Kevin Cowley, Tax Partner, Partner, PwC Isle of Man, examines the UK budget.
In the recent Isle of Man budget, Treasury Minister Alfred Cannan delivered a message of “stability and resilience”.
He confirmed the government’s continued support to support the economy of the Isle of Man, an economy which has struggled but still managed to provide extended periods of high productivity.
He confirmed that taxes in the island would be left alone for the time being; now is no longer the time to seek to increase income.
However, the UK economy has seen a much tougher time over the past 12 months and UK finances are in dire straits with borrowing levels at record highs in peacetime. The big question was how British Chancellor Rishi Sunak would react in his 2021 UK budget? The Chancellor has set three key budget targets;
Protect the economy;
Support the (economic) recovery; and
Repair public finances.
While not mutually exclusive, the tension between the first two of these goals and the latter is clear. This did not dampen the chancellor’s minds, however, as he claimed the measures announced would bring the UK economy back to pre-Covid levels by July 2022. The plan to achieve this is to give (now) and to take (later).
In the immediate term, in addition to confirming continued financial support for businesses and employees affected by Covid, short-term tax increases have been announced, including:
An extension of the current Land Stamp Duty Tax (SDLT) for properties valued under £ 500,000. Scheduled to end on March 31, 2021, this relief has been extended in its entirety until June 30, 2021, with a gradual return to “normal” levels by September 30, 2021;
Confirmation that the pre-election promise of a “triple lockdown”, guaranteeing the absence of increases in income tax, national insurance and VAT, would be honored;
No change to the Inheritance Tax (IHT), crushing rumors of a widespread overhaul; and
An extension of both the reduced rate of VAT introduced for the tourism and hospitality sectors and the VAT deferral scheme announced this time last year. Any VAT deferred from last year can now be paid in installments rather than as a single payment due at the end of that month.
From an Isle of Man perspective, these were mostly welcome updates. In particular, the Isle of Man VAT system mirrors that of the UK and therefore the positive changes announced as well as the confirmation of the main VAT rate has been very good news for businesses and consumers alike. from the Isle of Man.
In addition, many Isle of Man residents already have, or are looking to acquire, interests in UK properties that could be affected by the SDLT and IHT changes.
So far, so good. But recovery, with steps to restore government finances, will follow once the UK economy recovers.
As noted, pending the return to pre-Covid economic levels by July 2022, the main tax change has been a significant increase in the UK corporate tax rate postponed until April 2023.
The current rate of 19% will rise to 25% for companies with profits over £ 250,000. The 19% rate will however remain for small businesses, defined in this case as those with profits below £ 50,000.
This last point will be important for Isle of Man companies investing in UK rental property. Provided the annual rental profits are less than £ 50,000, the current low UK corporate tax rate will continue to apply to these profits.
The Chancellor also confirmed that while the general income tax and capital gains tax rates are not affected, his hands are effectively tied under the triple lock as shown above it was going to freeze the brackets and allowances for these taxes for the next five years.
In practice, as wages and asset prices rise with inflation, keeping ranges and allowances static means that more people will pay taxes at higher rates.
For example, freezing the tax-exempt personal allowance on its own could mean that a 40% taxpayer would pay an additional £ 400 in tax per year by 2026, assuming modest wage growth of 2% per year.
It remains to be seen whether the Chancellor has really succeeded in “crisscrossing the circle” by promoting growth while stimulating public finances.
The key will be to boost economic activity and growth in the UK and if this is done it will be good news for the Isle of Man as our own economy continues to be heavily influenced by that of the UK. There are certainly interesting times ahead.