There is an Isle of Man legend about a fairy helping industrious farmers and fishermen, harvesting crops, carrying building stones, and repairing boats and nets (1). The island’s contemporary fairy is zero taxation, and since 2004 its beneficiaries have been the explorers of outer space. From this sheep-filled isle in the middle of the Irish Sea, you can see the coasts of Ireland, Scotland, England and Wales on a clear day. According to the aerospace consultancy Ascend, it is fifth in the list of places most likely to make another manned lunar landing (2). How did this self-governing British Crown dependency, with a population of 85,000 and no university or research institute, become a power in the space industry?

In the capital, Douglas, business and government are concentrated in a small area around the port. Alexander F Downie, a member of the island’s legislative council (upper chamber), greeted us at its parliament, Tynwald, a name that recalls the dependency’s Viking history: the Isle of Man has the oldest continuous parliament in the world, first meeting as early as 979. He believes the island’s political stability is due to the absence of traditional parties: almost all of the 24 members of the lower house are independents, so decisions are made by consensus and individual vote. Every 5 July the whole parliament convenes on a special mound to announce the laws adopted over the course of the year.

Downie, a former trade and industry minister, believes the Isle functions with the dynamism of a small business, able to adapt its legislation to the needs of the market and unafraid of taking risks. In 1904, the Manx government passed a law allowing Julian Orde to set up the Tourist Trophy car race, which would have been impossible in the UK, where the speed limit was 20mph. The race later became the TT, one of the world’s leading motorcycle races, attracting 40,000 spectators and doubling the capital’s population. (Every year between five and 10 competitors are killed, and this June four died before training started: no risk aversion here.)

Creating advantage

Life for peasant farmers and fishermen was hard on Ellan Vannin (the island’s Manx Gaelic name), and young people were encouraged to emigrate because of the lack of food. The large photographs at the mine at Laxey make it clear that people often went hungry. But at the start of the 20th century, new jobs were created by tourism — the island is close to Blackpool. As charter flights in the 1970s allowed people to fly farther in search of the sun, Douglas specialised instead in offshore finance, now the biggest employer on the island, which has almost zero unemployment. According to the 2011 census, tourism, fishing and agriculture provide only 3% of employment; banking, insurance and other business services 27%.

All the islanders told us about the Isle’s risk taking, adaptability, low taxation (“we are tax-neutral”), government working hand-in-hand with business, political stability, security of ownership, and a well-developed financial sector. But these were not enough to allow it to aim for the Moon — there had to be demand, and that came from the end of the major powers’ space ambitions.

Tom Maher is the first corporate lawyer in Douglas to have been trained specifically in the space industry. “With Nasa (3) retiring the shuttle and Obama cutting funding,” he said, “the space industry is now fundamentally commercial. The government is increasingly becoming a customer of services provided by the private sector ... When it comes to travelling to low Earth orbits, the people doing the innovation and research are commercial people. Government is focusing instead on deep space exploration. The more commercial they go, the more they will need tax and regulation-friendly jurisdictions.”

Tina Rawlinson is a director of the Cavendish Trust, which specialises in setting up offshore businesses: “It’s a small industry with big figures. Now that space is starting to become a global marketplace, prices have become an issue. Whether by design or fluke, we have started hammering home the message that if you are interested in getting into space, you have to consider having a base on the Isle of Man.” A satellite operator on the island saves $100m by not having to pay insurance premium tax. “It’s like manufacturing moving to China or India,” said Rawlinson. Her colleague Pritesh Desai said: “The mentality has changed: countries cooperate much more than before, and they don’t have the political will or desire to prove something. The space race is dead, and unless China and India race to conquer Mars (because the technology does exist), governments will make way for the private sector, which is interested not just in satellites but also space tourism and experiments in zero-gravity.”

Specificity of space

While there are similarities between space travel and sea and air travel — two sectors which also operate under the Manx flag, tax and ownership system — space is quite different from other sectors. In the US, the International Traffic in Arms Regulations (ITAR) hasstrictly controlled the export of dual technology (civil and military use) since 1999. Rocket engines are not very different from missile engines. “Up to now, this type of regulation prevented companies setting up offshore,” said Maher. “When a US company wants to set up a subsidiary abroad or share technology with a supplier, it has limited choice. But one of the advantages of the Isle of Man is that we are recognised as being British for ITAR purposes.” Thirty of the 54 companies in the world working on satellites have a subsidiary on the Isle of Man.

The island has been dispensing orbital slots — parking places in space — since 2000, through a public-private partnership with ManSat, a company founded by islander Chris Stott. “Being married to the US astronaut Nicole Stott, and having worked for companies such as Lockheed Martin and Boeing, Chris had the idea of putting his island into orbit, and so he used his talents and networks,” said ManSat’s financial director, Ian Jarritt. Stott also founded Excalibur Almaz, a space tourism business that has bought up second-hand Soviet spacecraft, including Salyut space stations, and keeps them in a hangar on the island, ready to be brought back into service to send rich tourists to orbit the Moon.

The Manx government boasts that it has an excellent international reputation: the island is on the G20’s “white list” of financial centres implementing internationally agreed tax standards, and conforms to the Organisation for Economic Cooperation and Development’s requirements on tax matters. Businesses are not just attracted by the tax regime, said Tim Craine, the government’s director for space commerce, but by its expertise, since many of its professionals have been trained at the International Space University in Strasbourg. Craine is also proud of the fact that the Space Data Association (SDA), a non-profit association of satellite operators, is based in the Isle.

The SDA brings together information on its members’ satellite positions, calculates orbits and warns operators of possible collisions, so they can adjust their trajectories. “It is a concrete response to a real problem, which international regulations could not resolve because of commercial confidentiality,” said Heather Gordon, a lawyer with Cains, whose international clients include the biggest satellite operators. There is a similar initiative to manage frequencies, to try to reduce interference between satellites. Every hour of communication lost for technical reasons costs tens of millions of dollars.

But by not charging the space sector corporate tax, is the Manx government not letting this industry (essentially state-financed, and benefiting from publicly-funded research) off its fiscal duties? “If governments want to change their tax laws they can,” said a source, “but we must assume the situation benefits them.” The business still brings indirect but substantial benefits to the island. The government will have taken around £34m in income tax and VAT between 2005 and 2013, while the private sector will have made profits of up to £1.6bn in the period 2011-2013 — not bad for an industry that only employs 16 people full-time.

Downie says the Isle of Man does not just deal with operations on paper. He acknowledges that it will never have factories with thousands of workers, but it would love to set up small precision workshops employing 20-50 people, making rocket engine parts. Such precision manufacturing already exists: we visited the CVI Technical Optics factory, specialising in high-energy laser optics, founded in 1972. It provided equipment for the Lidar laser for the Phoenix Mars lander in 2008. A manufacturer of ejector seats, and a supplier of parts for Rolls-Royce aeroplane engines have also set up on the island, and De Beers manufactures synthetic diamonds there.

“Maybe some Manx schoolchildren ... will find a way to launch a rocket — but that’s not our aim,” said Maher. “Countries are specialising. You can launch rockets from Kazakhstan, but you wouldn’t go there to set up a business. You might make asteroids full of minerals land on Australia, but not on the Isle of Man. Our strength is in business.”