Guernsey Re-Evaluates Its Income Tax System

by Robert Lee, Tax-News.com, London

15 January 2009

Alongside the flat tax charge proposals announced on Janaury 9, Guernsey has released details of further tax proposals drafted by the government, including the suspension of Dwellings Profit Tax and amendments to the 'proportional relief' system.

Dwellings Profits Tax was introduced by the States in the mid-1970s as an anti-property speculation measure. It introduced a tax on the sale of a dwelling soon after purchase (the minimum period of ownership required to avoid the tax varies, depending on whether the property has been occupied by the owner or not) with a tax rate set at 100% of the profit.

In a statement Guernsey’s government explained the proposals:

“Collection of tax was never the principal purpose and the tax raised has never been significant – GBP58,000 over the last 14 years. Seven of those years produced no tax at all.”

“But the administrative burden on Income Tax – with a certificate required for every property transaction – takes up three people part-time at a cost of at least GBP17,000 a year. There are implications too for advocates’ offices, with consequent costs for those buying and selling properties.”

“The costs of collection have exceeded tax collected at least four-fold,” said Deputy Charles Parkinson. “And has the tax prevented property speculation and kept prices down? In its present form, my Department believes this tax is not effective in terms of administration costs, or in achieving its objectives.”

The Guernsey government has recommended its suspension and a review will take place to ascertain its future.

Regarding proportional relief, under income tax law some people are not entitled to the full personal tax allowances, but they can claim a proportion of those allowances based on the relative proportion of their Guernsey income to their total worldwide income.

For employees the automatic entitlement of 1/52nd of the full year’s personal allowance for each week worked is granted through the coding notice issued under the ETI scheme. If they claim proportional relief, the effect is that they receive allowances for a full year, irrespective of the time spent in the island.

The cost of proportional relief, which is granted mainly to seasonal workers and non-resident landlords and pensioners, is more than GBP850,000 a year and involves considerable administration. Compliance checks are also difficult, particularly when contacting people who have left the island. There is some concern about incorrect claims too.

It is proposed that proportional relief should be removed so seasonal workers will now receive their tax allowances through the coding notice and no further claims will be allowed. A simpler system, offering full allowances for pensioners living overseas but receiving a Guernsey pension, in place of proportional relief, will also be introduced.

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