A close eye on UK corporation tax |

Kevin Cowley, Tax Partner, Partner, PwC Isle of Man, reviews the UK budget.

In the Isle of Man’s recent budget, Treasury Minister Alfred Cannan delivered a message of “stability and resilience”.

He confirmed the Government’s continued support to bolster the Isle of Man economy, an economy which has struggled but still managed to deliver prolonged periods of strong productivity.

He confirmed that taxes on the island would be left alone for the time being; now is not the time to seek to increase income.

The UK economy has, however, had a much tougher time over the past 12 months and UK finances are in a perilous state with borrowing levels at peacetime record highs. The big question was how would UK Chancellor Rishi Sunak react in his 2021 UK budget? The Chancellor has set three key budgetary targets;

Protect the economy;

Support (economic) recovery; and

Clean up public finances.

Without being mutually exclusive, the tension between the first two of these objectives and the second is clear. This did not dampen the Chancellor’s morale, 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 give (now) and 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 Stamp Duty Land Tax (SDLT) holiday for properties worth less than £500,000. Scheduled to end on March 31, 2021, this relief has been extended in full 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 no increases in income tax, national insurance and VAT, would be honoured;

No changes to Inheritance Tax (IHT), crushing rumors of a widespread overhaul; and

An extension of both the reduced VAT rate introduced for the tourism and hospitality sectors and the VAT deferral scheme announced around this time last year. Any VAT carried over from last year can now be paid in instalments rather than a single payment due at the end of this month.

Welcome updates

From an Isle of Man perspective, these updates were mostly welcome. In particular, the Isle of Man’s VAT system mirrors that of the UK and therefore the positive changes announced together with the confirmation of the main VAT rate were very good news for businesses and consumers in Isle of Man.

In addition, many Isle of Man residents already have, or are seeking to acquire, interests in UK property which could be affected by any changes to the SDLT and IHT.

So far, so good. But the return on investment, with measures to restore government finances, will follow once the UK economy recovers.

As noted, with an expectation of recovery 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 increase to 25% for businesses with profits over £250,000. The 19% rate will remain for small businesses, however, defined in this case as those with profits of less than £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 rate of UK corporation tax will continue to apply to these profits.

The Chancellor also confirmed that although the general rates of income tax and capital gains tax are not affected, his hands are effectively tied under the triple lock as shown above, he would freeze the brackets and allowances for these taxes for the next five years.

In practice, as wages and asset prices rise with inflation, keeping brackets and allowances static means that more people will pay taxes at higher rates.

For example, freezing the Personal Income Tax Free Allowance alone could mean that a 40% taxpayer would pay an extra £400 in tax a year by 2026, assuming modest wage growth of 2% per year.

It remains to be seen whether the Chancellor has truly succeeded in “squaring the circle” in promoting growth while stimulating public finances.

The key will be to stimulate economic activity and growth in the UK and if this is achieved 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 definitely some interesting times ahead.