion, it looks as if something of the order of up to £200million each year is now being ‘lost’ to the General Revenue Account of the Isle of Man Government by courtesy of the zero rate of Manx income tax chargeable on taxable incomes of these companies.
I have referred to these figures as ‘a likely headline cost’ in the knowledge that the cited tax loss of up to £200million needs to be adjusted downwards for the likes of the tax on income from land and property, tax on distributions of income and the possible impact of double taxation relief.
And so, how much is the adjusted loss? Assuming that it is less than £200million, is it £50million, £100million or £150million? We should be told.
It would surely cover the annual cost of keeping Noble’s Hospital open for business.
After all, if the Government wants people to move to the Island, how can they be expected to do so if the Government’s policies in respect of health, education and social security are seen to be failing for want of adequate funding?
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At this point, I should make it abundantly clear that business people who own trading companies and individuals who own investment companies cannot be said to be engaging in either tax avoidance or tax evasion per se.
The use of companies has been going on in the Isle of Man since the advent of the Companies Act 1865.
The fact that most companies have effectively been given exemption from the annual tax that is called ‘Manx resident income tax’ is NOT the fault of their owners.
It is not a matter of tax avoidance or evasion; the exemption has been granted to them by Act of Tynwald.
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‘We will get the tax when they pay a dividend.’
… but why would ‘they pay a dividend’ if they don’t have to?
In the ordinary course, individuals residing in the Isle of Man who own companies are accustomed to finance the activities of their companies by advancing the necessary amount of capital on loan to their respective companies.
Such loans are usually stated to be ‘repayable on demand’ and are, thereby, usually readily repayable. They do not attract the duty that is payable to Government in respect of authorised share capital.
Repayments of such loans represent capital in the hands of the lender who, of course, is also the owner of the company.
The larger the loan to the company the longer the owner will be able to live on repayments of capital.
Alternatively, an individual residing in the Isle of Man who owns a company may well have a source of income outside the company which he or she lives on and pays tax on.
In that case, the owner may never seek a dividend from the company and therefore neither the company nor the owner will be required to pay income tax on the income of the company.
In the ordinary course, conventional wisdom supports the propositions that: –
– income tax is an annual tax which is charged by Government to fund its annual expenditure for a forthcoming year;
– income tax is usually charged on taxable income for the year at a rate or rates set by Government for that year;
– an amount of ‘income received less tax paid’ is usually held to be ‘capital’.
The last of these propositions is now foreign to Manx income tax law because ‘income received’ is first charged to Manx income tax calculated at the zero rate in the hands of the company and then once its capital status is thereby established, it is open to be charged once again to Manx income tax in the hands of the owner of the company at the rate of twenty per cent.
For the most part, NO Manx income tax is charged in respect of the taxable incomes of companies unless the owner(s) chooses to make a voluntary contribution the General Revenue of the Isle of Man Government by declaring a dividend!
The tax is essentially payable at the whim of the owner!
… and, in any event, how can the Assessor expect to succeed in the case of any contested assessment which is claimed to be made in accordance with Section 2PA of the Income Tax Act 1970 whose one page is completely confused by one or more the fifty-nine pages of ‘Assessor made law’ (see 4 above)?
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A Harmful Tax Practice?
The ECG held that that the Isle of Man Government’s exemption from income tax of the taxable incomes of the largely foreign owned companies was a harmful tax practice in the international context whereby all local companies are expected to have a common rate of income tax.
In the event, the Government chose to make the zero rate of income tax common to the GREAT MAJORITY of our companies in order to retain the already exempt status of insurance companies, gaming companies and companies which were formerly eligible for exemption in accordance with the provisions of the Income Tax (Exempt Companies) Act 1984.
And so, the incomes of the GREAT MAJORITY of our companies are now subject to a common (i.e. zero) rate of income tax.
The price of this compliance with these international standards is, in effect, now being borne by individuals who –
– who do not and have not any need to own companies (principally, say, employees and pensioners); and
– who pay income tax on the full amounts of their incomes at rates rising to 20%.
As things stand, ANY INCREASE IN THE RATE of income tax to provide additional funding for Government will be borne these individuals who do not and have not any need to own companies (i.e. employees and pensioners).
Companies owned by individuals residing in the Island will presumably continue to enjoy the zero rate.
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Income tax is generally understood to be a tax which is charged according to each person’s ability to pay.
It is ironic that the Isle of Man Government has created an environment in which, in effect, its income tax now falls largely upon those who are least able to pay.
Could this environment now be claimed to be a Harmful Tax Practice which warrants scrutiny by the EU and the OECD?!
It is certainly tough on those individuals residing in the Island who are least able to pay.
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What next?
In his Budget Speech to Tynwald on February, Hon Alfred Cannan, MHK, Treasury Minister, proudly declared:
‘Of course nothing defines these fast changing circumstances more than Brexit and the increasing demands to meet global standards when it comes to tax and international financial services. We are committed to meeting our challenges in these respects and building on our programme of engagement, understanding and leadership.’
He went on to say:
‘Our track record is second to none; we have signed our commitments to Base Erosion Profit Shifting, we have delivered our commitments on Beneficial Ownership, we have strengthened our financial crime and intelligence units and we are today engaging with the EU and OECD on matters of corporate tax and business substance. We should be proud and delighted that the OECD recently rated us as fully compliant with tax their transparency criteria.’
Later this year, the EU and the OECD will tell the Isle of Man Government whether our companies comply with their criteria in ‘matters of corporate tax and business substance.’
Allowing that it may be said that liability to Manx resident income tax falls mainly upon those in the Island who are least able to pay, I suggest that, whatever the verdict of the EU/OECD, Liberal Vannin seek thereafter to advance the cause of a fairer system of personal taxation for the Isle of Man.
Taxwatch 