The Chief Minister
Policy Council
Sir Charles Frossard House
La Charroterie
St Peter Port

28th May 2008

Dear Sir

1. Executive Summary

1.1. The purpose of Part 2 of this Report is to seek approval to amend that part of the Income Tax (Guernsey) Law, 1975, as amended (“the Law”) which deals with the types of income that are subject to deduction of tax under the ETI Scheme, to ensure that, with effect from 1 January 2009, this will encompass any benefits in kind which are chargeable to income tax.

1.2. Part 3 of this Report seeks approval to amend both the Law and the Social Insurance (Guernsey) Law, 1978 (“the Social Security Law”), in order to provide for the exchange of information, between the Income Tax Office and Social Security Department, and vice versa, for the purpose of ensuring the more efficient assessment and collection of income tax and social security contributions.

2. Proposed Taxation of Benefits in Kind through the Employees Tax Instalment (“ETI”) Scheme

 Background

2.1. An employee is chargeable to tax on his “emoluments”.  Benefits in kind are included in the definition of emoluments.  Guernsey has had an organised system for the valuation and taxation of benefits in kind since 1996.  

There are many examples of assets, services etc., which are enjoyed by employees as a consequence of their employment which constitute benefits in kind.  Statistics held by the Income Tax Office show that the most prevalent benefits in kind enjoyed by Guernsey residents are the provision of accommodation and the use of a motor vehicle (“a company car”).

2.2. Under the ETI Scheme an employer is required to deduct tax from an employee’s emoluments but the present legislation only applies the provisions of the ETI Scheme where “… any payment of, or on account of, emoluments is made by an employer …”

2.3. Some benefits in kind involve the making of payments.  For example, an employee may incur a private expense, the bill for which is met by the employer.  As the payment the employer is making is on account of the employee’s emoluments then such a payment would be covered by the ETI Scheme and tax should be deducted accordingly.

2.4. The majority of benefits in kind arise, however, because an employee is given the use of something that does not belong to him (such as the use of a company car).  The provision of such benefits in kind do not fall under the ETI Scheme.

2.5. Since 1996, employers have been required to complete an annual return detailing the value of the benefits in kind that have been provided to each employee.   On that return the employer has to show the types of benefits in kind which have been provided, under several headings, and he is also required to identify which, if any, have been taxed through the ETI Scheme.   Tax due on the remainder of the benefits in kind is dealt with when the Administrator issues assessments to the relevant employees.

2.6. Whilst the system described above is robust, in the context that benefits in kind provided to employees are ultimately charged to tax, there is a resource implication within the Income Tax Office (insofar as a member of the Administrator’s staff has to analyse the benefits in kind returns received from employers and disseminate the information contained therein to the relevant employees’ files, and Income Tax Office officials have to assess, on the individual employees, what are often relatively small amounts of benefits in kind and collect the tax arising).   This use of the Income Tax Office’s resources would be considerably reduced if the appropriate amounts of tax due in relation to the benefits in kind were deducted, by the employer, when he operates the ETI Scheme (for the week/month, as appropriate, in which the benefit was made available to the employee).  This tax would be sent to the Administrator along with all other tax that the employer had deducted under the ETI Scheme in relation to wages, salaries, commissions, bonuses, etc.

2.7. Income Tax Office statistics show that during the calendar year 2006 (the year for which the most reliable information is currently available):

- 331 Guernsey employers provided benefits in kind to employees (equivalent to approximately 1 in 11 employers).

- 1146 employees received benefits in kind.

- The tax yield from benefits in kind was approximately £640,000. 

2.8. Apart from the resource implications referred to above, there is little by way of an income tax issue in relation to benefits in kind.  By contrast, however, the Social Security Department currently collects contributions on only limited benefits in kind but proposes that this should be extended to include similar benefits, and similar values, as used by the Income Tax Office.  The Social Security Department has reported to the Administrator of Income Tax that there appears to be a trend for employers increasingly to provide benefits in kind instead of cash based emoluments, and that one of the reasons for this may be the avoidance of social security contributions.   

2.9. The Social Security Department currently has no mechanism by which it can economically identify benefits in kind which are received by employees and economically charge contributions unless the benefits in kind are treated as part of the employee’s total emoluments for the purposes of the ETI Scheme (in which case social security contributions would be automatically charged accordingly).

2.10. Historically, the Social Security Department has made the assumption that the majority of benefits in kind would be provided to the better remunerated employees and as those employees were probably already paying maximum, or near maximum, social security contributions, the resource cost of trying to collect social security contributions on benefits in kind would probably outweigh the potential gain.   

2.11. The Social Security Department believes, however, that the recent increase in contributions (to an upper earnings limit of £53,664 for 2007 and £64,896 for 2008, for employees and £108,108 in the case of an employer) gives rise to two consequences:

- more employees who receive Benefits in Kind will fall within the new upper earnings limit (and would, therefore, escape social security contributions on the Benefits in Kind they receive unless they are dealt with through the ETI Scheme);

- the increasing upper earnings limit may actually encourage the use of schemes designed for the avoidance of social security contributions in the future.

2.12. No statistical information is available from Income Tax databases which would help evaluate the likely extent of the loss of social security contributions from benefits in kind.  It is clearly unfair, however, that if an employee is remunerated solely in cash he should pay a higher social security contribution than another employee who receives the same aggregate total of emoluments but part of whose remuneration package consists of the provision of benefits in kind.

Detailed Proposals

2.13. At the request of the Social Security Department, the Treasury and Resources Department proposes that section 81A(2) of the Law be revised to make it clear that in addition to payments of, or on account of, emoluments made by an employer, deductions of tax under the ETI Scheme should also be made in respect of benefits in kind which are provided to employees in the pay period (e.g. weekly or monthly) in which the benefit was provided.

2.14. In formulating these proposals, the Department has taken account of the responses received from a public consultation exercise in which all Guernsey employers who, according to the records of the Income Tax Office provided benefits to their employees, were canvassed with regard to their views on the proposals.

Of the 331 Guernsey employers consulted, 28 provided responses (8.46%).

Of the 28 responses, 12 (43% of the total) had no objections to the proposal, in principle.  The remainder of the employers who responded to the consultation exercise (representing 4.85% of Guernsey’s employer population) raised a number of issues, mostly administrative in nature.  Whilst the Department recognises that the issues raised by this small percentage of the island’s employers are real issues for those individual businesses, in the interest of fairness to all employees and to ensure the proper and efficient collection of income tax and social security contributions, it is in the public interest that the Law be revised as proposed at paragraph 2.13 above.

2.15. The Department proposes that the legislation should come into effect from 1 January 2009.

3. Information Exchange between the Income Tax Office and Social Security Department

Background

3.1. As a consequence of an Oath of Secrecy that has to be taken by every person working in the Income Tax Office, there are significant restrictions on the persons to whom the Administrator may give information provided to him by taxpayers, employers, etc.   Section 206(7) of the Law provides that information can be disclosed to the Social Security Department but this is restricted to the name and address of any employer and the address of any other person. 

3.2. Section 111 of the Social Insurance Law also places restrictions on the extent to which the Administrator, Social Security Department, may disclose information to persons outside of the Department.  Without the consent of the person to whom the information relates, this is limited, mainly, to disclosures for the purposes of criminal proceedings or for the investigation of crime, and a limited power to disclose information (other than in relation to the income of a person) where the purpose of the disclosure is approved by the Department.

3.3. Whilst the purposes of the Income Tax Office and the Social Security Department are, inter alia, to collect income tax and social security contributions respectively, both organisations use a person’s income as the basis for assessing the amount of the tax and contributions.  As a consequence there are many occasions when the work of the Income Tax Office and the Social Security Department overlap.

3.4. Indeed, with the consent of the person concerned, the Income Tax Office already provides information to the Social Security Department, to enable it to assess, for example, contributions due from the self-employed and non-employed.  It is clear to both Treasury and Resources Department and the Social Security Department, however, that if there was a formal gateway providing for the exchange of information, in both the Law and the Social Insurance Law, this could lead to the avoidance of the duplication of effort and more efficient assessment and collection of both income tax and social security contributions.

3.5. The Government Business Plan (Billet XVIII of 2007 at page 1368) includes, at Priority 4 - Level 4:

 “C. Consider how savings might be achieved by merging and consolidating the collection, payment and treasury systems which, at times, overlap in the respective mandates of the Treasury and Resources Department and the Social Security Department.

a) Undertake a joint review to assess the feasibility and potential resources and cost savings of merging and consolidating income tax and social security contributions collection, payment and treasury systems.”

3.6. Whilst acknowledging the aim of this priority, in the Government Business Plan, the Treasury and Resources Department and the Social Security Department recognise that such change should only be undertaken after careful consideration, and investigation, of the possible consequences this may have on the administration of the Law and the Social Insurance Law, and the effect this could have on States revenues.

It is apparent, however, that some short term improvements can be made which would lead to a closer working relationship between the Income Tax Office and the Social Security Department, as well as the more efficient collection of States revenues.

Detailed Proposals

3.7. The Treasury and Resources Department proposes that the Law be revised to provide that the Administrator and Assistant Administrator of Income Tax may pass information, including information relating to income, which they have received in the exercise of their official functions, to the Administrator, Social Security Department, for the purpose of assisting the Administrator, Social Security Department, in fulfilling his functions under the Social Insurance Law; and the Administrator, Social Security Department, may in turn use the information so provided for the purpose of carrying out those functions.

3.8. The Social Security Department proposes that the Social Insurance Law be similarly revised to allow the Administrator, Social Security Department, to pass information, including information relating to income, to the Administrator or Assistant Administrator of Income Tax for the purpose of assisting the Administrator or Assistant Administrator in the exercise of their functions under the Law; and the Administrator and Assistant Administrator of Income Tax may in turn use the information so provided for the purpose of carrying out those functions.

3.9. The Departments propose that the legislation should come into effect on the date of its registration by the Royal Court.

4. Recommendations

The Treasury and Resources Department recommends the States:

4.1. to approve the proposals concerning income tax, as set out in this Report, and to agree that legislation is enacted accordingly;

4.2. considering it expedient in the public interest so to do, to declare, pursuant to section 1 of the Taxes and Duties (Provisional Effect) (Guernsey) Law 1992, that a Projet de Loi enacted to implement the proposals contained in part 2 of this Report shall have effect from 1 January 2009, as if it were a law sanctioned by Her Majesty in Council and registered on the records of the island of Guernsey.

Yours faithfully

C N K Parkinson
Minister
 
(NB The Policy Council has no comment on the proposals.)

The States are asked to decide:-

.-  Whether, after consideration of the report dated 28th May, 2008, of the Treasury and Resources Department, they are of the opinion:-

1. To approve the proposals concerning income tax, as set out in that Report, and to agree that legislation shall be enacted accordingly.

2. To direct the preparation of such legislation as may be necessary to give effect to their above decision.

3. Considering it expedient in the public interest so to do, to declare, pursuant to section 1 of the Taxes and Duties (Provisional Effect) (Guernsey) Law 1992, that a Projet de Loi enacted to implement the proposals contained in part 2 of that Report shall have effect from 1 January 2009, as if it were a law sanctioned by Her Majesty in Council and registered on the records of the island of Guernsey.