States has no choice other than to take a £4m. hit

WHEN the States meets near the end of June to decide the future of zero-10, there really is only one answer.

Europe's initial ruling that the regime is harmful means that to avoid any further political action, and to retain access to the financial markets, Guernsey has to scrap the anti-avoidance measure known as deemed distribution.

The island was unsuccessful in arguing that it was sufficiently different to what was operating in Jersey and the Isle of Man that it should pass the test.

European officials, in a decision that would have inevitably been rubber-stamped by the finance ministers at their next meeting, said it was only a matter of timing.

So where the other Crown Dependencies went last year, Guernsey will at the end of this year scrap deemed distribution and with it take a potential hit at the Treasury of up to £4m.

Former chief minister Lyndon Trott argues that by playing the wait and see game, the island has taken millions extra in tax.

Jersey has already lost some £8m. by rolling back its deemed distribution regime earlier.

The timing issue has always hung over zero-10.

Back in 2007, last-ditch attempts were made to delay its introduction by a year and therefore bring in an extra £100m.

That call was resisted.

It is hard to judge the success of these decisions – and to some extent it is futile.

What is clear was that Jersey's and the Isle of Man's decisions to fight extensively saved zero-10 – the key zero tax rate, anyway – whereas Guernsey was heading for a general rate of 10% corporate tax.

All the islands, it seems, were getting different messages – and there must have been a fault on the line to Guernsey at the time.

That is history – new Treasury minister Gavin St Pier is left to pick up what is essentially a done deal.

There are two issues that could be raised when this is debated – the first is, being outside the EU, whether we should be playing to their rules; the second, how will that £4m. loss be filled when the deficit is already £24m?

The potential of moving on without Europe's blessing has been considered, said Deputy St Pier.

'My view is, and I think certainly the view of the T&R board and Policy Council that considered it, is that it would be a dangerous path to start heading down.

'The mood music in the UK, as we've seen with LVCR, with changes in the UK Budget, is not highly favourable towards us at the moment.

'There's a new French president and, generally with the wider pressures in the EU, I think to be trying to stick two fingers up at them would not be wise politically. You could take the view that they are distracted with far bigger problems, but on the other hand it could be very easy for them to demonise us.'

It would be very easy for the UK to take measures to shut the island out of the international arena and the international finance community, he said.

'That would be hugely detrimental to us.'

He did not believe there was evidence that the island had suffered as a result of how it had dealt with zero-10, particularly holding back and consulting around a 10% corporate tax rate while the other two Crown Dependencies fought and then moved earlier to scrap deemed distribution.

'I wasn't in the States when that decision was made. It's difficult for me to comment on the detail of the political background, but I understand at the time when the decision was reached a very firm signal from the UK was given that zero-10 was not compliant. Perhaps Jersey and the Isle of Man got a slightly different signal. To some extent, what has happened is in the past – whether we could have acted differently is interesting but not terribly useful.'

Once deemed distribution is scrapped, Treasury will keep an eye on how individuals reorganise their tax affairs in response – this element of the regime impacted on how and when profits were taxed once they were passed on to an individual and therefore became liable for 20% income tax.

'As part of this process, we are making it clear to the EU that we are not introducing any other measures to replace the regime we're getting rid of.'

The expected loss is around one per cent of the island's revenue.

But £4m. is still £4m. at a time when the pressure is on to eliminate the deficit in line with earlier commitments when politicians won support for using the contingency reserve as the books were balanced.

Deputy St Pier, as others have, spoke previously of widening the bracket in which businesses are taxed at 10%.

Throughout the campaign we heard plenty of candidates say that business was prepared to pay more, which seems an odd commitment and one that has not been spelled out in public.

But Deputy St Pier was not giving any specific clues as to the plan for closing the deficit.

The budget process would, as it always does, look at levels of business and personal taxation, he said.

Guernsey really has no option if it wants to retain its zero-10 tax regime but make the changes demanded by Europe.

This was one problem inherited by the new Treasury board.

But with the changing political scene in Europe, the chances are it will not be the last.