It's not all cats and kippers

The Isle of Man has its own laws and a quirky way of life. But there's its serious side too - a pounds 15bn tax-haven.

If you are Manx, you feel different. Your Parliament is 1,000 years old; your ancestral language unintelligible to the English. Pound notes survive; country roads have no speed limits. On stamps, the Queen's head bears no crown, cats have no tails, and the Little People - Mooinjer Veggey - are everywhere. Douglas's faded guest houses may recall Blackpool and the local accent sound Scouse, but this is a Celtic place. The Pagan Federation has just appointed a national officer from here.

Many are unaware of Manx distinctiveness. They imagine a bit of Lancashire floated west. But the island's creation story is more persuasive - Irish giant Finn MacCool fought a Scottish contemporary and flung a clod of earth towards him. It fell short into the sea.

You can see the difference the moment you arrive. This island is awash in spring flowers, thanks to the Gulf Stream, while Lancashire remains stuck in winter. Whitewashed cottages in Cregneash have a rare, rounded thatch, tied at the eaves just as in Donegal. With their peat fires, they smell like Ireland.

Neighbouring England - known as "the adjacent island" - is awakening to this difference. Yesterday, the island's leaders met to discuss the implications of breaking away from the UK. The Isle of Man is a Crown dependency, outside the UK, but London remains responsible for "good governance" and foreign affairs. The Queen is "Lord of Man". This tiny statelet, ridiculed as "60,000 alcoholics clinging to a rock in the Irish Sea", is seriously considering the details of going it alone - practical stuff like passports, where young people would attend university, and who would represent the island abroad.

This may sound as serious as a bunch of corps commissionaires planning a Third World War. But they are in earnest. And the issue is not Gaelic romanticism. Long gone are the late-Seventies, when Manx extremists burned buildings under the banner "Financial Sector Fuck Off". Today's threatened rebellion is about money. In fact, about pounds 15bn currently enjoying sanctuary from the British taxman. Threats via Europe to destroy this tax haven are behind a potential constitutional crisis.

The island bristles with shiny new buildings and household banks that underwrite Manx prosperity. From where brandy was once landed to beat the British blockade during the Napoleonic wars, Sun Life plies its offshore insurance business. The omens are poor. After Napoleon's defeat, the Duke of Atholl sold the island's sovereignty to George III for pounds 70,000. The English killed off smuggling. The Isle of Man went bust.

Since the Eighties, the island has thrived on low tax, offshore finance, something the Germans oppose by championing tax harmonisation. The fear is that London's Labour government will do Berlin's bidding and stamp out this late flowering of Thatcherism. No one wants to go back to living off spuds and herring.

I'm sitting at Heathrow, awaiting the morning flight to Douglas, the island's capital. The lounge is stuffed with corporate types, silenced by an announcement. The small aircraft is full, warns a voice. "Please check in all hand luggage as there may be no space on board." I spot businessmen clutching bulging briefcases. Which, I wonder, is stuffed with tenners, all set for swift deposit?

Of course, I am imagining things. As the island's chief minister, Donald Gelling, reassures me upon arrival: "You could not go into a bank on the Isle of Man with a suitcase of money and open an account. Our banks are probably more strictly regulated than those in the UK." He is right. But the Isle of Man does have an unfortunate reputation. Remember that company found selling guns to Rwanda? Where was it registered? Ah yes. And the man recently disqualified for having hundreds of company directorships? Where was he based? Ah yes.

But more damaging is the reality of low taxation, which can hardly appeal to Gordon Brown. The top income tax rate is 20 per cent. Likewise corporation tax. Capital gains and inheritance taxes do not exist. And no one need know your name if you register your company here.

So does the chief minister, Mr Gelling, favour independence as Britain flexes its muscles? "We will not be declaring UDI. I favour as much autonomy as possible without breaking the UK link," he says in his office, decorated with Manx pastoral scenes. Mr Gelling is the classic Manx leader, endlessly seeking consensus and compromise.

His voters are, likewise, not natural radicals. They are close to their politicians. Mr Gelling's home address and telephone number is in the telephone directory along with other members of Tynwald.

I'm in the smoking room of Devereau's Manx Kippers in Peel, the smallest city in the British Isles (one cathedral, 3,000 people), whose tiny medieval streets all lead to the quays where mountains of herring were once landed. "I'm a Manxman through and through, but we need the strength of England behind us," says Peter Canipa, explaining the tastiest way to eat a kipper. (Microwave for 90 seconds, spread on toast with lemon and lime marmalade.) "We've stayed with the Union through two world wars," he says. "Why change a system that has lasted 1,000 years?"

Andrew Douglas, a former merchant navy skipper with the affable face of a Manx Seamus Heaney, agrees. He laments the faster pace of life. "The traffic has become terrible," he says of the almost deserted roads. "Did you know that the ownership of cars per head of population is greater only in Los Angeles?" But independence is not for him. "We are at ease with ourselves. We feel independent. We are not English, Scots or Welsh. We are used to governing ourselves. But we are interested in evolution, not revolution."

However, there will be plenty of malcontents if London mishandles Manx interests. In that tiny thatched village of Cregneash is Phil Gawne, a Manx language officer. Where in 1961, just 160 people spoke the language, today the figure is nearer 1,000. There are two Manx-speaking nurseries. "We need independence," he says, "to regain the self-confidence lost when a language is lost, an experience that is like four divorces and 10 deaths in the family."

David Canaan, Mr Gelling's long-time rival and a former Manx Treasury minister wants the Manx pound linked to the dollar if Britain adopts the euro. Nigel Wood, managing director of the Isle of Man Assurance Company, says the island might do better cultivating links with Norway than Britain. "My fear," he says, "is that we could become a pawn in the UK's negotiations with Europe and I don't for a moment doubt the propensity of the UK government to use us as such... What we need to do is to assert our position on the world stage." Such talk embarrasses Donald Gelling. He worries about frightening the island's all-important investors.

The Isle of Man seems true to its easy-going image, known as "traa dy- liooar". But underneath, stimulated by nationalism in Scotland, lies suspicion of London that could spark a crisis. Do I sense hostility as I return to the adjacent island? Everyone stares at my luggage. But they don't smell fishy money. Just Peter Canipa's excellent kippers.

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