Company Tax

On 1 July the Chief Minister made his budget speech. He formally announced the widely anticipated reduction in Company Tax to 10% (20% for utilities) as from 1 January 2011.

However he also announced other measures which will limit the benefit for most businesses. Employer’s social insurance contributions will go up by 10%. Commercial rates will rise by 12% and the early payment discount for rates is halved. The commercial electricity tariff will rise by 10% and commercial salt water rates will go up by one pence. These increases will  claw back much of  the savings arising from the reduction in Company Tax for most companies. Insofar as profits are reduced by these additional charges this will represent a tax of 100% on that slice of profit.

However the benefit for locally owned companies from the drop in Company Tax is academic. A company whose shares are owned by overseas shareholders will pay tax at 10% on its profits and there will be no further tax to pay when these profits are distributed to its shareholders by way of dividend. On the other hand if a company is owned by local residents then any dividends received by those shareholders will be subject to tax at the personal rate of the shareholders. Under the New Income Tax Act  any accumulated profits held by companies which are surplus to business funding requirements will be taxed at the shareholders marginal rate whether they are distributed or not. Therefore as far as locally owned businesses are concerned the real rate of tax payable is the personal tax rate of the shareholder.

The budget measures cannot be considered in isolation. We need to look at the requirements of the New Income Tax Act also. This Act places a heavy compliance burden on all companies (and the self-employed). Failure or delay in complying with any of the numerous rules and regulations will trigger off serious penalties and surcharges. Therefore compliance costs are likely to rise substantially.

Some companies may well experience serious cash flow problems from the requirement to make payments of company tax ‘on account’. For example, all companies are required to pay 50% of the estimated tax liability in respect of their current accounting period by 31 August and the other 50% by the following 28 February. Consequently, if a company prepares its accounts with a 30 June year end it will be required to pay half the tax for the year within two months of the start of the year and the second instalment four months before the end of the year. Therefore tax will be payable in advance of profits being earned and not on account of profits already earned.

The penalties for non-compliance are draconian. For instance, the Commissioner of Income Tax may send a written request for information for tax purposes which has to be provided within 30 days. If this information is not supplied then there is a £200 penalty on the day of failure and a penalty of up to £500 per day for every day in which the failure continues. There are any number of reasons why it might not be possible to supply the information within a 30 day period, but a delay of another 30 days, say, would result in a fine of over £15,000. This could easily drive a small business into insolvency.

Construction Industry

The Chief Minister announced a support scheme for the local construction industry. This is welcome news. The Federation has been lobbying over many years on behalf of local constructors  who were being left out of all the larger Government funded projects. Foreign companies usually got the main contract and then farmed out much of the work to non-Gibraltarian sub-contractors and the economic benefit to Gibraltar was therefore dissipated. Direct allocation of contracts may be the best way forward, so long as there is full transparency and no preferential treatment of favoured companies.

Investing in office development

He also announced that the Government is negotiating with the developers of a new office development to ensure that the construction of new office space would not be held up by lack of bank finance. There is currently a shortage of office space In Gibraltar and Government investment in this area makes sense so long as the terms which are agreed with the developer are fair to the taxpayer.

Proposed new local bank

Also announced were proposals to promote a new local bank to provide more resilience in local mortgage and business lending. In the current international banking climate this is a good move given that we have very few banks in Gibraltar which offer a full range of retail and commercial banking facilities and there were rumours a couple of years ago that one of these was planning to close its Gibraltar operations. However, it is important that the new bank operate on a normal commercial basis and is not subjected to pressures to lend in some areas of the economy for political reasons.

Statutory minimum wage increased

The statutory minimum wage will be increased by 8% from £5 to £5.40 per hour as from 1 January 2011.

Personal tax and government charges

Personal tax rates are being reduced with the top rate under the Gross Income Based system coming down to 29% from 35%. For those enjoying ‘Hollywood salaries’ (£353,000 and above)  tax rates will fall sharply with income between £353,001 and £704,800 taxed at 20%, between £704,801 and £1 million at 10% and over £1 million at  5%. Personal tax rates under the allowance based system have come down also (and allowances increased), but not to the same extent.  The top rate of tax under this system remains unchanged at 40%.The Government is therefore continuing its policy of encouraging tax payers to opt to be taxed on the Gross Income Basis.

Tax relief on contributions to Retirement Annuity Contracts and Personal Pension Schemes are restricted to the lower of 20% of earned income or £35,000 with effect from 1 July 2009.

Employees’ maximum social insurance contributions will increase by 6% in respect of employees earning more than £12,000 per year. The self employed will see their contributions rise by 5%.

Domestic electricity and water tariffs will increase by 5% and 3.5% respectively.

Individuals with special tax status

Category 2 individuals will pay a minimum tax of £22,000 (previously £20,000) and the maximum amount of income chargeable to tax will rise to £80,000 (previously £70,000).

High Executives Possessing Specialist Skills (HEPPS) will be chargeable to tax on income of up to £120,000 (previously £100,000).

Environmental measures

The Government has removed the import duty charge on electric cars, pedal bicycles and solar panels and related equipment. Import duty on hybrid cars and on four-stroke motor cycles has been halved. However import duty on two-stroke motor cycles has gone up from 6% to 30% and on motor cars it has gone up by various rates depending on engine size. Cars with an engine size of over 2000cc will incur import duty of 22% instead of 17.5%. Whether these fiscal incentives will work remains to be seen given that the topography of Gibraltar is not conducive to the use of either pedal bikes or electric vehicles. However, if the incentives do not encourage a switch to more environmentally friendly vehicles the Government will benefit financially from these sharp increases in import duty on conventional transport.

Stamp Duty on real estate

Stamp duty on real estate property is amended as follows:-