Tackling tax avoidance and the long term revenue shortfall

Andrew Gerrard, Director Harding Lewis Limited, recently wrote a comment on the Isle of Man Budget which featured in the March edition of the Isle of Man Portfolio. Here is what Andrew had to say: 

In his Budget speech, The Treasury Minister stated that some ‘…are structuring their affairs in such a way to convert income into capital which…is not chargeable (to income tax)’. Whilst it is clearly not acceptable to use schemes or structures designed only to avoid tax and no other purpose, unfortunately in reality it is not always possible to determine what might be abusive and what is not. It is of course correct that the Assessor pursues tax liabilities that are due and also makes every effort to close any obvious loopholes. However, the loopholes concerned (created by the zero/ten tax regime) have been apparent for several years and the Assessor’s interest in this is long overdue. However, the current approach being taken by the Assessor lacks clarity and assumes that any situation where it would appear less tax has been paid due to a change in circumstances is potentially abusive. This is of course a nonsense, and without a structured approach from the Assessor, huge amounts of information (some irrelevant) is being requested from arguably innocent taxpayers. New legislation is clearly needed to close loopholes, but until this is in place the Assessor appears intent on creating unnecessary stress to innocent taxpayers whilst information is gathered with no clear agenda or purpose. The Treasury Minister has now announced in his budget that a temporary taxation order will be issued in the near future. This is to be welcomed, but it is important that this is consulted upon to avoid the unfortunate mistakes of the past.

What the Treasury Minister did not state in his budget speech is that the Income Tax Legislation (Amendment) Bill 2017 proposes that before a taxpayer can formally appeal against an assessment raised he/she must pay the tax disputed up front. Further, there is currently no set timetable to ensure such an appeal is held within a set period of time. The taxpayer concerned may of course not have available funds to pay these disputed assessments and so his/her ability to appeal may not be available. This Bill has been issued without consultation, and if enacted will be a draconian step which could seriously damage the Island’s reputation as a ‘can do’ place to do business. It is to be hoped that this Bill is amended at the clauses stage before it becomes law.

In the long term, it has been made clear that the biggest threat to the Government finances arises due to the public sector pension liabilities of the future being unaffordable. This legacy issue indicates a disgraceful lack of foresight from Governments pre 2011. The current regime has been left in what seems like a no win situation. In order to ensure the civil service remains attractive to prospective employees, pension arrangements must clearly be competitive. However, even with the new changes, the current regime is a serious threat to the future ability of the Island to sustain a high level of public services. The Treasury Minister has further highlighted this by planning for the public service employees’ pension reserve to be depleted by 2021. Without further changes, it is expected that from this date onwards the taxpayer will need to cough up £58 million annually to fund the shortfall, and this amount will likely increase as time progresses this being due to the proportion of retired civil servants to working civil servants continuing to increase.

Overall, the budget is fairly positive, but it is only the very start of a challenging road for the Treasury Minister.