Common purse payments that help the island offer 0% corporate tax rate are to rise faster than UK economy growth rate

This article is more than 2 years old

This article is more than 2 years old

The British government has paid the Isle of Man more than £300m this year in a revenue-sharing deal that critics claim is subsidising the island’s zero corporation tax rate.

The arrangement, which was not disclosed to parliament, means the UK’s payments to the Isle of Man will be substantially increased at a time when the economy is growing slowly.

Tax campaigners say this means the UK is in effect subsidising the island to be a tax haven.

The funding formula dates back to the 18th century and is underpinned by a customs union between the Isle of Man and the UK.

The Manx government collects VAT and duties on tax and alcohol that is pooled with the money the UK collects, and then is shared out each year according to an agreed formula. The arrangement is known as the common purse.

The common purse payment is to rise by 4.5% a year until 2019, according to a generous deal negotiated last year by the then Treasury minister David Gauke.

It accounts for one-third of Manx government revenues and is based on a formula the Treasury has so far refused to publish.

Common purse payments were slashed under Labour, which hoped to nudge the Isle of Man away from its dependence on offshore trade, and again in 2011 under the Conservative-Liberal Democrat coalition government.

Those cuts were reversed in a deal signed on 2 March 2016, which was announced to the island’s parliament, Tynwald.

The Treasury did not publicise the agreement and Gauke, who is now work and pensions secretary, offered no statement to parliament.

Under the terms, common purse payments will increase by 35% from a low of £252m in 2013 to £340m by March 2019.

The UK economy is growing at 1.5%, one-third of the rate at which common purse payments will rise.

Richard Murphy, a professor at City, University of London, and tax campaigner, said: “It looks as if the UK is still heavily subsidising the Isle of Man to be a tax haven.

“Bizarrely, the UK is effectively paying the Isle of Man so that it can undermine our tax system by offering low or zero tax rates to those seeking to avoid their UK tax bills.”

Murphy believes the island received an estimated £70m more than the VAT it collected last year. He says the subsidy will only increase.

In March 2016, the then Isle of Man Treasury minister Eddie Teare told Tynwald the formula would be published in a “separate standalone document”.

Despite requests from the Guardian for the information, the Treasury and the Manx government have yet to publish the formula.

In a statement, the Treasury said: “The UK is not subsidising the Isle of Man. The arrangements are there to ensure we both get our fair share of revenues we collect for each other.”

A spokesperson said the new agreement was based on detailed surveys of household and business expenditure. The 4.5% increase was a “temporary estimate” and payments back to 2013-14 will be adjusted once new surveys are finalised.

A decade ago, under Labour, crown dependencies were forced by the EU to tax domestic and offshore companies at the same rate in exchange for continued access to the single market.

At the time, domestic businesses on the Isle of Man paid 20% tax, with offshore companies paying nothing.

In 2006, instead of introducing a low tax rate across the board, the Isle of Man announced that it would offer 0% to all companies except banks, who would pay 10%. What became known as the zero-ten regime was then rapidly adopted by Jersey and Guernsey.

The result is that the UK is surrounded by a network of zero-tax zones with access to the single market, allowing funds sheltered by billionaires to flow freely into the City of London and continental Europe.

The Isle of Man was able to fund the tax giveaway using common purse payments.

In 2009, following the financial crisis and a campaign by the Tax Justice Network, the then chancellor, Alistair Darling, took an axe to the Isle of Man’s subsidy. Revenues fell by £125m.

The Conservatives then began to reverse the cuts, first with an interim agreement, followed by the 2016 deal, which runs until April 2019. This year, thanks to the new formula, the island received £311m.