Could the Crown Dependencies offer Scotland a model for independent life?

Britain's three Crown Dependencies – Guernsey, Jersey and the Isle of Man – have a unique constitutional status in the world – not sovereign, but virtually independent all the same. Is it on these islands that Scotland's own future may be written?

• Like Scotland, the Crown Dependencies issue their own banknotes linked to sterling

THEY are dots on the horizon, the quirky and often forgotten reminders of these islands' rambling history. Their people sing their national anthems proudly and paint their old-fashioned British pillar boxes blue. They are absolutely not part of the United Kingdom, but their people are still very much British.

This week, First Minister Alex Salmond travels to London for a regular meeting of the British-Irish Council, the group set up under an agreement in 1998, to ensure co-ordination and co-operation between the various nations of the British Isles. England, home to nearly 60 million people, is alone among those nations not to be represented there. Jersey, Guernsey and the Isle of Man, together home to around a quarter of a million people, are.

Each has its own history, carved out by the various Vikings, Scots, Normans and Anglo-Saxons who have at one time or another visited their shores. Each now enjoys a similar status. They are possessions of the British Crown (Man was bought in the 18th century for 70,000). But they each have autonomy over their own way of life, able to set taxes as they see fit and make laws likewise.

Famously, the three islands have used that autonomy to market themselves as offshore tax havens for the rich, turning them into some of the wealthiest places on the planet.

Their example is now coming under scrutiny, as the new SNP Government in Edinburgh presses ahead with its plans for an independence referendum – which has turned growing attention on to what the Nationalists these days mean by independence. A study by Professor James Mitchell of Strathclyde University proposed that the SNP is now proposing a form of "looser union" with the UK, where it would attain sovereignty but remain part of a "confederation" of British nations. Such a nation would control matters in its own borders, but would buy in services from the rest of the UK where it was deemed appropriate.

The examples of the three British Dependencies fall short of the what the SNP wants for Scotland – full independence. But they are linked into the UK in a way which the SNP also envisages. For example, while internally autonomous, the UK has responsibility for defence of the three islands – a privilege for which the islands pay the UK Government every year. SNP figures have sketched out similar sharing arrangements for Scotland in a post-independence Scotland. Other agreements in the Dependencies see police forces buying into the UK police databases, and there are reciprocal arrangements on healthcare. This is sorted while allowing the three islands complete freedom to charge companies nothing in Corporation tax.

So could Scotland follow suit? Ben Thomson, of the Campaign for Fiscal Responsibility, says that the UK should encourage the kind of tax competition shown up by the three territories.

"The game is not about dividing up the cake. It is about how do you attract a bigger cake within the UK by attracting businesses to come here. We in a global game competing against Geneva, Luxembourg or Dublin. If these businesses didn't set up in the Channel Islands, they would end up in the Cayman Islands or Bermuda." Thomson says that, given the powers of the Dependencies, a fiscally independent Scotland could set taxes in its own areas of strength – such as oil and gas, or whisky – to suit its own local circumstances.

But turning Scotland wholesale into a tax haven would be near impossible, say tax experts. The three islands' heavy reliance on financial services, and low levels of social need, are utterly at odds with Scotland's own profile.

Rhona Irving, a partner with PriceWaterhouseCoopers, asks: "How would you replace the tax take if you reduced it to these levels? How would you fund public services? Are you going to attract enough businesses to make up the deficit you would have?"

David Mundell, Scotland Office Minister, said that any comparison between Scotland and the Dependencies was "completely misplaced".

He said: "They are on a completely different scale to Scotland and their function is also completely different, that of providing a different tax environment. Scotland is an industrial country with an entirely different profile to the Channel Islands."

But as the debate continues about Scotland's constitutional future, so the example of the Channel Islands and the Isle of Man bears closer examination. Is this the kind of Scotland that will emerge over the coming years?

Guernsey: BBC on TV and blue pillarboxes

GUERNSEY's newly appointed Lieutenant Governor, Air Marshal Peter Walker, who represents the Queen on the island, insisted upon arrival he had not come for an easy time. That, however, is how life on the island 30 miles off the coast of Normandy is commonly viewed.

Financial services make up a third of the economy, with light tax and death duties making the island a popular offshore centre for private equity funds to base their head office. The island's 60,000 people pay income tax at a flat rate of 20 per cent, with companies paying anywhere between 0 and 20 per cent. There is no corporation tax, capital gains tax, inheritance tax nor VAT. Visitors from Scotland and England can use their own banknotes, but Guernsey issues its own currency which, while linked directly to sterling, is not legal tender on the mainland.

The island is able to decide on this as a result of its historic self-governing status as a British Crown Dependency. It is not part of the United Kingdom, but people are still British citizens and the UK controls defence and foreign affairs on its behalf. Guernsey, with a population of 65,500, pays a fee to the UK for this. Islanders pay the same TV licence fee as mainlanders, and watch BBC and ITV. But Guernsey has separate vehicle registration plates, and its own internet top-level domain.

It is not a member of the EU, but increasingly it is coming under pressure from Brussels to change its tax rules, with bigger nations protesting about its offshore status. The island remains proudly monarchical, with the toast given to "The Queen, our Duke", in respect of her island title of Duke of Normandy. Familiar pillarboxes can be found across the island, exactly the same as to the rest of the British islands, except – as Alex Salmond may consider for Scotland – they are painted blue.

Isle of Man: A long-standing and proud independent legislature

THIS small island in the Irish Sea, with a population of 80,000, has never been part of the United Kingdom.

It was bought by the British Government in 1765 in a bid to put an end to its use as an offshore smuggling haven. Since then, political power has gradually devolved back to the island. Its parliament – the Tynwald – dates back 1,000 years to Viking origins and is believed to be the oldest parliamentary assembly in continuous existence. It is also the world's only tricameral chamber: members sit in two branches, and then come together to meet in the Tynwald to make laws. It has its own national anthem, but despite not being part of the UK, Manx residents are British citizens – on the front of their passports it declares: "British Islands – Isle of Man". The Head of State is the Queen, known on the island as the Lord of Man. As with all Crown Dependencies, the Crown has responsibility for "the good government" of the island. It is also in charge of defending and representing the Isle of Man internationally, for which the island pays the UK an annual sum. Consequently, there is no independent Isle of Man military – although the old Manx Regiment fought with the UK during the Second World War.

The island is not part of the EU, but its relationship as a Dependency allows it to trade within the EEA area in a fashion generally similar to its trade with the Union itself. There are no customs controls between the UK and the Isle of Man. There is an independent Isle of Man police force, accountable to the Isle of Man Government but, in one of many ad hoc agreements with the UK, it voluntarily submits itself to inspection by the UK Inspectorate of police.

Laws made by the UK Parliament do not apply on the island without the consent of the Tynwald, although many are adopted. The island has a long and proud independent legislature. It has gone its own way on numerous occasions: the death penalty was only abolished in 1993, woman's suffrage came in 60 years before the UK, sodomy was only legalised in 1992, birching only abolished in 2000. There are also differences in laws such as abortion; so-called social abortions are not covered in Manx law, forcing Manx women to go to the mainland and have terminations done privately.

As in Jersey, the rules for incomers are tightly regulated. Unless they are required by the island – for example, doctors or dentists, they need to get a work permit before settling. They must also be resident on the island for five years before being able to claim benefits. However, there are less restrictions on buying property that on Jersey.

Residents then enjoy income tax rates of between 10 per cent and 20 per cent for higher-rate payers, and can also forget about capital gains tax and inheritance tax. Corporation tax is 0 per cent, although income received from banking businesses is taxed at 10 per cent. Offshore banking forms a key part of the economy, with firms eager to take advantage of the tax rates. The Isle of Man government also uses its powers to, for example, subsidise film-making on the island – ensuring that 80 films have been made there since 1995.

Today, it is most famous for its annual TT race.

Jersey: 1.1m a year to UK for cost of army unit on island

BEST known to many as the 1980s home of Jim Bergerac and Charlie Hungerford, and a playground for British millionaires who prefer to stay within an hour's flight of the UK while looking after their untaxed earnings. More than 60 per cent of its economy comes from financial services, with around 50 international banks and financial service firms based there. The average GDP of its 92,000 residents is estimated to be nearly 37,000 per person, bettered only by Bermuda and Luxembourg. Unemployment runs at lower than 1 per cent.

Jersey's status dates back to 1204 when, after losing his possessions in Normandy, King John of England kept hold of the Channel islands, allowing them complete internal autonomy. This led to a completely separate form of governance and a separate legal system (it has its own Law Society) on the island. Acts of the Westminster Parliament only apply to Jersey if the island's parliament – known as the States – agrees. But, like Guernsey, foreign affairs and defence is reserved to the Crown. This means that if Jersey were attacked, the UK is constitutionally obliged to defend it. Jersey pays 1.1m a year to the UK towards the cost of a Territorial Army Unit based in Jersey. Over its history, the island has paid the UK for defence costs – for example, offering 300,000 to the cost of the First World War.

In fiscal terms, the island is entirely independent. The standard rate of income tax is 20 per cent, although the majority of people do not pay this much once generous tax-free allowances of up to 15,000 are taken into account. In 2008, the island's authorities introduced a new Goods and Service Tax at just 3 per cent, which is payable on all items purchased on the island, except the construction of residential properties. There is no corporation tax, with most firms given tax-free status, apart from some finance institutions which pay tax at 10 per cent. There is no capital gains tax, no inheritance tax and social security payments are kept to a bare minimum.

There are some restrictions. The island monitors "Brass plating" – whereby a foreign firm sets up a HQ in an empty office, to take advantage of low local tax rates. Companies have to show that senior executives are indeed based on the island – a restriction which would no doubt be maintained in Scotland if ministers here decided to lower corporation tax to attract firms north. There are also tight restrictions on housing, with the number of homes available to non-islanders tightly controlled. However, millionaires get special consideration, if they can show they are going to add to the island's social and economic health. Healthcare is free, although residents are told to take out insurance in case they need to visit an NHS hospital in the UK. For all practical purposes, Jersey is treated as a foreign country by UK educational institutions, and pays the full cost of students' education.

Jersey has recently called for full Commonwealth status, and has signed several bilateral treaties with overseas states.

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