Here is a drastically simplified history of the Isle of Man finance industry. I apologise for errors and omissions. I will correct any errors that you tell me about but can’t promise I will add anything I’ve missed (but I might).
It all starts in 1958, with the Isle of Man Act which removed control of the Islands finances from the UK. Soon after in 1961, a very bold decision was taken to abolish Surtax. This was the move that set the Island off down the ‘tax haven’ route. It’s now considered rather a pejorative phrase but that’s what we were.
Considering at the time Surtax accounted for something like 13% of Islands tax take – this was a rather surprising but ultimately seminal decision in terms of the Island’s development.
Not much happened for a while after that, the UK joined the EU (Common Market) in 1972 and we gained our special relationship under Protocol 3. Decimalisation followed in 1973 which resulted in increased banking deposits here as exchange control remained in force and we were a ‘scheduled’ territory. By 1975 the increased banking deposits resulted in Tynwald introducing a new banking Act. Although, at this stage, in these pre FSC days, I am informed that regulation remained rather laissez faire (i.e. there wasn’t any).
The passing of the 1978 Income Tax Act was also a key moment as it exempted insurance underwriting profits from tax and so marked the beginning of various bits of legislation designed to encourage the finance sector by giving tax breaks for what was essentially ‘non Isle of Man’ business. Other key legislation included the 1981 Insurance Act and, of course, the Income Tax (Exempt Companies) Act 1984 which marked the beginning of a truly remarkable period of prosperity and growth.
Anyway, I am getting ahead of myself. Let’s rewind a bit to 1979, as noted above, the banking sector was growing, buoyed up by the abolition of exchange control and by the fact that banking licenses were being handed out to all and sundry – some would say with insufficient thought or consideration. One source suggests that Falcon Bank managed to obtain a banking licence prior to its formal incorporation and that even following incorporation it had a paid up share capital amounting to just £2.00.
Of course, in retrospect, a banking disaster was inevitable; and in 1982, it arrived, in the middle of the horrendous UK recession in the shape of the Savings and Investment Bank (SIB). The loss was £42m which in today’s terms is about £176m (ouch). Many locals lost their shirts as well as overseas depositors and the Island’s reputation was in tatters.
At this point, Isle of Man Government reserves stood at £1m (really I checked that) Treasury went cap in hand to the Isle of Man Bank to try to borrow £4m to support SIB depositors but their request was reportedly dismissed out of hand.
The reputational damage, coupled with the recession which hit the ever shrinking tourist industry hard, resulted in a fall in Manx GDP of 28% between 1982 and 1984. Unemployment was also rising fast and feelings discontent led to anti finance industry groups like Fo Halloo making their feelings known in no uncertain terms.
All of this might have resulted in a rather dreary end to the story but of course it didn’t. The SIB debacle actually prompted a remarkable regeneration of the industry. And I think the Island owes a debt of gratitude to those responsible for the seminal decisions taken.
It’s impossible to name all those involved, but they included people like Jim Noakes, Edgar Mann, John Crellin, Charles Cain, Mark Solly, Sir Miles Walker, Dursley Stott and others, including perhaps more controversial characters like Chris Kingston who also played an important part in putting the Island on the map.
The Financial Supervision Commission (FSC) was set up in 1983, the Shipping Register & Income tax exemption in 1984, KYC requirements came in 1985, followed by Captives in 1986.
By 1991 the Depositor Compensation Scheme was in place, Government Income was rising and GDP was on an upward trend. Government reserves reached £110 million; all looked rosy, and it was. However, changes on the international scene were soon to bring new external pressures to bear.
In 1996 just as the Manx Government enacted the Isle of Man Limited Liability Companies Act, a US style entity with a view to attracting more business from the United States, the US Government enacted a raft of anti-tax avoidance legislation which effectively killed US business in the Isle of Man and the other offshore islands stone dead.
Following this the UK and then the OECD began to look more closely at the Isle of Man, the Channel Islands and other tax havens. At the time, the protocol where one country wouldn’t assist another to collect its taxes was very much in place so much of the thrust of this unwelcome attention was disguised as being to combat money laundering (i.e. proceeds from drugs, weapons and other organised crime) whereas in reality the agenda was much more about lost tax revenue. Big countries were starting to look jealously at the success of the tax havens and trying to find ways of tracing funds that had been legally earned but surreptitiously stashed offshore by their citizens.
The Andrew Edwards Report was commissioned by Jack Straw in 1998 to look into the regulation in the Channel Islands and the Isle of Man. Its conclusion found the Islands to be in the ‘top draw’ of financial centres from a regulatory perspective and drew the heat from the argument for a short while. But the threat had been recognised and it resulted tighter regulations. Suitcases full of money were no longer welcomed by Isle of Man banks, ‘all crimes’ money laundering laws were introduced in 1998 and the licensing of Corporate Service Providers and then trustees followed shortly after in 2000 and 2005 respectively.
The age of regulation had arrived with a bang – FSC headcount rose from seven in 1983 to 23 in 1998 and 63 by 2007.
In 2000, the OECD issued a report on harmful tax practices and started to focus on so called non-cooperative tax havens who would not commit to fiscal transparency but by now the Isle of Man was already well regulated and succeeded in remaining on the white list. It achieved this by beginning an intensive program of agreeing bilateral Tax Information Exchange Agreements with other countries commencing with the USA on 3 October 2002.
For a while, all seemed well again. The Island’s tax and fiduciary industry had matured somewhat so that by now, clients with undeclared money had become the exception rather than the rule. As well as the usual staple of non-dom planning, clever CSPs were making their money from selling legitimate (if not somewhat aggressive) tax structures such as Employee Benefit Trusts, Stamp Duty avoidance schemes, and Property Development Partnerships. Simultaneously both the Fund and the Life Insurance industries were booming.
In a strategy most famously pioneered by Charterhouse in Ramsey, payroll companies started to spring up too. By the magic of leading Counsel induced financial alchemy, these companies offered UK based workers a more or less tax free salary, even though they were UK nationals, living and working the in the UK. Needless to say they were very popular with their clients and as a result their owners became very rich. David Dean, Charterhouse’s founder was a regular member of the Times Rich List during this period but of course, as Jimmy Carr later found out they are understandably less popular the UK tax authorities and may have been instrumental in tipping the UK Government’s view of the tax havens from a tolerable nuisance to an outright menace.
The early noughties was a good time to be a law firm in the Isle of Man. An increasingly sophisticated and often institutional clientele wanted complex Fund structures rather than simple holding companies. Protected Cell Companies having been introduced by the Companies Act 2004 were in demand and spate of successful and high profile stock exchange listings all meant expensive legal work was in demand.
The main law firms Cains, and Dickinson Cruickshank (now Appleby) grew significantly and started to dramatically expand their own corporate services and trust activities. They jointly lobbied the Government to enact a new legislation for a New Manx Vehicle (NMV) which could compete on equal terms with the IBCs being turned out in the thousand by the British Virgin Islands. The result was the Isle of Man Companies Act 2006; a modern companies Act closely following the BVI template. Company number 1v was formed by Middleton Katz Chartered Secretaries on 1 November 2006.
Then came 2008 (ouch), first the credit crunch resulted a real estate crash which hit fiduciaries and the Fund industry badly. But worse, much worse was to come; In 2009, the UK Government prompted by its own fiscal squeeze decided to unilaterally renegotiate the IOM / UK VAT agreement – not just once but twice. The initial 2009 VAT loss was £114m annually and this was soon followed by another £30m in 2011 £50m in 2012 and £75m. The VAT blackhole in the annual budget which totalled nearly £190m (out of total Government spend of £533m) looked catastrophic and still does. Thankfully, the Government had substantial reserves (in excess of £1bn) saved from the good times and now faces of the challenge of balancing the budget before they run out.
Even in these austere times, there were a couple of bright spots such as the increasing number of super yachts being owned via Isle of Man resident structures for VAT purposes; an increasingly successful aircraft register and the beginnings of a very promising eGaming sector. The resilience of the economy is demonstrated by the fact that thus far, we have (just) avoided the recession which has blighted virtually every other western economy.
But we remain far from out of the woods, the UK Government egged on by campaigners like Richard Murphy and concerted newspaper campaigns recently started taking another look at aggressive tax schemes. Tax Avoidance has become a pejorative term which has resulted in ever increasing scrutiny and legislative pressure from HMRC and further afield.
On 11 December 2012, Chief Minister Bell announced that the Isle of Man would enter into an automatic information exchange agreement with the UK (IOM UK/FATCA).
It is hard to overstate the significance of this announcement and equally difficult to predict its long term impact. On the one hand, it could consolidate the Island’s position as a mature, responsible and independent international finance centre thus enhancing its long-term success but on the other, there is a danger that it could mark the beginning of a long term decline in its fortunes. Which will it be ? I’m afraid only time will tell.
Much of the information in this article was researched from two sources – both are excellent and highly recommended:
(i) New History of the Isle of Man Vol. 5: The Modern Period, 1830-1999: ISBN-10: 0853237166 | ISBN-13: 978-0853237167 By John Belchem
(ii) No Man is an Island: 50 Years of Finance in the Isle of Man – Roger Rawcliffe: ISBN-10: 0955404320: ISBN-13: 978-0955404320