IT was revealed yesterday that the Isle of Man will lose £75 million of its income per year after the government accepted a revised VAT Revenue Sharing Agreement.
Treasury Minister Anne Craine MHK made the announcement at yesterday's sitting of Tynwald.
She revealed that the Isle of Man Government had to sign the new agreement in order to secure the Island's Customs Agreement but said it was a "significant and unwelcome reduction".
This is Mrs Craine's statement in full:
"At the outset I can confirm that the Customs and Excise Agreement between the Isle of Man and United Kingdom Governments has been secured.
"To achieve this result it has been necessary to agree to a revised Revenue Sharing Arrangement which is part of the overall agreement.
"The Isle of Man Government firmly believes that the retention of the agreement is important to the long term economic and financial interests of the Island and I am confident that the agreement will continue to serve the Island and its people well.
"The Revenue Sharing Arrangement within the Customs and Excise Agreement was last amended in October 2009 with the previous amendment being two years prior to that. Adoption of the 2009 arrangement required revision to bring the Island's method of calculating its Gross National Income, or GNI, into step with that of the United Kingdom.
"In early October 2010 HM Treasury advised the Isle of Man Government that it wished the Revenue Sharing Arrangement to be further amended and to enter into negotiations on the details of such amendment. The reason given was that HM Treasury no longer accepted that the arrangements delivered to the United Kingdom a fair and equitable sharing of VAT and other duties.
"HM Treasury took the view that the structures of our economies were so fundamentally different that the continued apportioning of indirect tax revenues on the basis of aggregate national income was no longer acceptable.
"HM Treasury made it clear that unless a new sharing arrangement could be agreed it was ready to give notice to terminate the Customs and Excise Agreement. As I made clear earlier that would not be in the Island's overall best interests.
"The Isle of Man Government did not accept that the existing basis for the Revenue Sharing Arrangement was so seriously flawed that it required amendment. However the Isle of Man Government acknowledged that this was the firmly held view of the United Kingdom Government and as such the Island accepted the need to enter into negotiations for the amendment of the Revenue Sharing Arrangement in order to secure the continuation of the Customs and Excise Agreement.
"Since last October government has been in extended negotiation with HM Treasury on all aspects of the Revenue Sharing Arrangement. Also during this period the opportunity has been taken to have meaningful discussions, expressing our views and concerns, with the Deputy Prime Minister Nick Clegg, Lord McNally of the Ministry of Justice as well as Minister David Gauke the Exchequer Secretary to HM Treasury.
"Following almost 10 months of detailed and robust negotiations a new formula known as the Tax Base Measurement Method, or TBMM, has been agreed.
"The new TBMM sharing formula still focuses on the Island's economic activity as the foundation of the Isle of Man share of the common duties. Where it differs from recent sharing formulae is in looking at our economy in terms of national income on a sector-by-sector basis rather than in totality.
"The reasoning behind this new approach is that in order to produce an Isle of Man share that is deemed 'fair' by the United Kingdom Government, there is a need to recognise that different sectors have different exposure to VAT and hence different capacities to generate VAT revenues.
"If the Isle of Man was just a scaled down version, a microcosm of the United Kingdom economy, this distinction would not matter. But our respective economies are different in structure. Most importantly for the purpose of the new approach we are proportionately more structured towards VAT exempt activity than the UK.
"Rather than relate the Isle of Man share of VAT and other duties to a total measure of our national income, for example GDP (Gross Domestic Product) or GNI, the TBMM recognises the different VAT contributions arising from different economic activity and so calculates the Isle of Man share on a sector-by-sector basis and then adds these together to produce the Isle of Man total revenue share.
"At present the absence of certain key Isle of Man data means that the initial TBMM formula will by necessity use UK equivalent figures in parts. Work such as full household and business expenditure surveys will be initiated as a priority to enable the use of Isle of Man figures in the future and this work will take place over the next two years. Ultimately the Isle of Man will have the choice of whether to then switch from using United Kingdom data to Isle of Man data.
"In essence under the previous formulae the Island's VAT share increased on the basis of the overall growth in our national income regardless of whether the sectors generating that growth were VAT exempt or not. The new formula, by calculating the VAT share on a sector by sector basis, takes into account whether or not a sector is VAT exempt and so only generates additional VAT revenues when VAT is chargeable on sales. Similarly the Island's share of the other duties will also reflect these changes.
"An immediate issue for us all is the financial implications of the new arrangement. Whilst these can only be estimates at this stage and the final impact will depend on our future economic performance I will try to present the likely impact as simply as possible.
"The new arrangement will result in a reduction in the Isle of Man share of VAT and shared duties of £75 million per year. The UK has agreed to make transitional payments to the Isle of Man in this and next year of £45 million and £25 million respectively. This means that in simple terms the new arrangement will reduce our shared revenue by £30 million this year, £50 million in 2012-13 and £75 million a year thereafter.
"This is a significant and most unwelcome reduction in our revenues particularly on top of the reductions resulting from the last revision to the Revenue Sharing Arrangement. In effect it is a further 14 per cent reduction in our annual income.
"Government's success in obtaining agreement for transitional payments of £45 million and £25 million in the current and following year will allow for a measured and managed change.However government has no intention of trying to mask the fact that this change will mean challenging times for the Island into the future and further it will require tough decisions to be made by the next Tynwald and government."
Mrs Craine's statement continues here.
