Tuesday, 2 August 2016

How did we get into this fiscal black hole?

An interesting look at the past, published in July 2010 in the JEP.

It is certainly clear that the introduction of zero / ten introduced a major shift in the way profits on businesses were levied. But Baldrick, or to be more exact, Treasury Minister Terry Le Sueur, had a cunning plan.

Although most businesses that were trading and had paid tax at 20% of profits were now paying 0%, some of this could still be clawed back. Local shareholders would pay tax on their dividends, and if they did not take enough from the company, they would be taxed on a "deemed dividend", so that much of the 20% tax would still get paid via those dividends. And in the meantime, the burden of tax would shift towards those living in Jersey with the introduction of GST.

Unfortunately, that fell foul of the EU rules which had led to the extinction of the previous regime. That had local trading companies, paying tax at 20%, and "corporation tax companies", linked to trusts, which paid a fixed fee of £600 per annum instead. This meant that there was effectively a different internal and external tax system on companies. Bringing in deemed dividends simple moved this away so that there were different internal and external tax systems on shareholders. So it was repealed around 2011, leaving an even bigger hole in the Island finances. Baldrick had failed.

There has been consideration of a "territorial tax" which would be levied on businesses with a physical trading presence in Jersey, but so far nothing has come of it, even though if implemented globally, it would catch companies like Amazon. But perhaps there will be a window of opportunity, without the heavy hand of EU tax harmonisation, in a Brexit situation, to negotiate a better tax deal and put some of the burden away from individuals and back to companies.

How did we get into this fiscal black hole?
From John Clennett (former States Treasurer), July 2010

THERE have been many references in recent weeks to the structural deficit, and the need for drastic measures to remedy the situation.

From John Clennett (former States Treasurer).

THERE have been many references in recent weeks to the structural deficit, and the need for drastic measures to remedy the situation.

While there is concern as to what measures should be taken, nobody seems keen to explain how we got into this predicament in the first place. It seems to me there is a conspiracy of silence in the Treasury Ministry as to the true cause of the projected deficit of £64 million for 2010 and similar amounts for years 2011 and 2012.

The published States Accounts for years 2007, 2008 and 2009 show a surplus each year of more than £50 million (09 actual £71m) and yet we are told to expect a deficit in 2010 of £64m (probably more in the light of extra funds required) and similar deficits in years 2011 and 2012. So what has happened to cause this lurch from surplus to deficit?

The significant change is in income tax receipts. Actual income tax receipts for 2009 were £508 million and projected receipts for 2010 were at the time of the budget £391 million. It is unlikely that the recession would have had such an immediate and drastic effect. The word around which there is such a deafening silence is zero-ten. Although adopted by the States in 2004, 2009 is the first year in which zero-ten became operative so 2010 is the first year in which its full effect will be felt.

The States were warned at the time that such a reduction of tax revenue would be unlikely to be recoverable from savings in expenditure without serious damage to the level of services, and that the outcome would likely be a switch from a tax on profits to a tax on expenditure. At the time, there did not appear to be any serious consideration that the cost could be met by cutting expenditure.

The reason behind the introduction of zero-ten has never to my knowledge been fully explained given the enormous cost to the Island, nor has it been explained how it is that the differential tax treatment of different classes of company under the previous law was found to be unacceptable and yet a differential treatment of two classes of company under the new law is acceptable.

It may be that States members now wonder whether sufficient consideration was given to the cost of zero-ten to the Island when agreement was reached – with whom? – For its implementation.

No comments: