Since 1 January 2016 the company ‘higher’ rate of tax (20%) has applied to “large” retailers, which means those earning profits in excess of £500,000 in a calendar year, and the Tax Office have recently issued guidance on how they intend to impose the charge in practice.
This article intends to give a brief summary of the tax rates that apply to Guernsey companies and the businesses and activities that are affected by this change.
A Little Background
Since Zero-10, and a company ‘standard’ rate of tax of 0%, was introduced in 2008 (now almost a decade ago!) our Government have been looking for ways to ensure that business activities carried out in the Island are taxed here.
Despite the 0% ‘standard’ rate, there have always been certain activities that are subject to tax at higher rates – for example, from the outset, profits from banking businesses (with exceptions) and activities overseen by the Office of Utility Regulation have been taxed at 10%; profits from the ownership of Guernsey land (whether rents or property development) have been taxed at 20%.
Over time, the range of activities subject to tax at the 10% rate has been extended to cover many of the activities carried out by the finance sector, and now includes (not an exhaustive list) regulated fiduciary activities, most insurance-related activities and provision of fund administration services.
Where a business is owned by local resident shareholders, tax is paid on profits when they are distributed – whether that is by way of salary, bonus, dividend, etc – so the full 20% rate of tax has ultimately been (or will be) paid, although the directors have more control over when.
However, where a business is owned by non-resident shareholders (as is the case with many of the ‘big name’ stores on our High Street such as Boots, New Look, HMV, etc) profits can be transferred up to ‘group’ without ever being subject to tax in Guernsey.
Whilst there are clear benefits to the Island in attracting these businesses to the Island (the rents they pay to Landlords are taxed here, as are the salaries they pay to their employees) there is an understandable desire to ensure that the profits of the biggest corporate earners are taxed here too.
Who Is – and Who Isn’t - Affected?
In short, any company operating a retail business in the Island that sells goods to local residents, and generates tax-adjusted profits of £500,000 or more during a calendar year, will now be taxed at 20%.
On the face of it, the list of businesses that might be affected is large and (potentially) includes supermarkets, garden centres, car sales, petrol sales, convenience stores, online retailers, etc.
However, it is important to note that the charge only applies to the sale of goods directly to retail customers who are resident in Guernsey. The new charge will, therefore, not apply to:
- A business providing a service, such as a travel agent;
- A business selling food and drink for immediate consumption, such as pubs, restaurants and takeaways (these are considered to be primarily service providers);
- A wholesaler, where goods are sold to other businesses for onward resale (wholesale businesses are distinct from retail businesses);
- A business where over 95% of customers are resident outside of Guernsey, for example online retailers (these businesses are not considered to be carried out ‘in Guernsey’).
There are provisions within Law and the supporting Statements of Practice to combat straight-forward avoidance measures. Some are specifically mentioned, and summarised below, but the Director of Income Tax has wide-ranging powers to set aside a transaction (or transactions) that he is able to demonstrate have the main purpose of avoiding or reducing a tax liability.
- The profits of companies within a group structure, or under the control of a common individual(s), are combined for the purpose of determining whether the “large retailer” charge applies – two companies (each of which is a “retailer”) making profits of £300,000 are ‘caught’ in the same way as one company making a profit of £600,000 would be.
- Arrangements transferring profits between related companies (for example, by way of management fees, commissions or charging a premium rate for the provision of staff) that are intended to reduce the profits of a “retailer” will be disregarded.
As is always the case when preparing income tax returns and computations, there are various other matters to consider including the length of an accounting period and the extent to which profits accrue post-1 January 2016; claims for annual allowances; and claims for loss relief and determining which “pools” of income are distributed when a dividend is paid to a Guernsey resident shareholder.
For advice on these, or any of the points raised in this article, please contact Colin Jeffreys, Director, on 246324 or firstname.lastname@example.org
Colin Jeffreys, FCCA
29 September 2016
This article has been prepared as a general guide. It is not a substitute for professional advice. Neither Collenette Jones Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document.