Guernsey: Taxation of Benefits-in-Kind – Proposals to tax benefits through ETIMonday, July 28th, 2008
In a newly published States Report, the Treasury and Resources Department proposes
- to change income tax law to require the taxation of benefits-in-kind through the Employees’ Tax Instalment (ETI) Scheme from 1 January 2009, and
- to change income tax and social security law to provide for the exchange of information between the respective departments in order to ensure more efficient assessment and collection of income tax and social security contributions.
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”. Although some benefits, such as private expenses paid by the employer, are covered by the ETI Scheme, the majority of benefits are detailed on the Benefit in Kind Return at the end of the tax year.
Employers are already able to tax benefits through ETI but, if they do so, they must still be reported at the year end and the Return must be clearly indicate that tax has already been deducted.
The principal reason given in the Report for extending this procedure to all benefits-in-kind and collecting the tax on a weekly or monthly basis, with the quarterly return and remittance continuing as at present, is that it would serve to reduce the Income Tax Office’s resources considerably.
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.
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 reports 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.
The Social Security Department currently has no mechanism by which it can economically identify benefits-in-kind which are received by employees and 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 are automatically charged accordingly.
Historically, the Social Security Department has made the assumption that the majority of benefits-in-kind would be provided to 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 likely outweigh the potential gain.
The Social Security Department believes, however, that the recent increase in the annual upper earnings limit to £64,896 for employees and £108,108 for employers 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, and
- the increasing upper earnings limit may actually encourage the use of schemes designed for the avoidance of social security contributions in the future.
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. The Departments believe that it is unfair that an employee remunerated solely should pay a higher social security contribution than another employee who receives the same aggregate total of emoluments but whose remuneration package consists partly of benefits-in-kind.
Departmental exchange of information
There are significant restrictions on the persons to whom the Administrator of Income Tax may give information provided to him by taxpayers, employers, etc. The information that may currently be disclosed to the Social Security Department is restricted to the name and address of any employer and the address of any other person.
Similarly, 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.
Although the purposes of the Income Tax Office and the Social Security Department include the collection of 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.
It is clear to both Treasury and Resources Department and the Social Security Department that a formal gateway providing for the exchange of information could lead to the avoidance of the duplication of effort and more efficient assessment and collection of both income tax and social security contributions.
The proposal, therefore, is that the law governing the operation of the Income Tax Office and the Social Security Department be changed to allow information, including details of taxpayers’ income, to be exchanged to assist the departments to exercise their respective functions.
The Report asks the States of Guernsey to agree to the proposals and direct the preparation of the necessary legislative changes in order for them to be effective from 1 January 2009.
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