A bright future but with hurdles on the way!

‘A budget of substance for an island of substance’ was the closing remark of Treasury Minister Alfred Cannan at the budget breakfast this morning. Minister Cannan appeared pleased to report results which are ‘above expectations’.

Government finances

It would seem that the Government has taken some strides forward in improving its financial performance this year due to positive economic growth and improved tax receipts which were above expectation. The net revenue surplus (after the benefit of transfers from reserves) for 2017/18 is forecast to be some £18 million but the pink book paints a cloudy picture of exactly how government finances are structured. It is not immediately transparent what level of reserves used when comparing the figures with media publications. A transfer of £61 million from reserves is the bottom line transfer figure in the pink book.

The public sector pension fund is also going to be potentially very expensive to service in the future and this problem has not yet been addressed. This will probably necessitate further constraints on expenditure for the foreseeable future.

Capital expenditure budgeted for the next 5 years is £428 million, which is welcome news. Investing in our infrastructure is essential for many reasons, but will need careful targeting.

Tax rates

The main changes to tax and national insurance can be found in a Practice Note https://www.gov.im/media/1360550/pn-199-18-budget-2018-final-150218.pdf. Tax allowances have increased slightly which will benefit all taxpayers other than tax capped individuals (where there are no new changes other than the previously announced increase in 2018/19). Tax and national insurance rates are overall in line with last year or have increased very slightly.

Payments to shareholders or ‘participators’

A bone of contention for the Assessor of Income Tax in recent years has been the introduction of goodwill and / or unquoted shares into company structures that result in participator loan balances. Some clarity on this position is welcome, but the end result is not and further details can be found in a further Practice Note at https://www.gov.im/media/1360553/pn-202-18-payments-due-to-goodwill-or-shares-final-v-190218.pdf. This will be a cause for concern for many in that the overall inference is that selling/transferring unquoted shares or goodwill into a company structure are effectively deemed abusive whereas if the assets transferred or introduced are quoted shares or property this will not be so deemed. We disagree with the detail of this new legislation although we accept that change was needed. Clarification will be needed on a number of points and we are concerned such clarification might take some time.

Pension changes

Some changes to pension schemes have also been made this year and a new Pension Freedom Scheme has been established (https://www.gov.im/media/1360552/pn-201-18-pension-changes-final-feb2018-v2.pdf). Most notable is the reduction in the annual allowance for pension contributions from £300,000 to £50,000 effective from 6 April 2018. There is thus a limited window of opportunity to make a significant pension contribution before this date.

Cycle to work scheme

A welcome change to the Cycle to Work Scheme (https://www.gov.im/media/1360551/pn-200-18-cycle-to-work-scheme-benefit-in-kind-final-240118.pdf) sees this token gesture become a practical benefit that a lot more people may choose to take advantage of. The changes include the introduction of electric bikes to the scheme as well as the removal of the £1,000 maximum purchase cost restriction (although benefit in kind charges will apply for certain excess payments). This scheme might now have a respectable impact on the island’s traffic!

Conclusion

As a general rule we don’t want to see measures to collect more tax, however, in the absence of cuts to Government expenditure, this means that increased taxes receipts are needed to fund the structural budget deficit. Some new measures have been introduced to raise some revenue in the shorter term, which will hurt some shareholders of companies that own unquoted shares and purchased goodwill. It is a potentially complex area and one that needs further clarification.

Other than the reduction in the annual allowance for pension contributions rules noted above, which is significant, the remaining budget changes are modestly positive, particularly for the less well off.

We continue to be an Island that encourages entrepreneurship and the creation of jobs, and this is essential so that the public services we all need can continue, albeit under financial constraints.