Douglas, ISLE OF MAN - The latest UK budget has now been released and not surprisingly it has some potential ramifications for offshore jurisdictions such as the Isle of Man.

Spending cuts rather than tax rises will be the UK government's favoured means of addressing the deficit, with around 77% of the deficit reduction anticipated to come from cuts in spending.

UK Chancellor George Osborne's "tough but fair" Budget includes increases in both VAT and capital gains tax, a freeze on public sector pay for most workers and a major reform of welfare benefits and will have a big impact on:

  • Individuals
  • pensions and savings
  • trusts
  • businesses
  • VAT and indirect tax

The Chancellor laid the blame for the tough measures firmly at the door of the previous Labour Government, repeatedly referring to the changes as "unavoidable" in order to create "a new balanced economy". In contrast to countries like Greece, this will seem to analysts as a direct and decisive attack on the country's eye-watering deficit by 2015/16 as he seeks to raise an additional £40 billion.

There was some good news, notably the re-linking of pensions to earnings and the surprise increase in capital gains tax entrepreneurs' relief threshold from £2 million to £5 million. The Chancellor also announced plans to reform the corporation tax system with lower rates, simpler rules and greater certainty to enable companies to invest, attract foreign investment and boost growth. In the meantime, the standard rate of corporation tax will be reduced progressively over the next five years to 24% by 2014. For smaller business, there will be a reduction to 20% from April 2011. Worries of a potential increase in Capital Gains Tax to 40% prior to the budget have also proven to been eased, with a comparatively modest increase to 28% for only high earners.

The Chancellor stated that "the failures of the banks imposed a huge cost on society", adding that banks should make a more appropriate contribution reflecting the many risks they take and announcing the introduction of a bank levy from January 2011.

So what does it mean for the Isle of Man?

Initially, the most significant outcome from the emergency budget will arise from the increase in VAT to 20%. Shoppers in the high street will notice price increases from 4 January 2011 and unless retailers absorb part of the added cost to the consumer, we can expect to see high street prices to increase by approximately 2%.

While this is bad news for consumers, the Isle of Man Treasury will be welcoming the change.

The Treasury's largest single source of income is VAT and the increase in the rate of VAT means a much needed boost in Government income forecasted as an additional £25 million per annum.. Unfortunately, this increase in government revenue will not be enough to fill the entire gap left by the recent re-structuring of the UK/IOM VAT-sharing agreement so the Isle of Man Government still may be forced likewise to make cuts of its own.

And while the hike in Capital Gains tax to 28% for high earners may not directly affect the Isle of Man, it could be the additional push that wealthy individuals in the UK need to consider relocating to a low-tax jurisdiction (in case the 50% top rate of UK income tax wasn't enough already), again potentially boosting government receipts. Capital gains are not taxable in the Isle of Man which can mean huge savings for anyone relocating to the Island.

If a mass exodus of wealthy UK individuals to the Isle of Man does occur, this may help ease the effects of the increased VAT rates for local Manx businesses. While increased retail prices may deter some consumers from purchases, an influx of wealthy individuals means more disposable funds available on the Island to be spent in the high street.

Other changes to the UK economy arising from the budget could well have a knock on effect on the Isle of Man. Certainly it is almost impossible to determine the net effect of all the changes but it would appear that the changes are well-balanced from an Isle of Man perspective and potentially beneficial to the Island's economic stability overall once again showing that the Isle of Man is part of a fiscally responsible British Isles.

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