Cannan's Opening Salvo | KPMG | IM

Cannan's Opening Salvo

Cannan's Opening Salvo

Gregory Jones, Director at KPMG, examines the 2017 Manx Budget from the new Treasury Minister, Alf Cannan.

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Manx budget 2017

“Start as you mean to go on” is usually the advice offered to every new Manx Government at the beginning of its five-year term, and in particular to the Treasury Minister who may well be new to the role.

With last November’s election still fresh in the memory, no doubt Alf Cannan was keen last week to make an initial impact in his first Budget, given the economic and spending pressures the new administration has inherited.

I fear, however, that he may not have made enough unpopular decisions – and these will become more difficult to make as each year passes.

For starters, he will have garnered support for the increase in the income tax personal allowance to £12,500, thereby taking a number of lower-paid workers out of the tax net altogether. This builds on the work of his predecessor and mirrors the UK Treasury’s concern for those in society who are “just about managing”, or “JAMs”.

Then there are the many Manx residents who, like me, have often been prevented from getting home by fog at Ronaldsway and who will be pleased that the Landing System at the airport is to be upgraded at a cost of £1.5 million. (Now if only we could sort out the weather at London City….)

Unfortunately some of the Government’s other proposals are still shrouded in mist.

Public Sector Pensions, for one. The current annual cost of this is almost £100 million. Manfully, Mr Cannan has laid down a marker by announcing that the Government’s contribution to the PSP fund going forward will be limited to 15% of the (public sector) salary bill rather than the present 20%, with the balance to be funded by the public sector pension reserve.

It’s not entirely clear, though, what happens when the reserve runs out in three years’ time and economic growth is not enough to make up the shortfall. I think if I were a public sector worker, let alone a pensioner, I’d want a little more certainty.

Nor is it clear how we are going to reduce our dependence on reserves generally, which over the next five years we’ll plunder to the tune of nearly £400 million. We will be targeting savings in departmental budgets - £25 million of them over the next 5 years - but we’re not sure where they are all going to come from. That doesn’t sound like cutting your suit according to your cloth.

One decision which will certainly gain local support is the proposed increase in the “tax cap”, to £200,000 by 2020. The increase will happen in three phases: to £150,000 (from the present £125,000) on 6 April 2018, then to £175,000 on 6 April 2019 and to £200,000 on 6 April 2020. 

Remember that an election to pay the cap commits you for five years (unless you leave the Island or die in the meantime) at the rate applicable in the first year, although you can revoke the election at any time if you change your mind about paying the cap.

The cap has long been criticised by those who believe it effectively creates an inappropriately regressive income tax system: most other developed tax regimes require more tax from high earners, not less. Laudable though this proposal may be from a social justice perspective, I believe it will seriously affect the Island’s ability to attract and retain high net worth individuals.

This is not a problem if our economic strategy is indifferent to them. With this increase, though, I can see the total number of tax-capped residents dipping to single figures within the next five years or so.

Whilst I have no wish to promote the claims of other jurisdictions, there are plenty of options for high net worth individuals nowadays. The UK, of course, offers a very attractive regime for non-domiciled individuals, despite the restrictions and changes being introduced from 6 April 2017. For those looking to escape the UK, Ireland operates a “non-dom” regime similar to the old UK system.

Further afield, there is a long list of countries which offer very attractive tax regimes and which could be seen as very competitive in the context of the proposed “hike” in the Isle of Man’s tax cap. The Island does therefore need to decide whether the high net worth individual market is one we wish to be in. If so, we have to be careful not to price ourselves out of it.

One other announcement by Mr Cannan which will also strike a popular chord is the promise to get tough on tax avoiders. Tax cap aside, the Isle of Man only levies income tax at a maximum of 20% and does not tax capital, so there should be no reason to engage in tax avoidance, he said, and measures to deter this will be introduced imminently.

As I said earlier, very few local residents will oppose Mr Cannan’s tax proposals. Notwithstanding my concerns, I do have to congratulate him on two things. 

First, it was not until page 8 of the Budget speech that the word “Brexit” was mentioned (and a £1m fund set aside to help manage the consequences.)

 Secondly, Donald Trump gets no mention at all. Now that’s got to be worth something…

 

 

JAM tomorrow…?

JAM tomorrow…?

KPMG’s Greg Jones offers his views on the UK Autumn Statement 2016

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