Offshore Financial Centres - Treasury Contents


Further memorandum from the Isle of Man Government

  The Select Committee visited the Isle of Man on 9 July 2007. During the discussions that took place the Select Committee requested further details relating to the Customs and Excise Agreement between the United Kingdom and the Isle of Man. The following information is supplied in response to that request.

THE CUSTOMS AND EXCISE AGREEMENT

  The Isle of Man is not subsidised by the United Kingdom; rather the Island contributes to the economy of the United Kingdom, as evidenced by the Lord Mayor referring to the Isle of Man as a "core asset" of the City of London. In addition it shares most of the indirect taxes it collects with the United Kingdom under the terms of the Customs and Excise Agreement.

  Arrangements for the sharing of revenues between the Isle of Man and the UK date back to the Revenue Returns Act 1894 of Tynwald which required returns to be made by dealers in tea and tobacco imported into the Island and as a result enabled the Island to receive a fair share of duties on such imports.

  The arrangements for the sharing of indirect tax has continued, with many detailed changes since, such as in October 1957 when the "Agreement between the Governments of the United Kingdom and the Isle of Man regarding Customs and other matters" was signed. Commonly referred to as the Common Purse Arrangement this agreement survived until replaced by the current Customs and Excise Agreement in 1979.

  One of the taxes dealt with by the Common Purse Arrangement was Purchase Tax. This had been introduced in the Island at the same time as in the UK, and was charged at the same rates. The Common Purse Arrangement provided for HM Customs and Excise to collect the Purchase Tax chargeable in the Island and for the Commissioners of Customs and Excise to periodically pay over to the Isle of Man Government its share of this tax, as well as the other duties and taxes covered by the Arrangement, less expenses connected with collection and audit. When Purchase Tax was abolished and replaced by VAT (and Car Tax) on 1 April 1973, its place under the Arrangement was taken by the new taxes.

  Regular Decennial Tests were introduced following the 1957 Arrangement, in order to establish more accurate levels of consumption of the various excise (and other) goods in the Island, so as to be able to adjust the sharing arrangements accordingly and ensure they were as fair as possible. These tests involved surveys of receipts in the Island of the various goods, by both businesses and private individuals and, together with an adjustment for the calculated "resident population", enabled the calculation of the proportion of revenue ("common duties") liable to be paid over to the Island under the terms of section 2(2) of the Isle of Man Act 1979 of the UK Parliament, which provides the legal basis for the sharing arrangement.

  In July 1979 Tynwald approved the entering into of a new agreement with the UK, and the Customs and Excise Agreement 1979 was signed on 15 October 1979 and came into operation on 1 April 1980. Under the new Agreement the Island agreed to keep rates of most indirect taxes and duties at the same rates, and subject to the same reliefs, as in the UK and again most revenues were pooled and shared, with Decennial Tests continuing to provide a means of fine tuning the proportions.

  Over the years there have been numerous amendments to both the Common Purse Arrangement and the Customs and Excise Agreement such as for providing flexibility in respect of VAT on "non-exportable" services related mainly to the tourist industry and most recently (in 2007) to establish a new basis for sharing the pooled revenues based on the relative changes in national incomes of the two economies.

  The 1979 Agreement remains in effect, notwithstanding the merger of HM Customs and Excise into HM Revenue and Customs in 2005, and the common duties remain shared between the two Governments in accord with section 2(2) of the Isle of Man Act.

THE CURRENT SHARING MECHANISM

  The current mechanism results from a review and agreed changes made to the Customs and Excise Agreement in 2007 and is based upon the principle that there is correlation between economic activity and consumption generating indirect tax and so follows the spirit of the Isle of Man Act, section 2 of which provides as follows:

    "2 Isle of Man share of common duties

        (1)  Of the moneys standing to the credit of the General Account of the Commissioners an amount ascertained for each financial year in accordance with subsection (2) below shall be paid by the Commissioners, at such times and in such manner as they may determine, to the Treasurer of the Isle of Man.

        (2)  There shall be calculated in such manner as the Treasury may direct—

            (a)  the amount of common duties, whether collected in the United Kingdom or the Isle of Man, which is attributable to goods consumed or used in the Island, to services supplied in the Island or (as respects pool betting duty) to bets placed by persons in the Island;

            (b)  the cost incurred by the Commissioners in collecting the amount so attributable together with the amount of any drawback or repayment referable to that amount;

            and the amount arrived at by deducting from the amount calculated under paragraph (a) above the amount calculated under paragraph (b) above shall be known as the net Isle of Man share of common duties; and the amount mentioned in subsection (1) above shall be the excess of the net Isle of Man share of common duties over the common duties collected in the Island."

  This GNP (Gross National Product) Growth model is a principled approach since both the Isle of Man and United Kingdom are treated symmetrically. The model also scores very highly on simplicity and transparency; the data inputs for the calculation are minimal, all that is required are total United Kingdom and Isle of Man net VAT receipts, United Kingdom GNI and Isle of Man GNP, whilst application to other shared duties enhances simplicity and cuts administration costs. It also provides greater stability of future revenue incomes and so aids economic and financial planning.

  In brief the GNP Growth model applies the relative growth of the Isle of Man and United Kingdom economies to the Isle of Man's percentage share in the agreed base year and then applies that revised fraction to the current revenue pools to be shared under the Agreement.

  Whilst other Crown Dependencies are free to decide whether to impose indirect taxes and duties and, if so, at what rates, the Isle of Man under the terms of the Customs and Excise Agreement is obliged to follow United Kingdom indirect tax decisions, rates (with some minor variation) and developments, irrespective of how that affects it's economy and competitiveness.

SUMMARY

  The Customs and Excise Agreement between the Isle of Man and the United Kingdom is a long standing agreement, which has both stood the test of time and shown itself to be flexible to amendment, upon joint agreement between the two Governments, to respond to changing economic circumstances.

30 September 2008





 
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