The Policy & Resources Committee has sounded a warning about the prospect of expecting government to cut its way out of financial trouble.
The Tax Review sub-committee set up to ‘turn every stone’ on corporate tax options for fixing the island’s public finances has said that various options considered will just not do enough to put Guernsey back in the black.
Its membership – including three international tax experts – said that not withstanding the benefits of Pillar II tax changes, the States still needs to pursue the GST-plus package to bring in an extra £50m. a year.
It has recommended a handful of minor changes to corporate taxes, which could together raise about £3m. a year, and said that savings and efficiencies will still need to be found from States operations, which, if carried out in line with the resolution of the Government Work Plan, should save about £17m. annually.
P&R said that it was talking to committees about the potential for savings that could be achieved by reducing public services.
‘While reductions in public services have proved to be very unpopular, the committee felt that understanding the realistic scope for and impact of these more radical potential changes was an important part of its work in understanding how best to balance the books.
‘Determining where the political and public appetite actually is for cuts to public services will help inform the extent to which the deficit can be met by expenditure reduction and what will need to be met by bringing in more revenue,’ the committee said.
‘P&R and the committees are well aware that the public has historically been strongly opposed to service cuts.
‘While some committees identified options for service reduction, they were concerned that even as hypothetical options at this stage, they would be unpalatable for the community and asked P&R to exercise caution in how they were communicated in the upcoming tax reform policy letter so as not to cause alarm among people who depend on that type of support.’
P&R is also continuing to pursue proposals to transform transport taxes, including ‘a meaningful reduction’ in fuel duty which will be rebalanced with fairer, annualised charges on vehicle ownership to bring electric vehicles into scope, and progressing a surcharge on first registration duty for very high value personal vehicles.
Targeted tweaks could strengthen corporate regime
The Tax Review sub-committee said that it had ruled out several big ticket options for tax reform but identified some targeted adjustments that could strengthen the existing regime, while maintaining stability.
It said that it might have made different calls if building a new tax system from a blank slate, but major corporate tax reform – including the potential for the controversial switch to territorial tax – ‘would present considerable economic risk’ and could not guarantee the level of revenues needed for the States to address its financial challenges.
‘Guernsey’s reliance on highly mobile international financial services means that any substantial change could expose the island to uncertainty, including potential review by the Code Group and the OECD Forum on Harmful Tax Practices, and make Guernsey less competitive,’ it said.
And if GST-plus was to be progressed, major reforms to the corporate tax base at the same time as introducing a goods and services tax would risk ‘overloading’ the business community and tax administration.
The sub-committee said that engagement with industry had highlighted the importance of maintaining broad alignment with the other Crown Dependencies, especially Jersey.
A switch to Zero-15 would not trigger an international review but it would increase the risk of competition for the island, and the sub-committee resolved that any change in this area would need to be done in conjunction with Jersey and the Isle of Man.
Rather than significant structural reform, it said it had ultimately proposed short-term options that could be applied alongside other changes and recognising the evolution of the international business taxation environment.
Apply the intermediate (10%) company rate to entire corporate entity
Currently, the 10% rate applies only to specific activities, creating complexity, volatility, and scope for errors in tax returns. Extending the 10% rate to cover the whole corporate entity undertaking these activities would simplify compliance and reduce the risk of revenue impacting corrections, though it would only be expected to raise up to £500,000 a year.
Extend the intermediate (10%) company rate to apply to registered businesses
Regulatory developments mean some businesses undertaking financial activities – such as accountants, legal firms, and other professional service providers – are now required to register with the Guernsey Financial Services Commission. These firms form an integral part of the international financial services ecosystem. Given that regulation already underpins application of the 10% rate, extending the intermediate company rate to these businesses aligns with the current logic of zero-10 and is likely to remain acceptable to the Code Group and the FHTP. But the revenues would be relatively modest – expected at up to £2.5m. a year. Given other calls on revenue from these sources, the sub-committee says the proposal needs to be considered in the round.
Consider extension of the intermediate (10%) or higher (20%) company rate to apply to retail and construction businesses
The 10% or 20% rate could be applied more broadly to the retail and construction sectors, though larger retailers already pay 20% if profits are more than £500,000 a year and much of the construction sector is owned by local resident shareholders who pay 20% on distributed profits. So the additional revenue potential is relatively limited, estimated at between £3.4m. and £8m. The option also carries the risk of being seen to dilute the primacy of the 0% headline rate.
Limited increases to company fees or the introduction of a company levy
Consultation feedback indicated some willingness to consider higher annual company fees, although fixed-fee structures do not reflect company profitability and would be a blunt instrument. An extra £250 a year for each registered business would raise about £5m. Registration under an international services entity scheme could have an impact though, which would see income from this stream fall to more like £1m.
To progress the GST-plus package
The sub-committee described the package as ‘well developed with the potential to deliver around £50m. in additional revenue’.
‘It includes measures designed to mitigate the impact of a new consumption tax on lower and middle income households. Although implementation would be complex for both government and business, the package offers a credible means of placing public finances on a more sustainable footing in the near term.
‘While not risk-free – particularly regarding short-term inflation and consumption effects – the risks are materially lower than those associated with major changes to the corporate tax system.’
‘A combination of various revenue raising and cost reduction measures are likely to be required’
The Tax Review sub-committee is still unable to make all the sums add up in attempting to pull together, as directed, ‘the best package of sustainable revenue raising measures capable of addressing the structural deficit in States’ finances over the next 10 years’.
After allowing for an expected £40m. in additional revenue from Pillar II tax receipts, the structural deficit is still in the region of £77m. a year.
And even the introduction of GST-plus is only expected to take another £50m. out of that.
The sub-committee said it would need further measures to fill the gap but its own recommendations would only raise a further £10-15m. towards this.
It said that other, smaller measures –including motoring taxes or taxation to support environmental issues – could be developed in the longer term, but fall outside the scope of its review.
‘Overall, the sub-committee is of the view that a combination of various revenue raising and cost reduction measures are likely to be required to address the structural deficit.’
It said that a goods and services tax would provide ‘a relatively stable level of revenue each year’ and was less volatile than revenue based on corporate profits.
It also said that such change was required to respond to demographic change, with the number of islanders of working age reducing relative to the population as a whole, and so the island’s current reliance on income and employment taxes was unlikely to prove sustainable.
GST would broaden the tax base, offer greater resilience to economic shocks, and give businesses greater certainty.
‘Businesses value certainty, and it is key to economic growth.
‘The recommendations in this report broadly maintain the current corporate tax system while expanding it slightly to remove certain inconsistencies.
‘This should provide some certainty to businesses in the medium term,’ the sub-committee said.
And perceptions about unfairness and understandings about the current system would be addressed, in part, by the adoption of a GST, the sub-committee has agreed.
The group has also declared that the combination of GST-plus and its own proposals for corporate tax reform are a progressive approach.
The financial predictions indicate that public sector revenues would almost double between 2025 and 2029 once GST-plus and Pillar II taxes were fully bedded in.