Any relief on the tax front?
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7 October 2013
Jonathan Hooley says it is imperative to understand the subtle differences between Jersey's and Guernsey's tax regimes. Jonathan Hooley is a partner at KPMG in the Channel Islands.
On the surface Guernsey and Jersey operate very similar tax regimes. Both raise the majority of their revenue from income tax. Both tax income at 20 per cent. With the exception of dwellings profits tax in Guernsey, neither tax capital gains. Neither levy any form of direct taxes on capital held or donated, nor do they levy any form of value added tax.
However, scratch the surface and you will find differences in the ways in which companies and individuals are taxed which can have an important bearing on the way in which businesses structure themselves.
The starting point in both islands for determining the tax liability of individuals is residence. An individual resident in either island is liable to tax there on his worldwide income. What constitutes residence for these purposes in Guernsey is set out in statute. In Jersey, it follows UK case law concepts.
In both islands someone who spends more than 182 days on the island will become resident. But in Guernsey an individual can maintain a home and spend up to 89 days in Guernsey without becoming resident. In Jersey, anyone with a home on the island is considered resident, even if he spends only one day on the island.
In Guernsey, an individual can become resident if he visits the island with the intention of setting up a home in Guernsey and in fact does so either in the same or the following year. No such rule exists in Jersey.
Individuals in both islands can benefit from a remittance basis of taxation on a non-local income, under which a tax charge can be postponed or possibly avoided altogether if their connection with the island is sufficiently remote.
In Guernsey, the availability of this treatment depends on whether the individual has a home elsewhere. In Jersey, it depends on the number of days that the individual actually spends in Jersey.
Both islands offer a wide range of reliefs. Guernsey provides relatively large personal allowances. Jersey provides smaller allowances but has adopted thresholds below which individuals pay no tax at all.
The comparative tax liability of a married individual earning £50,000 per annum whose spouse has no income, who pays interest of £2,400 per annum on a bank loan and who makes an allowable contribution of £7,500 per annum to a pension arrangement is shown in the table below.
Tax advantages in Guernsey could be offset by the fact that most fringe benefits are taxable in the island. The individual in Guernsey will also pay his tax at an earlier date under the Employment Tax Instalment (ETI) scheme. In Jersey, only social security payments are deducted from an employee's salary.
The other significant difference is that most forms of income are taxed on a prior-year basis in Guernsey the exception being non-Guernsey investment income. In Jersey, only business income is taxed on a prior-year basis of taxation.
Determining the tax liability of a company in both Guernsey and Jersey is again dependant on residence. However, there are rather more marked differences between the definitions of residence for these purposes.
Jersey continues to follow the UK concept of central management and control so that the company is regarded as resident in Jersey if its directors control its affairs from Jersey. Like the UK, the place of incorporation is now also relevant.
The residence of a company in Guernsey is determined primarily by the place of incorporation. Control can also be relevant. However, in the case of Guernsey this means that control in an ownership sense rather than in a strategic management sense.
There are also differences in the treatment of other fundamental matters such as the treatment of dividends. Scrip dividends are taxable in Guernsey, but not in Jersey. However, differences of greater practical significance affect the concessionary treatments provided to businesses carrying on international business.
In 1993, both Guernsey and Jersey introduced a new tax regime for companies wishing to carry on international business from the island concerned. In Guernsey, the companies concerned are referred to as companies with international status. In Jersey, they are referred to as international business companies (IBCs). In Guernsey, but not Jersey, "international status" can apply to other entities such as limited partnerships.
In Guernsey, companies with international status are subject to the same tax treatment as any other entity resident or trading on the island. The only difference is that they will be subject to tax at a rate agreed with the income tax authority up to a maximum of 30 per cent. This rate applies to all the income they receive.
In Guernsey, it is not possible for an entity that has previously traded in Guernsey to acquire international status. By concession, in Jersey conversions are allowed.
The regime in Jersey is different in that the companies concerned are subject to fixed rates of tax which distinguish between international income and other activities.
Income from international activities is subject to low rates of tax which vary from 2 per cent down to 0.5 per cent. Income from other activities, that is, activities carried on in Jersey, are taxed at 30 per cent.
However, more subtle differences also apply. For example, in Jersey the income is taxed under Schedule D Case VI. This means that the income is taxed on a current-year basis rather than the prior-year basis which applies to other trading income in Jersey and applies to entities with international status in Guernsey. It also means that no relief is available in Jersey for losses incurred by such a company.
In Jersey, it is possible to establish a bank as an IBC. However, it is possible for a bank to achieve much the same tax treatment in Guernsey by taking advantage of the concessionary regime available to banks in Guernsey in respect of international business.
Computing taxable income in both Guernsey and Jersey follows the principles established by UK case law. Both have introduced a system of capital allowances. The prevailing rate for plant and machinery in Jersey is 25 per cent and 20 per cent in Guernsey.
However, repairs allowances are available to landlords in Guernsey. This allowance is available at rates varying from 5 per cent in respect of undeveloped land to 25 per cent in respect of dwelling houses and glasshouses and is an attractive relief for landlords. There is no equivalent relief in Jersey.
Both islands offer some relief for foreign taxes. However, with certain exceptions for UK and Guernsey taxes, in Jersey this relief is restricted to allowing a deduction from the income concerned in computing the amount of tax payable. In Guernsey, a credit is often available.
Guernsey has also recently introduced a formal arrangement for relieving losses against the profits of other group companies. In Jersey, comparable relief has to be achieved by use of management charges or other similar means. However, Jersey allows a two-year carry back of trading losses. Guernsey only allows a one-year carry back.
As earlier noted, most income in Guernsey is assessed on a prior-year basis. In Jersey only trading income is assessed on this basis. However, other differences in the ways that income tax is assessed and the time at which it becomes payable also apply.
Guernsey allows spouses to elect to have their tax liabilities assessed separately. This does not affect the amount of tax that they pay. However, it means that they become responsible for filing their own tax return and settling their own tax liability. A similar arrangement is not available in Jersey.
The basis on which the profits are assessed in the two islands also differs. In Jersey, a single assessment is raised on the partnership for which all the partners are jointly and severally liable. In Guernsey, each partner is assessed separately on his or her share of the profits.
Quite apart from the effect that the ETI scheme may have on the timing of the payment of tax in Guernsey, the time at which tax is payable generally in Guernsey is earlier than it is in Jersey.
In Guernsey, income tax is payable in two equal instalments. The first is payable half way through the year of charge and the second at the end of the year of charge.
In Jersey, income tax is not payable until some time after the year of assessment (that is, Jersey's equivalent of Guernsey's year of charge).
The tax systems in both Guernsey and Jersey may appear to the outsider to be similar. But it is not safe to assume that because something applies in Guernsey it will be done in the same way in Jersey.