On 22 July 2011 the States adopted the Income Tax (Amendment No. 39) (Jersey) Law 2011, and its related regulations with a view to changing the basis upon which a certain section of the community are taxed. The section of the community in question are those who apply for, and are subsequently granted consent, to purchase or lease property in Jersey because, in the view of the Housing Minister, to do so is both justified on social or economic grounds and is in the best interests of the Island's community. These are, of course, the famous "1(1)(k)s".
Why should these changes be of interest to anybody except these individuals themselves? According to the Minister for Treasury and Resources there are several very good reasons. First, however, we need to understand exactly what the changes are.
The previous regime applicable to 1(1)(k)s relied on drawing a distinction between income that arose in Jersey (Jersey-source income) and income that arose outside of Jersey (non-Jersey source income). The former was taxed at a standard rate of 20% regardless of how much was generated. The latter was taxed at a rate of 20% for the first £1 million of non-Jersey source income, 10% on the next £500,000 and 1% on all sums above that.
Crucially, the new regime removes the distinction between Jersey-source income and non-Jersey source income (other than in respect of income arising through renting out or developing Jersey property, which will remain chargeable at a rate of 20% regardless). This new "global" income will instead be taxed at the rate of 20% on the first £625,000 and 1% on all income thereafter.
Clearly, this is good news for the 1(1)(k)s since their Jersey income will now (subject to the exception noted above in relation to property income) be included in the amount which is subject to a sliding scale of taxation, and that sliding scale treats their income much more generously than before. Why though, is this good news for the rest of us? The arguments are as follows:
There will be more 1(1)(k)s, so there will be more revenue
The relevant politicians have decided that the Island has capacity to allow up to fifteen new 1(1)(k)s annually. Clearly, if anything like this number of wealthy newcomers arrive annually and if all contribute at least the envisaged minimum of £125,000 annual tax each, the income for the Treasury will quickly increase. The hope is, of course, that significantly more than £125,000 will be generated in tax from many of these new arrivals.
Jersey businesses may benefit from investment
The previous distinction in rates of taxation applied to Jersey-source income on the one hand and non- Jersey source income on the other, created an active disincentive for 1(1)(k)s to invest in Jersey-resident businesses. When considering how to use spare capital, these individuals were faced with a choice of investing outside of the Island (where any return generated by such an investment would be non- Jersey source income) and investing inside the Island (where returns would be Jersey-source income and be taxed at the full 20% rate regardless of their size). By abolishing the distinction and treating all income the same regardless of its source, the States have created a level playing field. As a result, Jersey businesses which present good investment opportunities should now have as good a chance of attracting the capital of 1(1)(k)s as non-Jersey businesses.
We may see an increase in economic activity
It could be that we see a change to the basis of the demographic profile of wealthy immigrants in Jersey. In decades past the typical wealthy newcomer was at, or approaching, retirement age and looking to enjoy life based in Jersey and living on investment income. Now, however, it is perceived that there is a large potential market of economically active successful entrepreneurs who might be attracted by the various advantages (fiscal and otherwise) that living in Jersey might bring with it. Such individuals, though, might well still be actively engaged in their businesses on a day-to-day basis. Could they manage to carry on doing that without the inconveniences (both in terms of time taken and attracting the attention of Her Majesty's Revenue and Customs) of regular commuting to London?
If the business concerned lent itself to such a move, the obvious answer would be to move it to Jersey along with the individual himself. Unfortunately, prior to the current amendments to the Income Tax legislation, income generated by the business in Jersey would have been Jersey-source income and attracted the full 20% tax rate, defeating a large part of the point of moving to Jersey in the first place. Now, however, the alternative of relocating the business to Jersey along with its wealthy owner is significantly more attractive since no adverse tax consequences will follow.
Of course, if a business comes to Jersey then it may well be that businesses will need employees from the local labour market, services from local providers and goods from local suppliers. In theory, the potential to generate activity at all levels of the Island's economy opens up. From that perspective, the changes to the 1(1)(k) tax rules ought to be for the benefit of all Jersey's residents.
While the understandable knee-jerk reaction to these changes may well be to question why, in these times of economic turmoil, our politicians are going out of their way to reduce the tax burden on the wealthiest members of our community, a little consideration of the issues quickly illustrates the potential benefits to us all.
Of course, these will remain "potential" until we see whether or not revenues actually rise and whether or not the Island's economy actually gets a boost through additional investment and jobs. Only time will tell whether the theory is borne out in practice
This article was originally published in Jersey Evening Post – Finance Industry Review, September 2011.
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