FinanceIsland is having tocope with an ever-growing burden ofglobal regulationPage 2

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ManufacturingOutput spans arange as wide asthat of an economy10 times its sizePage 2

ProfileMaker of kitchens,adapted for thedisabled andelderly, goes globalPage 2

EconomyChanges to a VATagreementhave hit theshipping registryPage 3

Thursday November 15 2012 www.ft.com/reports | twitter.com/ftreports

FT SPECIAL REPORT

CommentaryQuestions arebeing askedabout the moralityof tax planningPage 4

ProfessionalservicesExpansion reachesbeyond law andaccountancyPage 4

Away from the Victorianterraces of the lawyers andbankers in downtown Doug-las is a glimpse of thefuture for the Isle of Man.

On the edge of an indus-trial estate stands a modernedifice clad in local stonewith huge floor-to-ceilingwindows. It is Celton ManxHouse, the new home of theAsian company behind theSBOBet internet gamingbrand.

Bill Mummery, executivedirector of Celton Manx,says it is a statement of hisbusiness’ commitment tothe island. His corner office,lined with prints of theisland, commendations forthe group’s charity workand photographs of MrMummery’s encounterswith the sporting elite –SBOBet sponsors West HamUnited and the Manxnational football team, forexample.

“Celton came here in 2005because it wanted a qualityjurisdiction. You have theEnglish legal system, regu-lation specific to the indus-try and, as most of our mar-kets are outside the EU, wepay VAT only on the reve-nue we generate in the EU,”

he says. “Since then, thechallenge has been manag-ing growth.”

The island is on the UK’swhite list, allowing licenceholders there to serve UKpunters. Celton’s main oper-ations are in the Philip-pines, where it runs livecasinos for its website andits customer service teams.

But the Isle of Man hashuge data storage centresthat are not vulnerable totyphoons, vast broadbandand satellite communica-tions capacity and thebanking facilities to handleclients’ money.

Hence egaming, one ofthe island’s newest indus-tries, is one of its fastestgrowing. From a standingstart a decade ago it nowaccounts, with informationtechnology, for about 9.7per cent of gross domesticproduct.

As well as Celton, 188Betis headquartered on theisland, Paddy Power has abase there, along with soft-ware companies enablingthe online growth, such asPlaytech and Microgaming.

There are not, however,huge numbers of jobs(about 750), admits TimCrane, the government’segaming ambassador, butthey are well paid. “It hasbeen a very important con-tributor to our economy.”

It also provides thedemand to justify invest-ment in data centres andtelecoms infrastructure thathelps all businesses. Licen-sees pay £35,000 plus 1.5 per

Continued on Page 2

Asia internetgaming on a rollGambling

Andrew Boundsreports on a newrevenue source thataccounts for almost10 per cent of GDP

The Isle of Man may besmall but it is adaptable. Ithas featured as the slums ofVictorian Bristol, the roll-ing hills of Ireland, the rug-ged coast of Cornwall andeven urban locations suchas Boston and Hamburg insome of the 100 films shotthere since 1995.

Stars such as JohnnyDepp (The Libertine) andClaire Danes (Me and OrsonWelles) have set foot on theisland, bringing a touch ofglamour – and much neededspending in its restaurantsand hotels offseason.

The first film was TheBrylcreem Boys, the 100thwas Dom Hemingway, agangster film with JudeLaw and Richard E. Grant,that is still in production.

According to a report byOxford Economics, the con-sultancy commissioned bythe government, the filmindustry brought £81m inbenefits and created 2,140full-time equivalent jobyears.

The government hasinvested £170m (in 2011prices), which has gener-ated £85m from producersthrough the equity share ofrevenues and £375m from

additional tax revenues.However, changes to

value added tax rules thatput an end to the islandkeeping the VAT earned oncinema screenings in theUK have hit the industryhard.

The UK and Ireland thenextended their own taxbreaks. It costs about£250,000 extra to make aproduction on the island.From a high of 12 in 1997,only two productions weremade there in 2011. Thenumber of days of filminghas fallen from 830 in 1997to 25 in 2011.

“The competitive offer ofthe Isle of Man to film pro-ducers is now relativelypoor compared to its com-petitors, lagging both theUK and Ireland in terms oftax incentives, local coststructures, skills and thevariety of image locationsfor film making,” OxfordEconomics concluded. “Notonly is the Isle of Man rela-tively uncompetitive whenit comes to attracting film-makers, it is also operatingin a declining market.”

Hilary Dugdale, who runsthe government’s film unit,Isle of Man Film, says thegovernment’s proactivehelp, such as closing roadsand providing equity fund-ing, was no longer suffi-cient to entice filmmakers.She says it is important tobring in the spending offilm crews, which also pro-vided temporary jobs formany on the island andthat change is needed.

However, the path chosenhas caused controversy,with seven members ofTynwald, the parliament,voting against and one min-ister being sacked for doingso in June. The governmentdecided to take a stake inPinewood Shepperton, thefamous studios near Lon-don where James Bondmovies are made, and allowit to use £25m of its publiclyfunded Media DevelopmentFund (MDF) to invest infilms. This gives Pinewoodthe ability to create demandfor its studios, while manyoutdoor locations would beon the island. The plan totake a 19.99 per cent stakewas reduced to 9.99 per centand purchased for £12.2m atthe end of October.

Pinewood was bought ayear ago by John Whit-taker, the billionaire chair-man of Peel Holdings, theproperty, media and logis-tics group, who lives on theIsle of Man.

In 2007 management ofthe MDF was handed toCinemaNX, a Manx com-pany, to run. Steve Chris-tian, the co-founder of Cine-maNX, has taken a boardseat at Pinewood and fourstaff have transferred to thestudios.

Mr Christian and IvanDunleavy, Pinewood Shep-perton chief executive, havejoined Prosper Capitalwhich is already licensed bythe Financial ServicesAuthority, as well as regis-tering Pinewood FilmAdvisers with the FSA.

The Public AccountsCommittee (PAC) of Tyn-wald had criticised the gov-ernance arrangements ofthe MDF.

The Treasury waived theneed to put the contract outto tender, a move the PACsaid should not be repeated,while the attorney generalruled that CinemaNX didnot need an investmentlicence.

It has refused to publishaccounts, as it can legallydo, although it gives 20 percent of its profits to the gov-ernment. One year’saccounts were published atthe insistence of the PAC,which showed the bulk ofCinemaNX’s revenues camefrom interest on the MDF.

The Liberal Vannin party,which has two members ofparliament, is pressing for afurther inquiry into thePinewood deal. KateBeecroft, one of them, says:“This is taxpayers’ money.

Lights, camera butslightly less actionFilm

Andrew Boundsfinds the industry’sattractions are beingoutmatched by rivals

There is a lack of transpar-ency and accountability.”

Eddie Teare, treasuryminister, admits the dealwas controversial. “It hasbeen an unusual stepbut . . . it was quite clearthat the offering we hadwas no longer attractive.

“Teaming up with a namesuch as Pinewood Shepper-ton gave us extra leverageand . . . they recognised ourstrong position in the inde-pendent film sector and theexpertise we have there.They wanted to diversifyfrom the big budget films,the Bond films, to try to getother films as well. The ini-tial indications have beenvery good.”

He could not outline whatinvestment targets hadbeen set. “We have gotaccess to their [CinemaNX]accounts as treasury but wehave got to recognise therehas to be some degree ofconfidentiality.”

.

On location: DomHemingway,currently inproduction andstarring Jude Lawand Richard E. Grant,was filmed partly onthe island

Closing roads andproviding equityfunding is no longersufficient to enticefilmmakers

At first glance little seems tohave changed on the Isle ofMan. It has just posted its28th year of economicgrowth, the bars of Douglas

teem with suited bankers and lawyersand horses still pull trams along itsseafront during the summer season.

Yet it is facing its toughest testsince its offshore financial sector wasestablished in the 1980s in response toa deep recession.

Its model of European welfare com-bined with low taxes is being re-exam-ined as revenues fall and the globalslowdown hits its banking sector.

Once unheard of, industrial strife isgrowing: state-employed bus drivershave been dismissed for refusing toaccept the loss of paid lunchbreaks,while civil servants grumble aboutredundancies and curbs on their pen-sions.

Allan Bell, the experienced formertreasury minister who now heads thegovernment as chief minister, hasdrawn up an “agenda for change” set-ting out a smaller state and fewerbenefits while maintaining the “cohe-sion of Manx society”.

He says the economic change –chiefly driven by the UK revising anagreement in 2009 on how to sharevalue added tax revenue, whichslashed government finances by abouta third – represents an “opportunityand a challenge”.

“The Isle of Man is starting from aposition of strength. We have avoidedrecession and unemployment is stilllow,” he says. Gross domestic productper head is higher than in the UK.

But with the UK economy sluggish,the euro crisis spreading uncertainty,and regulatory pressure increasing,“we have to be swifter in identifyingnew niche opportunities for the futureto enable us to continue the growthwe have enjoyed now for 28 years”.

As a self-governing dependency ofthe British Crown, the 81,000 strongisland has not hesitated to adjust itslaws to attract business.

It is an important operator in thespace industry, with one in four satel-lites launched last year being ownedon the island. It retains a strong man-ufacturing industry, especially in

aerospace, nurtured by governmentsupport.

It has also created successful shipand aircraft registries, which bringbusiness to the island’s professionalcommunities by arranging mortgagesand companies to own the assets.

The attraction of an online gamingcluster has blessed it with impressiveIT infrastructure. It invested in thegood times in plentiful power androad infrastructure, which could beaugmented by offshore wind farms inthe Irish Sea.

Nevertheless, Standard & Poor’s,the rating agency, downgraded itsAAA credit rating a notch in Novem-ber 2011, citing external factors. Itretains a AAA rating from Moody’s.

Mr Bell says: “We have to recognisegovernment cannot provide every-thing in the way it has in the pastand, if we are going to maintain acompetitive tax structure . . . therehave to be limits. Tax increases wouldbe totally counterproductive.”

That requires means testingchild benefit and squeezing somesavings reliefs to bring the budget

into balance by 2015-16.Nevertheless, the island has a

stronger revenue base than many off-shore jurisdictions because of its 20per cent VAT rate shared with theUK. It also attracts companies thatcan register for VAT there and tradein the European Union.

The top rate of income tax is 20 percent and there is no inheritance tax,stamp duty or capital gains. Banksare the only businesses subject to tax,at 10 per cent.

Mr Bell says that, while the islandwould continue to comply with rele-vant international tax and moneylaundering agreements, there was “an

air of hypocrisy” about some Britishrhetoric.

The UK government has attackedthe behaviour of offshore centreswhile encouraging French investorsto flee high taxes there and crowingabout reductions in corporate tax lur-ing back multinationals.

However, he says the relationshipwith the UK had “calmed down a bit”since the revenue sharing changes.

“We need to protect the economy,”says Mr Bell. “We are anxious to see alevel playing field. You look to Asiaand see Singapore and Hong Kongand other emerging centres and ques-tion whether they are following thesame standards. I still have to be con-vinced that the regulatory pressuresare applied equally to competitors.”

As part of its diversification theisland’s government in October took a9.99 per cent stake in Pinewood Shep-perton, the film studios, and gavePinewood access to £25m of publicmoney to invest in films. Filmingwould be done at the studios and onthe island. Pinewood is owned byJohn Whittaker, the billionaire chair-man of Peel Holdings, the property,media and logistics group, who liveson the island and discussed the dealdirectly with Mr Bell.

Peter Karran, a minister who wassacked for voting against the Pine-wood deal, says he fears that govern-ment plans for outsourcing or “corpo-ratising” services to cut costs couldreinforce a too-cosy relationshipbetween the government and busi-ness. “It is a system built on patron-age,” he says. His Liberal Vanninparty is calling for an inquiry into thePinewood deal.

However, Mr Bell wants to makemore use of the wealthy on the island.Teaming up with Peel Holdings inother areas would enable it to funneloverseas investment to northwestEngland and show that the island “isa genuine partner for good, not a taxhaven on a sandspit in the Irish Sea”,he says.

Despite the commitment on tax, anincrease from 18 to 20 per cent in 2010has made business leaders nervous.Garth Kimber, chief executive of XelaHoldings, an online gaming company,

says: “Maintaining zero corporate taxis vital. It has got to be a governmentstrategy. They have made all the rightnoises but, until you see that [budget]gap closed, there is a degree of con-cern. I would like to feel 100 per centcertain. It is an island and not every-body wants to live on an island. If wewant to bring quality employees over,they have got to see the benefits.”

There are also worries about access.Mr Bell admits that he has concernsover a proposed offshore wind farm inBritish waters that could interferewith the vital Steam Packet ferryservice from Liverpool and Heysham.

“We can’t afford any disruption tothe sea links. It is the lifeline for theisland. For our business communityand for manufacturing in particular,”he says.

Noel Hayes, chairman ofManx2.com, which charters regularflights to unscheduled destinationssuch as Gloucester and Belfast, says

he is worried that its air links couldbe reduced.

Easyjet has begun services fromLiverpool, using large 150-180 seat air-craft, while Flybe has the biggest net-work, using 80-seat aircraft. Easyjet isoffering cheap new capacity he saysbut, with 700,000 passengers a year,bigger aircraft could mean fewerflights.

“The island can have economy orfrequency,” he says.

He welcomed a review announcedon the open skies policy, citing theexample of Guernsey, which still con-trols access to its airport to ensureoperators can make money and pro-vide frequent flights.

Nevertheless, most businessesremain committed to the island. BillMummery, executive director ofCelton Manx, an egaming company,quotes the latest marketing slogan:“‘The Isle of Man, where you can’. Itdoes what it says on the tin.”

Manx society facesreduced state roleAndrewBounds finds amodel of Europeanwelfare combinedwith lowtaxes being re-examined as revenues fall and slowdownhits the banks

Once unheard of, industrialstrife is growing, with busdrivers sacked and civilservants grumbling aboutredundancies

Headwinds: the island is facing its toughest test since the 1880s Alamy

Doing Business in the Isle of Man

2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 15 2012

Doing Business in the Isle of Man

cent on the first £20m ofgross gaming yield annu-ally. There are 47 licenceholders but Mr Crane saysthe policy objective is“quality, not quantity”.

Industry executives agreethat the US move againstManx-based PokerStars,which runs online pokerrooms, for money launder-ing, illegal gambling andbank fraud, has reinforcedits reputation.

PokerStars struck a civilsettlement with the USDepartment of Justice inJuly, paying back $571m tothe government and reim-bursing the non-US playersof Full Tilt, a rival, for$184m but admitted nowrongdoing.

PokerStars acquired theassets of Full Tilt, whichwas also charged, as part ofthe deal. While PokerStars’players had been protectedby the Manx regulator –which insists clients’money is kept in ringfencedaccounts – those at Alder-ney-based Full Tilt were outof pocket until PokerStarstook it over.

Anxious not to miss outon gambling revenue from

Continued from Page 1 its own citizens, the UK isproposing a move to a“point of consumption”model in which moneywould be levied dependingon where customers are,not where the businessesthey bet with are. “Globallythere is a move towards taxand regulate. Governmentsare looking for new ways togenerate revenue.”

He believes the EU, wheremember states operate asindividual markets, willeventually create a singlemarket in betting.

Garth Kimber, the gov-ernment’s former egamingambassador, was head-hunted by Xela Holdings,another Asian company,last year to establish a baseon the island. He says thecompany wanted access toEurope and the possibilityof listing there one day.

However, he says most of

the big Asian gaming com-panies are now on theisland and the governmentneeds to work on attractingmore business service pro-viders for the industry toensure the cluster remains,whatever changes there areto international regulation.

Micrograming, a providerof casino and online gamingsoftware, established its HQon the island in 2001 andemploys about 80 people.

Playtech, the marketleader worth £1bn, this yearmoved its country of domi-cile from the British VirginIslands to the Isle of Man,already its HQ, as it movedfrom Aim to the main list inLondon.

“The Isle of Man under-stands the industry. It is agood place to base a busi-ness,” says Roger Withers,the chairman.

He says recent growth,driven by mobile devices,will continue.

“There is a heck of a lotof growth to come. Most ofthe social networks aremoving into games and willneed a partner. We have theworld’s biggest library ofcasinos and games andthese can be applied tosocial networks.”

Asia internet gaming on a roll

Manx regulatorinsists clients’money is keptringfenced

An industrial estate on theedge of Douglas, surroundedby outlets such as Pets atHome and double glazingsalesmen, is the last placeyou might expect to find aglobal manufacturer.Yet Tim Baker, finance

director of DLP, a maker ofkitchens and bathroomsadapted for the disabled andelderly, says it is the perfectlocation.“It is a lightweight,

relatively high-valueproduct,” he says, so thecost of shipping materials inand out is offset by the zerocorporate tax rate. “It is amultipurpose manufacturingfacility. It is small batches,flexible, with short leadtimes. We can take an orderin the morning, schedule aproduct in the factory, haveit out on the last boat of theday and it’ll be in ourSkelmersdale hub in theearly hours of the morning.”The Isle of Man has

worked for DLP, whichtrades under the AKWmedicare brand. “We havebeen in the market for 25years and are the marketleader in the UK,” Mr Bakersays.The company has a £40m

turnover and 260employees, with 70 on theisland and most of the restin the UK. All design,research and financialactivity takes place on theisland as well as someassembly. Units are sent tothe main manufacturing anddistribution facility inDroitwich.It sells mainly through

occupational therapists, whorecommend products, and tocharities and councilsrunning care homes. “Theychoose by brand or brandequivalent so you have toget yourself on the list. If

you can modify people’shomes, as their mobilityreduces, they can stay therelonger. Most people want tostay in their own home and itis an awful lot more costeffective for the state,” hesays.The UK accounts for 90

per cent of sales, but DLPalso sells in Belgium, Franceand other European countries.It has a distributionagreement in the US and ishopeful of fast growth there.Mr Baker admits the UK

public sector budget cutshave hit sales but he believesan ageing population offersmassive potential.“Increasing longevity gives

us a great opportunity. It hasbeen a niche market. Whatwe see happening is people,as they are having to providefor themselves, will move intoa future-proofing mentality.”That attracted ECI Partners,

a private equity house, toback a management buyoutin 2008.There are 5,000 products

because of the differing sizesof showers and kitchens.They include shower screenswith small windows forcarers to gain access. Theyhave to be tough enough to

support a wheelchair.AKW was established in

1990 in Worcester butstarted shower traymanufacturing on the Isle ofMan in the 1990s. It thenmoved into kitchens. Nowthe challenge is to createproducts that are not justfunctional but also attractive.They include a built-in hobthat can be lowered for awheelchair user.A small team of designers

works above where thefibreglass shower trays dry,testing taps, smashingworktops and creating newproducts.The latest is a shower for

the partially sighted. Bigbuttons feature Braille and itis incapable of getting to ascalding temperature. Thehead swivels while still in theholster, reducing the chanceof it being dropped.While much production is

mechanised, the finalassembly is labour intensive,with workers standing atcounters to add joints andseals on to shower screens.The government has given

grants towards newmachinery, part of itspackage to helpmanufacturers.“We provide the kind of

jobs needed on the island,”says Mr Baker. “Noteveryone wants to work inan office.” The company hastaken on several youngunemployed and unqualifiedworkers to give them achance under anothergovernment supportedscheme. “There is a strongwork ethic in here,” MrBaker says.“We have great growth

opportunities. The challengeis to make the rightchoices.”

Andrew Bounds

DLP Global maker of products for disabled and elderly

Functional but attractive

Financial services remain thebedrock of the Isle of Man’seconomy, despite the island’ssuccessful push to diversifyinto areas such as e-gaming,

manufacturing and informationtechnology.

The financial sector makes up35 per cent of gross domestic productand employs a quarter of the workingpopulation. Its share of GDP hasfallen from 48 per cent in 2001 asother parts of the economy haveexpanded, but it still contributes togrowth. Life assurance is the mostbuoyant area.

“The Isle of Man is quite resilientbecause it is a well balanced economyand its financial services are spreadacross a number of disciplines,” saysJohn Spellman, the island’s directorof financial services. “It’s a very chal-lenging market out there and, likeothers, we have had job losses, butalso, luckily, we have been able togenerate opportunity.”

The Department of Economic Devel-opment is developing a country-by-country strategy to win its share ofwealth and corporate business inemerging markets, recognising thatthose such as China, India and theMiddle East have differing needs. The

aim is to promote the range of serv-ices the island has to offer.

Its main pillars are banking, insur-ance, the fiduciary sector and invest-ment fund management and adminis-tration.

Banking is the biggest employerwith just under 3,000 staff. Theisland’s 18 banks, like elsewhere, havestruggled with the low interest rateenvironment and global deleveraging.Deposits have fallen from £57bn in2008 to £47bn, but there are signs ofstabilisation. Output rose by 4 percent in 2010-11, according to govern-ment figures. Banking accounts for 11per cent of GDP.

“It’s not easy for anyone, but I’d saywe are holding our own. We adjust tothe environment,” says Mark Water-house, chief executive of Zurich BankInternational and chairman of the Isleof Man Bankers’ Association.

There are hopes of attracting newbanks from emerging markets to theisland – and, even if that fails, saysMr Waterhouse, existing banks hopeto offer services, for example, to Chi-nese companies exporting to Europe.

Insurance, employing nearly 2,000,has the biggest share of GDP of anysector of the economy at 14.7 per cent.Its output grew by 22.8 per cent last

year. The life assurance sector, whichincludes many of the biggest names,such as Royal Skandia, Friends Provi-dent and Axa, is a big strength. Singlelife premiums from the UK have stag-nated, but regular premiums for lifeand pension products in Asia and theMiddle East are growing healthily.

“Future growth is going to comefrom the developing world,” saysDavid Kneeshaw, chief executive ofRoyal London 360° and chairman ofthe Manx Insurance Association. “It isreally important that the Isle of Manis seen by regulators round the world,politicians and advisers, as a safeplace to put clients’ money.”

The island also has a fairly stablesector of captive insurers, whichinsure risks for parent companiesranging from financial groups to utili-ties, manufacturers and airlines.Despite a “soft” global insurance mar-ket which does not favour captives,there has been an increase in inquir-ies about setting up new ones.

The fiduciary sector, which hasabout 1,900 staff and accounts fornearly 5 per cent of GDP, saw outputgrow by 15.6 per cent last year after aflat period following the economiccrisis. It has 200 licensed trust andcorporate service providers handling

business from family trusts to vehi-cles for owning yachts and aircraft.

“Those that have a more diversifiedpresence are faring better than thosethat have their eggs in one basket,”says Mark Denton, managing directorof SMP Partners and chairman of theAssociation of Corporate Service Pro-viders. “Some of the smaller firmsmay combine with others in theisland or be swallowed up.”

The fund management and adminis-tration industry, which employs up to1,000, expanded rapidly before thecrisis and has been hard hit sincethen. Funds under management havefallen from $58bn in 2008 to $22bn. ButIta McArdle, a consultant who chairsthe Isle of Man Fund ManagementAssociation, has seen a shift in senti-ment in the past couple of months.

“We are seeing a lot of new inquir-ies and a significant number of peopleconverting it into business,” MsMcArdle says. The island is particu-larly targeting early-stage funds ininnovative niches.

Amid rapidly evolving financialmarkets, the Isle of Man must alsocope with an ever-growing burden ofglobal regulation, on which it is work-ing closely with Jersey and Guernsey.

The latest difficulties include the

US’s Foreign Account Tax ComplianceAct, a far-reaching law designed tosmoke out tax-evading Americansholding money abroad, under whichbank and investment details held byUS citizens in other jurisdictions willbe handed automatically to the USauthorities. A deal similar to thatreached between the UK and the US islikely.

The island is also considering care-fully the impact of Sir John Vickers’UK banking reforms, which willringfence banks’ retail businessesfrom their investment banking

activities. One issue will be whatflexibility, if any, banks on the islandhave over which of their activities areringfenced.

The Isle of Man is also consideringits approach to the EU’s Solvency IIinsurance capital regime. It may seekequivalent status for its life assurancesector, but not for captives.

Companies must adapt to a rapidlychanging commercial situation.Anthony Long, chief executive of Cap-ital International, a family-owned pro-vider of investment services, says thelengthy global downturn is “reallystarting to bite. We, and indeed theIsle of Man, have fared very well sofar, but we have seen a flattening ofour growth this year”.

Its turnover had been growing by15-20 per cent a year, but technologi-cal change is making UK rivals morecompetitive. That means the firmmust deepen automation to cut itsown costs, but there could also beopportunities as larger firms out-source operations such as custody andtreasury.

“Financial services are still takingsteps forward,” says Mike Hennessy,chief executive of the Chamber ofCommerce. “But it is a challengingenvironment, no doubt about that.”

Plan to win customers in emerging marketsFinancial servicesGovernment strategists are developing country-by-country approach to promotion of specialist skills, writesBrianGroom

Ita McArdle: targeting niche funds

From apple juice towatches, space equipmentto aircraft landing gear, theIsle of Man’s manufacturingsector spans as wide arange as a country 10 timesits size.

Making up 5 per cent ofthe economy and employing3,000 people, the industry isenjoying the manufacturingresurgence worldwide. Theisland has an aerospacecluster, high-tech engineer-ing businesses and a rangeof food and drink providersthat are moving intoexports.

The latest fillip camewhen its famous queenscallops were added to anEU list of more than 1,000products whose names areprotected by law.

Last year the Isle of Man“Queenie” won the UKSustainable Seafood awardafter years in which Manxfishermen worked with thegovernment to protect themarine environment. NowBrussels has added moreprotection for the Queenieby declaring it a “ProtectedDenomination of Origin”,joining Champagne andParmesan.

The island has a growingreputation for food and

drink: the Isle of ManCreamery’s cheese is widelyavailable in UK supermar-kets.

One of the latest is theApple Orphanage company,which produces apple juice.Its founders WilliamFaulds, 28, and CharlotteTraynor, 28, met at LeedsUniversity.

Mr Faulds had returnedto the family farm – whichhe claims has the “wettestfield on the Isle of Man” –and started making juicefrom the small orchard hisparents kept.

He and Ms Traynor thenhit upon an innovative idea– to source more applesfrom hobby growers whohad more than they needed.In return for the apples,they would receive bottlesof juice.

Ms Traynor recalls: “Thefirst time we did it, we hadpeople queuing round theblock to drop off theirapples. We must have had10 tonnes of fruit.”

For each 3kg, growersreceive a 250ml bottle ofjuice. Many are single vari-ety, such as the AndrewJohnson, only found on theisland.

They made about 4,000litres this year in a barnconverted for the purposeand have planted their ownorchard to scale up thebusiness. It makes a profit,but not enough to supportthe pair, so they still live onthe farm.

There are about 17 aero-space companies on the

island, including Ronald-sway Aircraft Company andGE Aviation, which makeslanding gear but has beenput up for sale by its USowner.

Eddie Teare, treasuryminister, notes: “The evi-dence of water on Mars wasfound by a piece of kitmade on the island.”

Adrian Moore, head of

manufacturing at theDepartment of EconomicDevelopment, says the busi-nesses are linked with theUK through the North WestAerospace Alliance. Somehave 20-year contracts withRolls-Royce for its newTrent engines.

The next challenge is toensure there are enough

skilled engineers and thedepartment is working withlocal employers to set up atraining college. “There is askills gap,” says Mr Teare.“We are trying to upskillthe younger section of ourcommunity. There are jobs.It is matching those unem-ployed with the opportuni-ties.”

Target Tools, a supplier ofmachine tools and parts, isa vital link in the supplychain, says Mr Moore.

Simon Radcliffe, director,co-founded it in 1994 to sup-ply general engineeringtools. But it has recentlyfocused on aerospace,which accounts for 75 to 80per cent of turnover.

“We have developed a lotof business in the UK. Wehave even sent tools toChina for our customers,”he says. Government grantsfor capital assistance and azero corporate tax rate com-pensate for high transportand power costs,” he says.

“There is great supportfor the industry on theisland. If we have a problemwe ring the ministry and

can get straight through tosomebody who can help.”

Bodystat, a maker ofmedical devices, has alsogrown with the help of gov-ernment grants. SakkieMeeuwsen, founder andchief executive, moved thebusiness there from SouthAfrica in 1990 in order togain access to the Europeanmarket. The machines canmonitor the status ofpatients and are also usedby athletes to measure theirfat levels.

They are used byresearchers looking for newdrugs. Some hospitals andGPs are adopting smallerunits for diagnostic tests. “Icould analyse two patientswith the same conditionand tell you if one is goingto die and the other not,”Mr Meeuwsen says. Havingjust built a new headquar-ters outside Douglas, hesays the company is on theverge of rapid growth.

“I would not like to berunning a small business inthe UK. With all the redtape and health and safetyit must be a nightmare.”

Food and drinkenjoy growingreputationManufacturing

Andrew Boundsreports on industrialprowess across widerange of products

Core activity: William Faulds and Charlotte Traynor make 4,000 litres of apple juice a year

80%Part of Target Tools’ turnoveraccounted for by theaerospace industry

Andrew BoundsNorthern Correspondent andEnterprise Editor

Brian GroomBusiness and EmploymentEditor

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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FINANCIAL TIMES THURSDAY NOVEMBER 15 2012 ★ 3

Doing Business in the Isle of Man

With growth running at3.4 per cent in 2010-11and estimated at thesame rate this year, theIsle of Man is one of few

areas in the developed world to haveescaped recession.

While its financial services industryhas shrunk slightly – its share ofgross domestic product has remainedstable at about 35 per cent since thefinancial crisis – other sectors such asegaming and manufacturing haveachieved strong growth.

Nevertheless, it is feeling the fiscalsqueeze as much as its neighbours inIreland and the UK after the loss ofabout £200m a year in value added taxrevenue from changes made to its“common purse” sharing agreementwith the UK that are less favourableto the island.

GDP stood at £3.5bn in 2010 and theisland has no debt. Inflation hasbegun to fall sharply after increasesin VAT, food and energy prices arefiltered out.

Eddie Teare, treasury minister anda retired senior banker, says: “We arestill growing, although it is an econ-omy of two halves. The economy thatfaces out to the wider world is grow-ing well but the one that is dependentupon the local spend is coming underpressure. There is pressure on theconstruction industry, hotels and lei-sure. But we are still creating jobs.”

A national insurance holiday forcompanies taking on staff has created250 new jobs.

“The overall level of unemploymentis still low at 2.2 to 2.3 per cent but Iam not complacent.”

Mr Teare has outlined a four-yearplan to balance the budget, using£91m of its £1.5bn reserves to cushionthe blow.

“We are looking more at spendingcuts in a measured way,” he says.

“This year, we are using £55m fromreserves, 1.5 per cent of GDP. I feltthat was as much as we could do inone step. It is a fine line betweencutting and impacting on businessconfidence.”

The budget should be balanced by2015-16. The cuts will amount to£214m with £26m tax increases and£103m in spending cuts.

However, he says retaining jointvalue added tax arrangements with

the UK was vital for competitiveness.“It gives us advantages for compa-

nies that want to establish companiesin the UK,” he says. “The Isle of Mancan handle all VAT affairs. Traderscan talk to the one VAT office.”

VAT changes have had othereffects. Its successful shipping regis-ter, which generates income for corpo-rate services providers, has been hitby a change made by the UK five

years ago. Owners of yachts who wantto register them on the island for VATpurposes, allowing the VAT bill to bepaid over the 20 year life of the boat’smortgage, now have to visit the islandto be eligible for the benefit.

Chris Allix, director of DominionMarine, who has been registeringand managing yachts since 1984,says the changes had allowedMalta, which did not have the same

requirements, to win some business.Most Isle of Man companies have

now had to open outposts on the Med-iterranean island, he says, incorporat-ing the yacht company there butusing the island for back office work.

“You will still use the Isle of Manbut not for everything,” he says.

The number of superyachts regis-tered has hovered at about 100since 2010.

Dick Welsh, director of the island’sship registry, says the registry hascontinued to gain ground with largerboats, thanks to its quality serviceand low fees, overtaking Norway andthe US to become the world’s 15thlargest.

Fees are charged at a flat rate,whatever the size of the boat. It had436 merchant ships at August 31 and atotal tonnage of 14.3m.

The maritime industry employsabout 580 people with average salariesof £35,000 and £20m in local spending.

The aircraft register won its 500thcustomer this year.

It has had much success by enroll-ing leased aircraft while parked orbetween customers, says HartleyElder, director of civil aviation.

The island is hoping to enter therenewable energy market.

Ken Milne, of the Department forEconomic Development, says it isnegotiating with wind energy produc-ers to extend the Irish Sea farm intothe island’s territorial waters. It ownsthe seabed. But the island’s 90MWdemand is too small for such windfarms so it would need a deal to sup-ply surplus energy to the UK.

Meanwhile, Sefton Group, the coun-try’s biggest leisure group, says it isperforming strongly. “We are a micro-cosm of the Manx economy,” saysBrett Martin, chief executive.

While business travel is down, itsfour-star Sefton Hotel, Palace Hoteland Casino and Sefton Express budgethotel by the airport have benefitedfrom robust local spending.

Mr Martin says Manx residents stillhad cash to spend, and with fewersplashing out on foreign holidays,more were taking cheap breaks inDouglas for the theatre or otherevents.

The group made a modest operatingprofit but fell to £6.3m loss in 2011because of interest rate swaps andlosses on property sales.

Mr Martin says events such as theManx Grand Prix motorcycle racesand the End 2 End mountain bikerace across the island were attractingmore and more foreign visitors.

Mr Teare says the government willdo more to promote these.

“We have got to recognise that peo-ple come here for the scenery andactivities.”

Changed tax deal puts squeeze on growthEconomyRare for the developedworld, the island has escaped recession but it is nonetheless feeling the fiscal pressure, reportsAndrewBounds

GDP stoodat £3.5bn in2010 andthe islandhas no debt

Foreign visitorsflock to the ManxGrand Prixmotorcycle races

Tony Goldsmith

4 ★ FINANCIAL TIMES THURSDAY NOVEMBER 15 2012

Doing Business in the Isle of Man

As the Isle of Man’s econ-omy diversifies, so too itsprofessional services sectoris expanding beyond lawand accountancy to adviceon areas such as pensions,yachts and aircraft manage-ment.

It feeds off the growth offinancial services and othersectors, but also acts as aconduit to bring new busi-ness to the island.

“The accountancy profes-sion works with the legalprofession and the bankingprofession,” says EddieTeare, treasury minister.

“If an internationalorganisation is thinking ofdoing business through theIsle of Man, we have theexpertise here to act as aone-stop shop.”

Like other sectors, it beenaffected by the global eco-nomic slowdown.

But it is growing in expe-rience, sophistication andinternational outlook.

All the big four account-ancy firms have sizeableoperations, along with oth-ers such as PKF, MooreStephens, Baker Tilly and

Grant Thornton.David McGarry, KPMG’s

Isle of Man managing direc-tor, has seen his staff growfrom five to 110 since 1982.

He acknowledges thatthings have got toughersince the financial crisis.

“We have not had a dip[in turnover] but we are notgrowing at the rate we werefour or five years ago.”

Capital markets businesshas slowed and clients aredriving a hard bargain onaudit fees.

But many accountancyfirms have expanded inareas such as tax planning,value added tax and advi-sory services.

Mr McGarry says: “Wetry to support our clients asthey grow, but also to bringnew business to the island.I spend a lot of my time outpromoting the Isle of Manas a location for funds.”

The biggest event in thelegal world in recent yearshas been the arrival ofAppleby, the world’s largestoffshore law firm in termsof staff, via a merger withDickinson Cruickshank, anIsle of Man firm.

Brian Johnson, director ofAppleby Aviation, a newsubsidiary, was previouslydirector of civil aviation forthe island.

He says the island, withits UK value added tax reg-istration allowing access tothe EU, and bespoke com-pany law for owning air-craft, had become a world

leader in aircraft registra-tion.

“When the register firststarted, we thought therewould be 12 in the firstyear. We have had 500 air-craft in the first five years.”

Each aircraft bringsbetween £15,000 and £20,000in annual revenue to corpo-rate service providers,

banks and advisers, hesays.

Mr Johnson says Applebyhad “done extremely wellwith Russian clients. Theyare very demanding but ifyou can provide the servicethey will stay with you”.

Cains, another island lawfirm that has been in busi-ness for more than 100years, achieved revenuegrowth of 3.5 per cent lastyear – below the 10-12 percent it was achieving beforethe crisis, but not bad in adifficult climate.

Profit was up by 8 percent before exceptionals.

Virtually all the firm’sbusiness is international,much of it in easternEurope and southeast Asia.

Cains has built a reputa-tion as legal adviser to Rus-sian and Indian companiescoming to list in London.

The island has become abigger host of non-UK Aimcompanies than any otherjurisdiction.

That work has dried upsince 2008, but Cains is stillwinning work on debtissues in markets such asNew York and Singapore, inwhich the offering entity isan Isle of Man company.

Other work comes fromwealthy families or compa-nies in growth areas, plussome restructuring work oncompanies in trouble.

Andrew Corlett, Cains’managing director, says theattraction of listing via anIsle of Man company is “asystem of law which isreadily understood byadvisers around the world,acceptability for the listingauthorities and tax trans-parency in terms of nowithholding tax on any cou-pon”.

Simcocks, another lawfirm, has seen turnover fallby 25 per cent since 2008and staff shrink from 60 to50 as work emanating fromLondon has slowed.

But Phil Games, chiefexecutive, says it is fightingback by expanding into theBritish Virgin Islands.

Two of Simcocks’ staffhave qualified as BVI law-yers and it will open anoffice there early next year.

The aim is to providelegal advice to BVI compa-nies managed by local cor-porate service providers – amodel that could be repli-cated in other jurisdictionswith an English commonlaw base.

Some count the regulatedprofessions working fortrust companies and corpo-rate service providers aspart of the professionalservices sector.

These are, in any case,developing into “solutions-type businesses”, says MarkDenton, managing directorof SMP Partners and chair-man of the Association ofCorporate Service Provid-ers.

“The CSPs that will dobetter are ones that haveaccountancy and tax capa-bility, VAT capability andprovide a fuller service.”

Sector grows in sophistication,experience and global outlookProfessional services

Brian Groom findsdiversification intopensions advice andmanagement ofyachts and aircraft

Cains law firm: virtually all of its business is international, much of it in eastern Europe

‘Russian clients arevery demandingbut if you providethe service they willstay with you’

Many countries and other offshorecentres would envy the Isle of Man.Amid global financial turbulence, itseconomy grew by 3.4 per cent in2010-11 – a 28th year of continuousexpansion – and it is estimated to beperforming similarly well in 2012.

The island’s inhabitants areacutely aware, however, that theycannot afford to be complacent. Itfaces four notable challenges.

First, it must continue to show theadeptness that has allowed it todevelop niche opportunities todiversify its economy in fields suchas e-gaming, space and advancedmanufacturing, along with aircraftand shipping registries.

Second, it has hard choices tomake to balance its budget by 2015-16 after the shock in 2009, when theUK Treasury rewrote the “commonpurse” agreement that determineshow revenues from value added taxare shared, cutting governmentincome by about £200m a year.

Third, it needs to market itselfeffectively, particularly in financialservices, to claim its share of themarket for managing the growingwealth in Asia, the Middle East andother emerging economies.

And fourth, it must continue torespond to international pressureagainst low-tax financial centres,which is strengthening because ofthe higher taxes and drasticspending cuts that people in largereconomies are suffering.

That pressure is entering a newphase: people are questioning notjust the legality, but the morality oftax planning. Allan Bell, chiefminister, recently told Tynwald, theisland’s parliament: “This change inattitude is being played out in themedia, on the streets of capital citiesand in political actions that weignore at our peril.”

Manx people have a history ofresilience and pragmatism. One of itsstrengths is that, for an island ofonly 81,000 people, it has aremarkably varied economy.

That did not come about by

accident: it has painstakingly set outto exploit new niches so as to avoidover-reliance on financial services. E-gaming alone now accounts for 9.7per cent of gross domestic product.

Space is the most eye-catchingniche. An array of aerospace, spacetourism and satellite communicationsbusinesses is located on the island. Itcould even win the race to fly atourist around the Moon afterExcalibur Almaz, a locally based

company, says it will be ready totake passengers on private lunarexpeditions by 2015. The sector isforecast to generate £1.7bn turnoverover the next three years.

What has helped the island todevelop these niches is its ability tomove quickly in creating the rightlegislation and regulation. Otherjurisdictions are latching on to thistechnique, however: the timeavailable to exploit a niche before

others leap in is getting shorter.The financial sector, which still

accounts for 35 per cent of GDP, isitself diverse, with four strongpillars: insurance, banking, fiduciary(trust and corporate serviceproviders) and investment funds.Strong growth in life assurance ismore than making up for a flatpicture in banking and a decline offunds under management.

The island’s attractions include not

just low taxes, but also proximity tothe City of London – through whichit gains much business and to whichit contributes capital flows – alongwith pragmatic regulation and awide range of expertise.

It is stepping up marketing inemerging economies with a country-by-country strategy that recognisesthat what works for India may notdo so for China or Abu Dhabi.

Some think the Isle of Man wasslow off the mark: its success willdepend on how well it can harnessthe range of products and services itoffers.

In meeting its fiscal challenge, thegovernment has already made sometough decisions. It has squeezedmortgage interest relief andannounced that universal childbenefit will be means-tested fromApril 2014.

The government is cushioning thefiscal squeeze by drawing onreserves over the next three years,but expenditure has to come down

further, which means rethinkingelements of its generous welfarestate.

It is aided by the fact that most ofits politicians are independents, so itis a judgment about fairness ratherthan an ideological battle.

Meeting global pressure against taxhavens is in many ways the hardesttask, even for a co-operativejurisdiction that has for more than adecade tried hard to meet therequirements of the EU, OECD andthe International Monetary Fund.

It is not easily ducked. Abiding bythe rules is one thing, but oneperson’s aggressive tax avoidance isanother person’s legitimate taxplanning.

Asked how the island would reactif one of its companies was accusedof the former, Mr Bell says: “Wewould be very concerned if we wereseen as being used for that purposeand I am sure we would takeappropriate action to ensure theloopholes were closed.”

Under pressure over themorality of tax planning

Space age: sector isforecast to generate £1.7bnturnover over the nextthree years Charlie Bibby

Excalibur Almaz, a locallybased company, said itwould be ready to takepassengers on privatelunar expeditions by 2015

Brian Groom