Technology | 2009.11.06
The taxman cometh
In the 60s, the Isle of Man recast itself as an offshore tax haven. How will the Manx \'nation\' react now that status is under threat?
Of all the ways to think about the Isle of Man – tax haven, motorbike race course, former birching capital of western Europe – the most difficult for the outsider to grasp and accept is the description "nation". How big is the nation? Thirty-three miles long and a maximum of 13 miles wide. What language does the nation speak? Mainly scouse and Mancunian, mixed in with some Scots and Irish. Where does the nation shop? At Marks & Spencer, Thorntons, Boots, Tesco and Next. What does the nation watch? Strictly Come Dancing, Coronation Street, and (coming soon, for one night only) Ken Dodd at the Gaiety. What colour are the 80,000 nationals? Overwhelmingly white. And where do most of them come from? At the latest count, 51% were born elsewhere, mainly in the country 60 miles across the sea to the east. On a very fine day, you can see the Cumbrian mountains from the promenade at Douglas, the nation\'s capital.
The same promenade has a big war memorial packed with the names of men who died fighting in the British cause and boarding houses (most of them now converted into flats) with names such as Kenilworth, Cunard, Marlborough and Savoy. Outside one of the prom\'s few remaining hotels, a bronze figure sits on a bench. This is Sir Norman Wisdom, probably the nation\'s most famous settler, advertising to the passerby that he can come inside and eat Sir Norman\'s Cottage Pie in Sir Norman\'s Brasserie. (The real Sir Norman sits in a nursing home elsewhere on the island, a 94-year-old sufferer from dementia, unable to recognise himself in his own films.) The sheer, familiar Britishness of all this is what makes the idea of the Isle of Man\'s separate nationhood so hard to understand.
Differences can, of course, be established. The nation has its own flag, its own anthem, its own parliament, its own £5, £10 and £20 notes, and a language (expensively revived but rarely heard) different to English. It might even have its own national dish: chips, cheese and gravy. But often greater differences, assuming there is some kind of British norm, occur between the nations that make up the UK. Douglas is much more like Llandudno than, say, Llandudno is like Penzance. The Isle of Man\'s difference is not so much cultural or social as financial. It stems from a history of mainland neglect and beneficence that has left it outside the UK (and the EU) as that hard-to-understand legal entity, a crown dependency, with the well-known consequence that it can make its own laws and set its own tax rates. These are very low. Corporation tax is zero for most businesses and 10% for banks; income tax has a top rate of 18% and a cap on the total amount that means no individual, no matter how high his earnings, can pay more than £100,000 a year; there is no stamp duty, death duty, or tax on capital gains and inheritance.
As an economic strategy for the wellbeing of 80,000 people, it has until now been an outstanding success. In the mid-1980s, the island\'s per capita GDP was about half the UK figure; the most recent statistics, for 2007-08, show it at least a fifth more. "A mini Celtic tiger," is how someone described this progress to me, though unlike in Ireland the recession has still to happen; the estimate for economic growth in the current financial year is 2.5%, while house prices, to judge from estate agents\' windows, aren\'t far behind those in the south-east of England. Then last month London delivered a blow that had been coming ever since Alistair Darling told a Commons select committee in the early days of the financial crash that the UK Treasury needed to take "a long hard look at the relationship with the Isle of Man, a tax haven sitting in the middle of the Irish Sea".
Darling\'s target was the agreement in which the two governments share the revenue from VAT and duties on gambling and alcohol, which in various forms and to various formulae has survived for hundreds of years. The details are arcane – you can spend half a day trying unsuccessfully to unravel them – but the upshot of the UK Treasury\'s long hard look will be a steep reduction in the Isle of Man\'s share from the pot. This year the agreement contributed £339m to the Manx government; it will shrink by at least £50m next year and by at least £100m in the years thereafter. Because the agreement has supplied 60% of the Manx government\'s revenue, the cuts present the island with the biggest crisis most people can remember, and also reveal a truth. The Isle of Man owes its excellent schools, hospitals, infrastructure, transport and generous welfare provision (the basic state pension, for example, is 50% higher than in the UK) to payments gathered mainly by HM Revenue and Customs. Enemies of tax havens such as the Tax Justice Network (TJN) describe the payments as a subsidy from the UK taxpayer, which will continue even after the cuts. Manx people hotly dispute that. But however you describe it, the fact, surely, is that the Isle of Man\'s lavish public spending has not come about by charging 0% corporation tax and setting an income tax cap on billionaires at £100,000 a year.
I went to see the chief minister, Tony Brown, known as "The Chief" or "Chiefy" to his staff, and the owner of a hardware store in Castletown – the island has many treats for the British nostalgist but one of the most pleasant is the sight of small shops selling useful things. We met in his wood-panelled government office, but it was easy to imagine him behind a counter, as a cheery figure selling electric irons and light bulbs and joshing customers in his Liverpool accent ("Manx scouse", he said). I wondered why his government was so shy of "tax haven" as a description (all the official literature makes a big point of denying it) when it was so obviously a place to go to avoid paying taxes. The quarrel seemed to be with what the phrase connoted – money laundering, opaque banking techniques, drugs money – when the Isle of Man had, as Brown said, "actively engaged with the international community" to tackle these problems and was now widely recognised to have a financial system at least as transparent as most of the big tax jurisdictions.
"Still, your attraction is that you have very low taxes."
"Very low? I wouldn\'t say very low. I\'d say low – like the City of London has low rates compared to Europe."
This is a favourite island argument – the pot-calling-the-kettle-black rebuttal – in which the Isle of Man features as an easy scapegoat for much bigger sins committed elsewhere. And who can\'t see the merit in it? This week an index produced by the TJN, an organisation usually reviled among the Manx population, showed that the island was placed 24th out of 60 jurisdictions ranked for their lack of transparency in relationship to their volume of financial activity. The American state of Delaware came first, followed by Luxembourg, Switzerland, the Cayman Islands and the City of London, so what did those goody two-shoes, Barack Obama and Gordon Brown, have to say about that?
Generally, inside and outside the chief minister\'s office, the feeling has grown that the UK is "picking on" the Manx. The minister for agriculture, fisheries and forests, Phil Gawne, told me that London mustn\'t go too far, otherwise a more militantly nationalist breed of politician may come to power in Douglas, and in unspecified ways make the relationship much more fraught. As Gawne went to jail as a young man for politically motivated arson, it can be assumed that he knows what he\'s talking about – but the irony is that he was protesting against incomers attracted by the same low tax rates that he sees now as his nation\'s salvation.
Neither are the cuts the only cause of resentment. The Manx government pays the UK a few million every year for defence and diplomatic representation abroad. It also pays the international rate in fees – £9,000 as opposed to £3,000 – for students at UK universities, while the NHS charges for any patients referred from the island for treatment in UK hospitals. Next year, however, the UK is ending its reciprocal healthcare arrangements, which means that Manx residents who fall ill or get injured in the UK will be charged as soon as they leave A&E and take up a bed in a ward. Another local newspaper, the Manx Independent, discovered that even for countries far beyond the EU – Moldova, Kyrgyzstan – similar bilateral agreements would remain untouched.
One feels sympathy. So much about the Isle of Man seems sympathetic to ordinary aspiration and, if you like, ordinary people. Unlike those snotty crown dependencies in the Channel Islands, the Isle of Man is open to settlement by the poor as well as the rich (though workers need permits and must work for five years before entitlement to social security). But it\'s worth remembering how we reached this state. The Isle of Man has always set its own tax rates, even after the crown bought the rights to the island\'s revenues, though not the island itself, from the Duke of Atholl in 1765. Tax evasion in the form of smuggling was a staple of the island economy around this time, and then, after the steamships and tourists began to arrive in the 19th century, it largely disappeared as a way of making money. Tourism transformed the island, but it provided unsteady, seasonal employment – even in the postwar era Manx people migrated to East Anglia every autumn to crop sugar beet – and by 1960 the number of holidaymakers was shrinking year by year.
It was a UK governor, in the days before the UK surrendered its power, who identified the solution as low taxation. In 1960, Sir Ronald Garvey persuaded the island\'s parliament to abolish surtax at a time when marginal rates in the UK were rising. The aim was to attract a richer kind of islander, officially known as New Residents and unofficially still remembered as the "When-I\'s", as in "When I was in Mombasa," because so many were retired from imperial duties. They gave their bungalows African names and talked about "my accountant" at cocktail parties. North Country businessmen and a scattering of writers and celebrities also arrived: George MacDonald Fraser, Mollie Sugden, Ronnie Ronalde ("If I were a blackbird I\'d whistle and sing"), and of course Norman Wisdom. Financial capitalism had still to be globalised; the idea that institutions could migrate as easily as people had to wait until new technology developed in the 1980s. But the idea that Isle of Man\'s economic future would be founded on people and businesses escaping UK income tax had London origins, and until the great crash happened London seemed perfectly content.
Gawne pointed out to me that although the island made most of its money from alchemical companies making money out of money, the government itself was left-of-centre in its commitment to public services and redistributive policies. It was important that the cuts and the rises in tax, which will certainly come, did not bear down upon the weak. Does it remind you of anywhere else?
For more information, please visit
http://www.guardian.co.uk/theguardian/2009/nov/07/ian-jack-isle-of-man
