Feasibility Report into the introduction of independent taxation in Jersey: October 2013.

A FEASIBILITY REPORT INTO THE INTRODUCTION OF INDEPENDENT TAXATION IN JERSEY

October 2013

Foreword – Minister for Treasury and Resources

As part of the tax system modernisation programme, the Tax Policy Unit was asked to review how Independent Taxation could be introduced into the Jersey system. This report identifies the anomalies of the current regime and ways in which these could be addressed in moving to Independent Taxation. It is clear from this research that while it is possible, it is complicated and will need time to implement properly.

The term Independent Taxation' refers to the policy of taxing individuals as individuals, regardless of their marital status. In Jersey there is currently a default' for married couples to be taxed jointly. There are also certain allowances that apply to married couples, which do not apply elsewhere within the tax regime, such as the Wife's Earned Income Allowance.

While married people have been able to opt for separate assessment, rather than joint, since 2003, there is a now a clear need for the tax regime to adapt and evolve so that in the eyes of the State each individual is treated equally for tax purposes.

It is a widely accepted principle that our tax system should be both efficient and equitable, and that tax policy should not be used to encourage or discourage lifestyle choices; individuals or couples, whether married or cohabiting, should be treated equally. Independent taxation is therefore an important aspect of tax modernisation and provision for the needs of today's families.

The United Kingdom (UK) has had a system of personal taxation in place that treats married women as completely separate and independent taxpayers, for both income tax and capital gains tax since April 1990.

This principle of a moving to Independent Taxation makes sense in a modern society. However, it is vital that the logistical, administrative and financial impact of this change is managed correctly and makes the tax system simpler.

While the report that follows has gone some way to providing us with a clear understanding of the potential impact of change, a wider review of the personal tax regime will be required to facilitate the introduction of independent taxation. It cannot be achieved, equitably, overnight. It needs a phased approach.

A first important step towards Independent Taxation will be made in this year's Budget, namely decreasing the marginal rate band by 1%. This will have the effect of bringing the Marginal Tax Rate and 20 means 20' into closer alignment so that we can consider bringing in further simplification in future.

There is a commitment to introduce Independent Taxation in Jersey. Over the next two years work will continue on introducing Independent Taxation to the following timetable:

• Review completed and recommendations included in the 2016 Budget at the end of 2015.

• Commencement of implementation in 2016.

• Implementation fully completed by 2020.

This timetable is based on the assumption that the cost (there is an inevitable cost to either the States or to taxpayers) of introducing Independent Taxation will be acceptable to the States.

In addition, a long-term tax programme will be published in 2014 alongside the 2015 Budget which will include the Independent Taxation review as well as matters such as self-assessment and current year basis. Consideration will be given to including further changes in the 2015 Budget.

Senator Philip Ozouf

Minister for Treasury and Resources 8th October 2013

TAX POLICY UNIT REPORT

A FEASIBILITY REPORT INTO THE INTRODUCTION OF INDEPENDENT TAXATION IN JERSEY

October 2013

CONTENTS:   Page no:

1. EXECUTIVE SUMMARY6
2. SCOPE OF REPORT....10
3. BACKGROUND .11

4. WHY A REVIEW OF THE PERSONAL TAX SYSTEM IS NEEDED..15

5. WHAT DOES INDEPENDENT TAXATION' MEAN?.................................................25
6. HOW COULD INDEPENDENT TAXATION BE ACHIEVED?....................................29
7. FINANCIAL IMPLICATIONS...35
8. ECONOMIC IMPACT OF OPTIONS..41
9. PRACTICAL/OPERATIONAL MATTERS.51
10. KEY FINDINGS AND RECOMMENDATIONS.....53  

APPENDICES – SUPPORTING RESEARCH

Appendix 1  General principles and background behind the introduction of independent

taxation in the UK

Appendix 2  The current tax regime – joint taxation and separate assessment

Appendix 3  The marginal rate band

Appendix 4  Rationale for existing allowances

Appendix 5  Comparative illustrations of married and cohabiting couples under the existing

regime

Appendix 6  Taxes Office data on married couples claiming the single person's tax exemption Appendix 7  Current income tax registration form

Appendix 8  Long term tax policy principles

[NOTE: FOR REFERENCE TO MARRIED COUPLES' PLEASE ALSO READ CIVIL PARTNERS'; AND FOR REFERENCES TO HUSBAND' AND WIFE' PLEASE READ PARTNER A' AND PARTNER B' RESPECTIVELY.]

1. EXECUTIVE SUMMARY

1. Background to the report

The publication of this report is in response to the commitment made by the Minister for Treasury and Resources in December 2012.

There have been a number of calls for the States of Jersey to consider independent taxation over the past few years.

The aim of this report is to identify whether it is possible to move from the existing joint assessment regime to independent tax and if so, what are the implications.

2. Issues considered in the review The review considered the following aspects:

• anomalies and unintended consequences of the current regime;
• broad options for moving towards independent taxation;
• the financial implications, where possible, of moving to independent taxation; and
• the practical and operational issues of independent taxation.

It was not possible within the timeframe or given the difficulties in mining current data, to undertake a full financial impact analysis or a detailed review of each possible solution. It was clear early in the review that this is highly complex with many interacting elements which need to be considered more fully and over a longer period of time.

3. Key findings and recommendations

Independent taxation should be an integral part of Jersey's long term tax policy programme. There is a desire for the States of Jersey to consider introducing independent taxation and it is an important step in modernising the Jersey tax system.

It is possible to make this fundamental change to the tax system but it should not be done in the short term, as the financial implications could be substantial due to the complexity of the current regime and the anomalies it created. In addition it is not possible to identify all of the unintended consequences of each potential solution.

Taking steps to simplify the current tax regime in the near term would help facilitate the move toward independent taxation by spreading or alleviating the financial implications and minimising the risk of unintended consequences.

Jersey currently has a two tier tax system which adds to the complexity and creates the anomalies found in the system. These are the marginal tax rate and '20-means-20'. One method of simplification would be to remove the marginal tax band – i.e. the 27% tax rate and just have one regime. However removing the 27% rate in one step with no other changes would cost the States about £70m. This is not a feasible alternative but it may be possible to move towards a single rate over time and with compensating changes to, for example, exemptions and reliefs.

Another approach would be to replace the married tax treatment with the single person's treatment while maintaining the two tier system. However, simply moving a married couple to single person's treatment without considering the allocation of allowances and reliefs would cost taxpayers around £8m. These two extreme examples illustrate that this is not a simple measure that can be introduced in one step. A structured, stepped approach is needed to minimise the financial impact.

In summary the introduction of independent taxation should be pursued but as part of a wider modernisation programme, and in line with the development of the long term tax policy programme.

The recommended next steps are as follows:

• Given the interaction of independent taxation with other aspects of the tax regime that require modernisation or simplification, a first step should be to establish a detailed long term tax programme for the personal tax regime[1]. This should identify all aspects of modernisation/simplification with an indicative timetable and should cover the next 5 to 10 years.
• Take a step in the 2014 Budget toward simplification by reducing the marginal rate by 1% and consider further reductions in future Budgets
• Continue reviewing the exemption thresholds and allowances and determine how these can be changed in the short term to deal with the anomalies and help move towards independent taxation.
• Start to reduce the increases in exemption thresholds and allowances to reduce the growing discrepancies between married and cohabiting couples.
• Work will continue on designing a detailed step plan to introduce independent taxation to the following timetable:

• Review completed and recommendations included in the 2016 Budget at the end of 2015.
• Commence of implementation in 2016.
• Implementation completed by 2020.

This timetable is based on the assumption that the cost (there is an inevitable cost to either the States or to taxpayers) of introducing independent taxation will be acceptable to the States.

In addition, a long-term tax programme will be published in 2014 alongside the 2015 Budget which will include the independent taxation review as well as matters such as self-assessment and current year basis. Consideration will be given to including further changes in the 2015 Budget.

2. SCOPE OF REPORT

This report sets out the background to the review and why this work is necessary.

The purpose of the review is to objectively and rationally assess the potential strengths and weaknesses of introducing independent taxation in Jersey weighing up the potential value to be obtained against the potential cost.

This report explains what independent taxation' means and the ways in which this could be achieved in Jersey.

It goes on to discuss the potential economic impact of introducing independent taxation including the impact on different categories of taxpayers, as well as the practical and operational implications.

From a Treasury perspective, ideally this should be a revenue neutral measure. It is also assumed that the tax system is not a mechanism to be used to encourage or discourage marriage and that couples, whether married or cohabiting, are treated equally. The review has been carried out with both of these points in mind.

The appendices provide details of the supporting research and information.

Finally, the report concludes with recommendations on the next steps for the Minister for Treasury & Resources to consider.

3. BACKGROUND

1. Why has this report been prepared?

On 12 December 2012, the Minister for Treasury & Resources made a commitment to States Members that he would produce a feasibility report on the subject of independent taxation by the end of September 2013.

This report is the product of that commitment. The detail of the commitment made is as below.

 "I am committed to produce a report by the end of September 2013 which addressees the implications of amending the Jersey tax regime to introduce independent taxation. This is part of our ongoing commitment to modernising Jersey's tax regime. Independent Taxation is an important if not fundamental element of that modernisation.

 A great deal of work is going to be needed to determine how this might be achieved and identify all the intended and unintended consequences. There are likely to be significant financial and manpower implications and the States will need to be invited to decide how these are to be dealt with.

The scope of the report is in the process of being determined, it is likely to include:

• The interaction with other key elements of the existing tax regime such as the marginal rate tax band and the prior year/current year basis of tax collection;

• Investigating whether there is a neutral solution in terms of financial burden – due to the current nature of our regime there are likely to be winners and losers, be that taxpayers or the States revenues;

• Operational issues (Taxes Office resource, IT etc) in view of the other major changes to the personal tax system that are being implemented over the next few years;

• External economic advice on the wider impact of such a change;

• The impact on non tax matters such as pension entitlement or the Social Security Long Term Care charge;

Following the completion of the report, which we will publish and present to members, there will need to be a period of time for consultation. It may be that there will need to be green and/or white papers consultations.

Whilst it is not possible to introduce changes in the 2014 Budget, I would hope to set out a firm timetable this time next year."

The detail within this report, and any subsequent recommendations that may result from the completion of its next steps, are underpinned by the taxation principles as outlined in the Strategic Plan (published in 2012). The long term tax policy principles as set out in the 2012 Medium Term Financial Plan are on included in Appendix 8.

2. What are the current rules?

Under the current rules, upon marriage a woman's income is deemed to be that of her husband. This income is recorded on a joint tax return form, which for most sources of income records the husband and wife's income separately. The resultant income tax liability is assessable on the husband.

The married couple is treated as one taxpayer. The Income Tax Registration Form' (Appendix 7 refers) which must be completed upon commencement of receipt of income, applies to a married couple as a taxpayer. Individual forms do not need to be completed.

There is no joint income tax liability; the liability lies with the husband.

In calculating whether that taxpayer is exempt from income tax, subject to tax at 27 % after deduction of an income tax threshold and other deductions, or subject to tax at the standard rate of 20%, a married couple rather than a single person's income tax exemption threshold is applied.

The 2013 income tax exemption thresholds are as follows:

There are also certain allowances which apply to a married couple that do not apply elsewhere within the tax regime, such as the Wife's Earned Income Allowance (currently £4,500).

Since 2011 the tax return has included a box on the married personal tax return enabling the husband within a married couple to allow the Taxes Office to correspond directly with his wife regarding their taxation affairs. Prior to this, the husband was required to submit a letter of authority in order to authorise communication.

The law was amended in 2003 to allow the parties within a married couple to apply to receive separate tax assessments. This means both the husband and wife would each complete their own annual tax return form declaring their own income, and subsequently would each receive their own income tax assessment. The effect of this election is that the wife's income is not deemed to be that of her husband and they are each separately assessed and charged to tax under the law.

However, the income tax assessment is identical to that which would be calculated had they not opted for separate assessments – i.e. from a tax perspective there is no advantage or disadvantage. The same exemptions and reliefs that would have applied on a joint assessment still apply. It also does not affect the ITIS rate that applies to both partners, which is based on the joint income.

From a taxpayer's perspective, this is primarily an administrative arrangement which allows a wife to deal with her own tax affairs but does result in the wife being personally liable for her tax liability.

3. Why are we reviewing this now?

The States recognises that aspects of Jersey's personal tax regime, including joint assessment, need modernisation. The establishment of a dedicated Tax Policy Unit provides the resource for Jersey to consider its long term tax programme and to specifically address this issue now.

4. WHY A REVIEW OF THE PERSONAL TAX SYSTEM IS NEEDED

In recent years there have been a number of requests for the States of Jersey to consider the introduction of independent taxation.

This is an extremely complex issue because of the way the personal tax system works. However, it is recognised that the current system needs to be modernised and results in some unintended consequences. This section highlights the challenges created by certain features of the current regime.

1. Tax bands

It is difficult to identify which tax payer bands are affected by changes to the tax system because of the way the '20 means 20' system interacts with the marginal rate'. (Appendix 3 explains the operation of the marginal rate band.)

The marginal rate tax band is often associated with lower earners and '20 means 20' with higher earners. In reality, because of the way the allowances and reliefs are given within the tax system, this is not always the case. A summary prepared in June 2013 by the Taxes Office advised that a married couple household with income in excess of £150,000 could be a marginal rate taxpayer in certain circumstances, although in such a case paying an effective rate of almost 20%. The term marginal rate taxpayer clearly does not necessarily mean those on lower/medium income. Furthermore the effect of increasing exemption thresholds and the removal of allowances under 20 means 20' means that approximately 84% of taxpayers are now paying tax at the marginal rate with an effective tax rate of less than 20%.

2. Allowances/reliefs

The tax system incorporates a number of allowances and reliefs, including some that are gender based.

The following[2] are available to all taxpayers regardless of their level of income:

• Child allowance
• Higher child allowance
• Additional personal allowance

The additional personal allowance was introduced to assist single parents but this additional allowance can also be claimed by cohabiting couples. This provides for different treatment between cohabiting and married couples and seems to be an unintended consequence of the current regime.

The following are available to marginal rate taxpayers:

• Wife's earned income allowance (gender based as not available to husbands)
• Childcare (and enhanced childcare) tax relief
• Mortgage interest relief

These allowances and reliefs are claimed via the tax return form and not specifically allocated against the husband's or wife's income.

Childcare tax relief can only be claimed by married couples if the wife earns income in excess of £4,500 and is set against their joint income; the male partner in a cohabiting household cannot claim this relief although the female can. It is therefore effectively a gender based allowance and again leads to different outcomes for cohabiting and married couples.

3. Cohabiting/married couples – inequalities

There are inequalities between the tax treatment of married couples and cohabiting couples in addition to those identified in 4.1 and 4.2. This is illustrated in Appendix 5. These examples use the basic scenario of income and allowances. They do not include claims for relief such as mortgage interest or child care tax relief which complicate matters further.

Whether a couple is financially better or worse off being married or cohabiting depends on the fact pattern of that particular household. Whereas in other cases, the position is more advantageous for the cohabiting couple because they may be able to maximise their allowances by, for example, using two single persons allowances which is greater than one married couple's allowance.

The point is that the ability to obtain a tax advantage or disadvantage as a result of being a married or cohabiting couple is dependent on that particular couple's circumstances.

For example, a working unmarried couple who both are within the marginal rate income tax band with one child may pay less income tax than a married couple with the same income. This is because of the differences in the single person and married income tax thresholds as illustrated below.

Table 4.3: Cohabitees:3

2 x single income tax thresholds (£13,780 each)  £27,560 1 x child allowance  £3,000 1 x additional persons allowance   £4,500 Total allowances   £35,060

Table 4.3a: Married couple:

1 x married couple income tax threshold   £22,090 1 x wife's earned income allowance   £4,500 1 x child allowance   £3,000 Total allowances   £29,590

3 2013 income tax exemption thresholds

The married couple would have a higher income tax liability than the cohabiting couple if the two couples have the same level of income.

Conversely there are situations whereby a married couple receives beneficial treatment compared to a cohabiting couple in similar circumstances. This is particularly acute where there is one spouse/partner who is not working.

Table 4.3b: Cohabitees:

1 x single income tax threshold   £13,780 1 x child allowance   £3,000 1 x additional persons allowance   £4,500 Total allowances   £21,280

Table 4.3c: Married couple:

1 x married couple income tax threshold   £22,090 1 x child allowance   £3,000 Total allowances   £25,090

In this scenario the cohabiting couple would have a higher income tax liability than the married couple if the two couples have the same level of income.

The above simple comparisons demonstrate the existing inequalities within the current tax regime.

The situation is complicated further when other income tax reliefs such as those shown in 4.1 and 4.2 are taken into account. The example below illustrates the position where the opportunity to claim childcare tax relief can be utilised to the advantage of a cohabiting couple, compared to a married couple. This is by one partner utilising sufficient allowances to bring their income below the income tax threshold so they fall outside of the tax net.

Table 4.3d: Cohabitees:

Man's income £45,000 Less: Child allowance (split between partners) £5,930 Additional persons allowance £4,500 Income tax threshold £13,780 Net taxable income   £20,790 Tax at 27% (marginal rate)   £5,613

Woman's income   £20,000

Less: Child care tax relief   £6,150

Child allowance (split between partners) £70 Income tax threshold £13,780

Net taxable income   NIL

Total tax liability   £5,613

Net income £59,387

Table 4.3e: Married couple:

Husband income   £45,000 Wife income   £20,000 Total income   £65,000 Less: child allowance £6,000 Child care tax relief   £6,150 Wife's earned income allowance   £4,500 Married income tax threshold £22,090 Net taxable income   £26,260 Tax at 27% (marginal rate)   £7,090 Net income £57,910

The cohabiting couple has a tax liability which is £1,477 lower than a married couple in this case.

The availability of other income tax reliefs, such as relief for mortgage interest paid can also affect the tax position in a similar way to the payment of Child Care Tax relief.

Continuing to annually increase income tax exemption thresholds exacerbates this problem. Consideration should be given to decreasing and, eventually, removing the 27% marginal tax rate and removing the two tier tax system.

There are other inequalities too. The Income Tax Law provides that in the event of an individual incurring a trading loss they may be able to offset against their taxable income for the year, thereby allowing a benefit where an unmarried couple would not be entitled.

Taxing individuals on an independent basis could help rectify this situation.

4. ITIS (Income Tax Instalment System)

A married couple's tax affairs are combined under one tax reference.

The Taxes Office issue a joint ITIS rate based on their estimated joint income. This can be problematic for taxpayers on marriage when one spouse's ITIS rate can be much significantly different than expected due to their spouse's level of income. However they may jointly elect for the rate applicable to the earnings of one of them to be increased and the rate applicable to the earnings of the other to be correspondingly reduced.

When ITIS was introduced in 2006, the current year' basis of tax collection was also introduced for new taxpayers. The extant prior year' basis of tax was retained and the two systems run concurrently. Individuals who were registered before 1 January 2006 have income tax deducted from their earnings on a prior year basis of collection. This means the tax deducted is offset against the tax liability for the prior year. Individuals who registered on or after 1 January 2006 have income tax deducted from their earnings that is matched against their current year tax liability. Whether an individual pays ITIS on a prior or current year basis has no impact on their overall tax liability, it just affects when the tax is paid.

The existence of these concurrent regimes may cause complexity in the event of marriage.[3] When an individual moves from being taxed as an individual to the married couples tax regime, the individuals involved may not be on the same ITIS basis. For example, a wife who pays ITIS on a current year basis may marry a husband who pays ITIS on a prior year basis. In this case the wife has the opportunity to benefit from the cash flow advantage of deferring the payment of her income tax liability for a year by moving from a current to prior year basis of ITIS collection.

The interaction of the prior year basis of tax collection with the taxation of married couples also presents further problems. Firstly, this is because those taxpayers are always a year behind in settling their tax affairs. Therefore there is always a latent liability. Further consideration would need to be given as to how to address this in the transitional period if independent taxation were introduced. Secondly, upon divorce this latent liability may also be an issue and specific provision is sometimes given to this in the divorce settlement. Moving to independent taxation could address these issues.

5. Year of marriage

In the year of marriage, a wife includes her own income on her own tax return up until the date of marriage. The husband then declares her income from date of marriage to the end of the tax year on his tax return form. A similar process is applied in the tax year of separation.

Consequently in a year of marriage or separation, the tax return process is more resource intensive for the Taxes Office to administer.

The income tax exemption thresholds available in the year of marriage are advantageous due to the change in status. The wife receives a full single person's income tax exemption. It is not time apportioned. The husband receives the full married couple's income tax exemption threshold and the full Wife's Earned Income Allowance. It is not time apportioned. The same thing happens in the tax year of separation.

6. Spouses geographically separated

There is a provision in the Income Tax Law that applies to married couples where the spouses each have a different tax residence status. This enables them to be treated as if they had been separated, provided this does not result in a higher tax liability than if they were taxed as a married couple.

This illustrates another level of complexity arising from the current regime which would not exist if individuals were taxed independently, based on their own income and their own tax status.

7. Seasonal workers

In order to register with the Taxes Office, all individuals are required to complete an Income Tax Registration Form.

There is one form per married couple. In the case of seasonal workers, perhaps coming from overseas, it is possible that their spouses are not in Jersey and yet their details, including their estimated income, needs to be completed and submitted to the Taxes Office. There is a question over the accuracy and value of this information. It will also affect the taxpayer's ITIS rate even though the "absent" spouse's income is not subject to tax in Jersey.

8. Civil partners

Civil partners are required to notify the Taxes Office once their civil partnership has been registered in the same way that a married couple would do so upon marriage.

Civil partners are taxed in the same way as a married couple; they receive the same reliefs (married income tax exemption threshold, and earned income relief).

The income tax law treats civil partner A' (who is the older partner) the same as the husband in a married couple. Civil partner B' (the younger partner) is treated the same as the wife in a married couple. (It is possible for the older partner to irrecoverably elect to be B' and for the younger partner to be A').

There is a specific tax return for civil partnerships. It is identical to the complex tax return but refers to self' and partner' rather than self' and wife'.

There was some criticism levied at the time of the introduction of the Civil Partnership Law in Jersey that it provided a perfect opportunity to update and amend the income tax law which has been described by some as "archaic". Furthermore the ability to elect which is partner A' and which is partner B' may be seen as giving an unfair tax advantage over a married couple who cannot select who is treated as the husband' for tax purposes, by taking advantage of the wife's earned income allowance. This is one of the pitfalls of using gender based allowances in the tax regime.

9. Additional process for separate assessments

The Taxes Office administration of married couples who opt for separate assessment is cumbersome. Income tax allowances may be split between each spouse. If the taxpayers do not request this, the Taxes Office allocates them based on their income. The assessment is then generated in accordance with this. A further assessment is prepared treating the married couple as if they had not elected for separate assessments for comparison purposes. This is to ensure the individuals involved do not pay any more, or less, had they not made the election. It is a resource intensive process.

It is impossible to compare the cost of tax administration for married couples who opt for separate assessment with the potential cost of independent taxation. Currently the process for such couple is to treat them as the exception rather than then norm hence the level of manual involvement by assessment officers is disproportionately higher than for the joint assessment of a married couple. If the Taxes Office systems were set up to operate independent taxation this would not necessarily be the case, not least as under independent taxation the allowances and exemptions would likely be set by law which removes the need for manual involvement.

10. Taxpayer reporting

Independent taxation would potentially allow more accurate reporting with one individual being treated as one taxpayer and their data being recorded separately from their spouses. It should allow easier data analysis which would better facilitate tax policy developments.

5. WHAT DOES INDEPENDENT TAXATION' MEAN?

The term independent taxation' can mean different things to different people and in terms of the Jersey tax system is open to interpretation. The OECD publish a glossary of tax definitions, and even this does not include the term independent taxation'.

This may result in taxpayers wanting independent taxation to be introduced but actually meaning something different.

1. Modernising the tax regime

In a Jersey Evening Post article dated 27 January 2012, a local family law expert referred to the law which automatically regards a married woman's income as belonging to her husband as ridiculous' and also that the law was archaic' and should be updated to reflect modern society.

This raises the question of whether there is a desire to modernise the tax system so that a wife's income does not belong to her husband but for the law to be amended to reflect a husband and wife as having joint income and consequently a joint and several income tax liability.

This would resolve the issue of the "dated" approach of a wife's income belonging to her husband without necessarily fundamentally changing the income tax system – i.e. there could still be joint taxation and the system could retain the current married income tax threshold rates/method of allowances/reliefs and the gender based allowances. However it would not address a number of the other issues of the current system identified in Part 4.

From a legislative perspective this would still require a fundamental amendment to the Income Tax Law and comprehensive Law Officers advice would need to be sought to ensure the creation of a liability which does not currently exist would not present any issues in respect of the European Convention on Human Rights.

2. Separate assessments

Some may view the existing option of separate assessments as a type of independent taxation. However, the way this operates does not equate to independent taxation.

Since 2003, the income tax law has included a provision to enable a married couple that is ordinarily required to complete a joint tax return, may elect for separate assessment'. The purpose of this is to allow spouses to have autonomy and privacy in conducting their tax affairs if they wish. (Appendix 2 refers.)

In terms of administration, the current approach is time consuming because it involves allocating the reliefs and allowances between the spouses in the most equitable and tax efficient manner. Such allocation is not determined by law.

There are currently about 400 married couples that claim the separate assessment, out of over 18,000 married couples. There is a perception that because the number of married couples opting for separate assessment is low, this could indicate a lack of demand for independent taxation. However the two systems are very different. Opting for separate assessments does provide some privacy for each spouse to deal with their taxation affairs. However the overall liability for the married couple is the same as if they were assessed jointly – therefore simply because people do not opt for additional paperwork in return for the same tax position does not necessarily mean they would not support the introduction of independent taxation.

3. Comparative jurisdictions

This is a very high level summary of the regimes that apply to married couples in other jurisdictions. It does not seek to identify the effect of the regime on married versus cohabiting couples. The differing treatment illustrates how independent taxation is not a straightforward issue.

4. Independent taxation

The definition of "independent" as defined by the Oxford English Dictionary is as follows: "Capable of thinking or acting for oneself"

Applying such a definition to taxation, and hence introducing independent taxation would mean treating each individual as a taxpayer in their own right, subject to income tax based on their own income and their own entitlement to allowances. It is assumed, for the rest of this report that moving to independent taxation' means this.

6. HOW COULD INDEPENDENT TAXATION BE ACHIEVED?

The ultimate aim must be to have a tax system that taxes each individual based on their own income and circumstances without creating a financial disadvantage to taxpayers or the States.

This section examines four broad options that could achieve the aim of independent taxation, although none of them will be revenue neutral to both the taxpayer and the States.

This is not an exhaustive list and is only to illustrate the potential routes that could be considered and highlight the implications. Further work is required to determine which would be the most appropriate way forward. It could be a combination of one or more of these.

Part 4 of this report discussed why a review is needed and highlights some of the challenges created by the existing features of the current regime when considering independent taxation. Whilst considering the merit of each available option, an indication is also given to how they may be able to address these issues.

1. Option 1: "Split" the current regime.

One option may be to "split" the current regime but maintain the existing exemption thresholds and allowances and the marginal rate and 20 means 20' regimes.

Each married couple will be treated as an individual. The single person's income tax exemption threshold would apply to all taxpayers. However there are difficulties with the existing regime as most allowances and exemptions are only intended to be used once. Therefore it will be necessary to decide how such reliefs are to be allocated. There are a number of approaches to address this issue:

• Each married couple could choose which party is entitled to the income tax allowances via an irrevocable election. Forecasting the cost of this would be difficult because it would necessarily involve guessing which party would claim the allowances. Assumptions could be made from a tax perspective, for example the higher earner claims the allowances. However in reality some households may choose to allocate their allowances differently, perhaps in accordance with their allocation of household finances.

• Each married couple could claim their allowances annually via their personal tax return form based on their income. It would be difficult to forecast tax revenues on this basis, as a couple's financial situation could change year on year. This could create administrative difficulties for the Taxes Office.
• Allowances could be allocated against one spouse's income and any excess could be transferred to the other spouse for them to utilise. This could create administrative difficulties and it would be difficult to determine the financial implications.
• Each spouse could be entitled to 50% (or some other allocation) of the available allowances, regardless of their income level capacity to utilise them. This approach could be criticised as it could reduce the level of allowances currently claimed.

Other issues to consider are as follows:

• The Wife's Earned Income Allowances would need to be abolished or changed. Maintaining this would retain the inequality in treatment compared with cohabiting couples which may be able to claim the child allowance and the additional persons allowance for their child. To what extent the additional persons allowance is claimed by cohabiting couples compared to single parents for whom the rules were originally introduced to benefit, is unclear.
• Defining a cohabiting couple if extremely difficult as, evidenced by the recent UK changes. This could make it difficult to define the application of certain exemptions, for example.

A key advantage of maintaining the income tax thresholds is that this is a concept which was originally introduced, back in 1963, as a mechanism to alleviate the tax burden for low/ middle earners. To some extent this is still the case. However, this can still be addressed through a different mechanism, if necessary. Maintaining the core elements of the current regime will not be seen as a significant change and could be more accurately assessed, financially.

A key disadvantage is that this could have an unintended financial impact on certain households which may not be solved with introducing further complexity or discretion. As well as maintaining a two tier tax system, it could also be perceived as a sticking plaster' approach rather than pursuing the modernisation of the tax regime.

Furthermore, it may be that there is an elective approach to independent taxation, for example the default position is joint taxation and individuals elect for independent taxation, or vica versa. Either way this would have an impact on the costs of tax return administration and potentially a greater financial impact as couples would generally only elect if it was beneficial (i.e. if their tax liability would be reduced).

Comparison with how Option 1 may address the challenges raised in part 4.

Adopting this option would not impact on the issues around the tax payer bands as explained in 4.1. The impact on the income tax reliefs and allowances as explained in 4.2 would depend on the decisions made as listed above.

However this approach could potentially solve the anomalies detailed in sections 4.3 to 4.8. These being:

• the inequalities for married v cohabiting couples
• ITIS
• procedure in year of marriage (and separation)
• the treatment of spouses geographically separated, seasonal workers and civil partners

This is because each person would be treated individually for tax purposes, and so the discriminatory treatment removed.

The extent of the impact on process and taxpayer reporting as discussed in 4.9 and 4.10 would depend on the decisions taken regarding the income tax reliefs and allowances.

2. Option 2: Replacement of the income tax thresholds.

Another option is to remove the current two tier tax system by removing the marginal rate tax band, and replace it with a universal set of exemptions and allowances.

This could be done in stages, for example reducing the 27% in tranches of, say, 1%. The cost of reducing the marginal rate from 27% to 26% would be about £8million. This figure is made up of about £6.9million decrease in income tax from the marginal rate taxpayers. Additionally there would be a further 1,210 taxpayers who currently pay at 20% who would move back into the marginal band at an additional cost of £1.2 million.

A key advantage of this option is that it would provide opportunity to review some fundamental elements of Jersey's tax regime as part of the modernisation process.

This would, however, be extremely difficult to assess and those adversely affected may not be identified until after the event. As with Option 6.1, addressing those unintended consequences could be difficult.

Comparison with how Option 2 may address the challenges raised in part 4.

Adopting this option would potentially solve the anomalies and challenges within the existing tax system as identified in sections 4.1 to 4.10. These being:

• tax payer bands
• reliefs and allowances

• the inequalities for married v cohabiting couples
• ITIS
• procedure in year of marriage (and separation)
• the treatment of spouses geographically separated, seasonal workers and civil partners

This is because each person would be treated individually for tax purposes, and so the discriminatory treatment removed. It also moves towards one rate of tax.

The extent of the impact on process and taxpayer reporting as discussed in 4.9 and 4.10 would depend on the decisions taken regarding the income tax reliefs and allowances.

3. Option 3: Create a completely new personal tax regime

The third option is to create a completely new tax regime in order to facilitate the introduction of independent taxation.

The advantage of this approach is the opportunity to create a new regime with scope to target measures in order to protect those on lower incomes whilst ensuring equality amongst married/unmarried taxpayers.

The fundamental difficulty with this option is that it would be impossible to cost with any certainty. One of the main challenges when considering any change to a tax regime is the potential financial impact on taxpayers and to the Treasury. As the intention is not to introduce independent taxation as a tax revenue raising or reducing measure, estimating the financial implications is essential. Creating a completely new regime would be extremely difficult to model with any certainty based on the data currently available. Designing a tax regime from scratch is very resource intensive, but may be more effective in addressing the complexity and anomalies of the current regime.

The creation of a completely new tax system would obviously be designed with the clear intention of solving the issues raised in part 4.

4. Conclusion

The ultimate intention is for Jersey to have a simple tax system that delivers independent taxation with minimal financial impact on taxpayers or the States.

Due to the complexities of the current regime, which is highly dependent on individual and household circumstances, it is impossible to fully assess the financial impact on the States, or to identify each person who would benefit or lose out from any one of these changes. What this review demonstrates is that there is no easy solution.

Moving towards a 20% tax rate for all whilst providing specific, targeted, exemptions and allowances for certain taxpayers, depending on their level of income rather than their marital status, would be the recommended route if simplification is the key objective. This would involve reduction of the marginal rate and the eventual subsequent removal of the two tier system to be considered in line with independent taxation.

It is recommended that a fuller review of the tax regime be undertaken to identify areas that can be simplified first before taking the final step towards independent taxation.

7. FINANCIAL IMPLICATIONS

The purpose of this section is to highlight the financial impact on taxpayers and/or the States of Jersey Treasury of moving towards independent taxation.

The introduction of independent taxation is unlikely to be a tax neutral measure for individuals or for the States. This is because of the complexity of the current system, as illustrated in Part 4. It is probable that it would create financial winners and losers' within the taxpayer community.

For the purposes of this report the Taxes Office has provided some data, which can be used for illustrative purposes. It is not worthwhile using resources to model all of the possible options.

The Taxes Office data shows the financial implications of just one example. In essence this is an illustration of Option 1' as explained in Part 6 of this report, i.e. the Taxes Office data shows what the financial impact on taxpayers, and the State, of effectively splitting' the tax regime and applying the single person's income tax. The criteria for the data are as follows:

• The basic premise is that each individual in a married couple is treated as an individual;
• Each individual is entitled to a single persons income tax threshold;
• Those married couples that elect for separate assessments are not included (less than 200). Also there are number (about 1,400) of married couples that cannot be categorised because they do not compute as normal' assessments. These are also excluded from the sample;
• If a wife had no income, all allowances are allocated to the husband;
• If both husband and wife receive income the allowances are split equally between them – there is no opportunity to reallocate unutilised allowances;
• Any unutilised allowances and income tax thresholds are not transferred;
• The results show the impact for each married couple even though they would be

taxed independently.

Below is a summary of the key results arising from this test. (Note: this summary ignores the cases where the measure would impact less than 100 married couples. Appendix 6 provides further information.):

• The net position would be to increase income tax revenues by £8.2million, i.e. this would result in a net cost to the taxpayer.
• There is no conclusive answer as to which types of taxpayers will pay more income tax and which will pay less. There are winners and losers from various taxpaying groups.
• The results demonstrate that the impact depends on numerous factors – an inevitable conclusion when the tax regime includes so many allowances and applies them in tightly defined circumstances.
• The total number of taxpayers paying less income tax would be about 8,400 married couples.
• The total number of taxpayers paying more income tax would be about 7,800 married couples.
• The total number of taxpayers unaffected by this measure would be about 2,400 married couples.

Based on 2011 data, those taxpayers who would pay less income tax are shown in the illustrations below. Each graph refers to a specific taxpayer group and the shows the number of taxpayers within that band that will have a reduction in their income tax liability in multiples of £500.

Graph 7.1 Marginal rate taxpayers – reduction in tax liability

6000

5000

4000

3000

number of taxpayers 2000

1000

0

£0-£500 £501- £1,001- £1,501-

£1,000 £1,500 £2,000

Graph 7.2 Standard rate taxpayers – reduction in tax liability

300

250

200

150

number of taxpayers 100

50

0

£0-£500 £501- £1,001- £1,501- £2,001-

£1,000 £1,500 £2,000 £2,500

Those taxpayers who would pay more income tax are shown in the illustrations below. As with the illustrations above, each graph refers to a specific taxpayer group and the shows the number of taxpayers within that band that will have an increase in their income tax liability in multiples of £500.

Graph 7.3: Marginal rate taxpayers – increase in tax liability

600

500

400

300

number of taxpayers 200

100

0

£0- £1,001- £2,001- £3,001- £500 £1,500 £2,500 £3,500

Graph 7.4: Standard rate taxpayers – increase in tax liability

108

107

106

number of taxpayers 105

104

103

£0-£500 £501-£1,000

Graph 7.5: Exempt taxpayers becoming subject to income tax

140

120

100

80

60 number of taxpayers 40

20

0

£501-£1,000 £1,501-£2,000 £2,001-£2,500

Graph 7.6: Exempt taxpayers, over 63 years of age, becoming subject to income tax

140

120

100

80

60 number of taxpayers 40

20

0

£0-£500 £501- £1,001- £1,501-

£1,000 £1,500 £2,000

The following findings are not illustrated in the above graphs:

• 705 marginal rate taxpayers over 63 years of age would have a decrease in their tax liability of between £0 and £500.
• 1,479 marginal rate taxpayers over 63 years of age would have an increase in their tax liability of up to £3,000.
• Those marginal rate taxpayers where the wife has no income would see an increase in their tax liability of between £2,501 and £3,000. The number of taxpayers affected are as follows:
  • over 63 years of age – 479
  • under 63 years of age - 685

The conclusion of this data is that introducing independent taxation based on this type of model would be a cost to the taxpayer but not to the States. Within the various taxpayer bands it is difficult to generalise to who would be adversely affected and hence find a solution.

Inevitably a different route, such as removing the income tax thresholds and reducing the marginal rate from 27% to 20% would produce different outcomes, but as noted above it is extremely difficult to model the impact due to the complex nature of the regime.

It is recommended that further work be done to identify ways of simplifying the regime over time so that the financial impact can be minimised before a move to independent taxation is undertaken.

8. ECONOMIC IMPACT OF OPTIONS

The following comments have been provided by the Economics Unit in relation to the taxpayer modelling they have provided below.

In section 5.3, independent taxation has been described as treating each individual as a taxpayer in their own right and subject to income tax based on their own income and their own entitlement to allowances.

This analysis focuses on one way in which this could be done:

• the income of each spouse is taxed separately
• each spouse receives a single person threshold instead of jointly receiving a married couple threshold.
• the Wife's Earned Income Allowance is removed.
• where a married couple is entitled to further reliefs (because they have children or a mortgage for example) the higher income earner uses them.

In essence this modelling demonstrates the impact, from an economic perspective, of Option 1 as explained in Part 6 of this report, i.e. effectively splitting the tax system so as to allow each individual to claim the single person's income tax exemption threshold.

1. Impact on married taxpayers

The illustration below shows the impact of this change on married couple taxpayers.

These graphs are divided into three parts, and each part shows a different example of a married couple situation. The situations were chosen to show a range of consequences to taxpayers of moving to independent taxation. The consequences depend on the number of allowances and reliefs a married couple is entitled to, the size of household income and the split of how the income is earned between the married couple.

Each part shows the impact of a married couple having single income tax exemptions on:

1. The effective tax rate
2. The change in the effective tax rate
3. The change in disposable income

Within each part there are three household scenarios, which range from the case where one spouse earns 100% of the income to a household where their income is earned in equal shares.

The results describe how much more/less disposable income (i.e. how much more/less income tax to pay) married couples in different situations would have by moving to independent taxation.

The first model refers to a married couple with no children and no entitlement to mortgage interest relief.

Married couple with no children and no mortgage

Household 1 100%/0% Household 2 70%/30% Household 3 50%/50%

Effective tax rate with/without independent taxation Effective tax rate with/without independent taxation Effective tax rate with/without independent taxation

25%

20% 15%

10%

Married household after

5% Married household before

0%

k 25k 50k 75k 100k 125k 150k 175k 200k Change in effective tax rate Change in effective tax rate Change in effective tax rate

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

k 25k 50k 75k 100k 125k 150k 175k 200k

Change in disposable income Change in disposable income Change in disposable income

0

-500 -1,000 -1,500 -2,000 -2,500

k 25k 50k 75k 100k 125k 150k 175k 200k

These graphs show the impact on married couples that have no children and no mortgage. There are no reliefs or allowances available to these taxpayers because they have no children and no mortgage (they either rent, or own property outright). The taxpayers are under 63 years of age and therefore not entitled to age related exemptions.

The main points are:

• Where there is a sole earner in this type of married couple:

• households who earn income of between £12,000 and £80,000 would pay more tax. This is because the non-earner cannot use their personal allowance, whereas at the moment their married partner does.
• the biggest losers would be the households who earn between £20,000 and £60,000 who would pay about £2,200 more in tax.
• households who earn above £80,000 would not be affected by the change.

• Where there is a small earner in the married couple:

• households where the lower earner earns less than their new personal allowance (£13,780) would pay more tax.
• some high-income households (around £70,000 and above) would pay less tax because their partner's lower income would now benefit from their new personal allowance. The tax saving would be over £2,000 for households where the main earner earned £90,000 and above and the smaller earner earned around £15,000.

• Where each partner in the married couple earn similar amounts:

• households who jointly earn £28,000-£100,000 would pay around £260 more tax because the value of their new allowances would not be as high as the married couple allowance plus wife's earned income allowance.

The second model refers to a married couple with two children and a mortgage

45

Married couple with two children paying mortgage interest of £7,500 and childcare cost £8,000

Household 1 100%/0% Household 2 70%/30% Household 3 50%/50%

Effective tax rate with/without independent taxation Effective tax rate with/without independent taxation Effective tax rate with/without independent taxation 25% 25%

20% 20% 15% 15% 10% 10%

Married household after Married household after 5% 5%

Married household before Married household before 0% 0%

k 25k 50k 75k 100k 125k 150k 175k 200k k 25k 50k 75k 100k 125k 150k 175k 200k

Change in effective tax rate Change in effective tax rate Change in effective tax rate 10% 10%

8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2%

k 25k 50k 75k 100k 125k 150k 175k 200k k 25k 50k 75k 100k 125k 150k 175k 200k Change in disposable income Change in disposable income Change in disposable income

1,000 2,000 500 1,500 1,000

0

500 -500 0

-1,000 -500 -1,000

-1,500

-1,500

-2,000

-2,000 -2,500 -2,500

k 25k 50k 75k 100k 125k 150k 175k 200k k 25k 50k 75k 100k 125k 150k 175k 200k

These graphs show the impact on married couples with two children, mortgage interest relief of £7,500 a year and childcare costs of £8,000. The higher earner claims all of these reliefs.

The main points are:

• Where there is a sole earner in the married couple:

• households who earn income of between £33,000 and £125,000 pay more tax (up to £2,250).
• the biggest losers are married couples with one earner earning between £45,000 and £100,000 who would pay about £2,250 more income tax.
• households who earn income over £125,000 are unaffected

• Where there is a small earner in the married couple:

• households who earn income of between £35,000 and £100,000 pay more tax (in the region of £1,000 more).
• the biggest losers are married couples with one small earner who jointly earn between £40,000 and £60,000 who would pay up to £2,000 more income tax.
• households who earn income over £100,000 pay up to £2,500 less tax. This is because the small earner now gets their own allowance, which is withdrawn (as the married couple exemption threshold) in the current system under 20 means 20.

• Where each partner in the married couple earn similar amounts:

• households who jointly earn £35,000-£75,000 pay more tax (up to £2,500 more) because the main income earner cannot use all of their allowances. However, if

the allowances could be shared between them they would pay similar amounts of tax before and after the change.

• households who jointly earn over £75,000 would pay less tax.
• the biggest winners' would be those who earn between £120,000 and £160,000 jointly. They would pay £1,000 - £1,500 less income tax.

A third section of modelling was done based on a married couple over 63 years of age with no dependent children and no mortgage (i.e. the same fact pattern as for the first section but for an older married couple). There are no reliefs or allowances available to these taxpayers because they have no children and no mortgage (they either rent, or own property outright).

The outcomes are similar to those in the first section of modelling but at slightly higher income levels because taxpayers who are over 63 get slightly higher exemption thresholds than those who are under 63.

In conclusion, in the absence of compensating changes, a simple switch to independent taxation by splitting the current regime will adversely affect those at the lower to middle income bracket.

2. Comparison to unmarried couple taxpayers

The analysis shows the married couple winners and losers' that would result. However, it should be borne in mind that although many married couples will either win or lose, after the change they will be treated the same as unmarried couples bringing equity in treatment to the income tax system. (This is assuming there is equality across the available allowances).

Unmarried couples would not be affected by this model but could be affected by some of the others.

3. Effect on incentives to work

A person's decision to work and the amount they want work is affected by many different factors, including age, household situation and availability of work. The income tax rate they face on the next pound earned (the marginal rate of tax) is another consideration.

The exemption thresholds for taxpayers mean that up to that level of income, the marginal rate of tax is 0% and so the income tax system is not acting as a disincentive to start working.

Above the thresholds the marginal rate of tax becomes 27% of every extra pound earned, and at higher income levels the marginal rate of tax becomes 20% of every extra pound earned.

The earlier analysis showed that married couples with a sole income earner would lose out because they would not be able to use the exemption threshold of the spouse with no income. In this instance the incentive to decide to work has been improved because the spouse with no income does not have to pay any income tax on the first £13,760 of their earnings, whereas in the present system they would have to pay either 27% or 20% of this income depending on the other spouse's income level.

The earlier analysis also showed some married couples with a very high earning spouse and a low earning spouse could pay less tax because the low earning spouse would now have their own exemption threshold. However, the incentive to work extra hours has worsened slightly because they would have to pay 27% on any extra income earned compared to 20% at the moment.

Although the incentives to work may improve for some spouses, it should be borne in mind that some do not want to work (e.g. are retired) or are unable to work (e.g. unemployed or looking after a family). Naturally in most cases the overall household tax liability would contribute to the decision.

Conclusion

Making these changes to the income tax system would generally affect more those married couples with one main earner and no second earner, and one main earner and a second earner earning less than around £15,000.

In these cases, married couples with lower incomes would pay more income tax (because they can no longer pool their income to benefit from all of their thresholds, allowances and reliefs) and married couples with higher incomes would pay less income tax (because the lower income earner now benefits from their own personal threshold which they would not have got as a couple as a standard rate tax payer).

Married couples that earn more equal amounts would not be affected at lower incomes, provided they can share the allowances and reliefs they may be entitled to. At higher incomes they would pay slightly less income tax, but this is because of the small difference between the married couple threshold and wife's earned income allowance vs. two single person thresholds.

Although some of these couples may be better or worse off than before, they would be treated the same as unmarried couples.

Purely from a tax perspective, the move to independent taxation may improve the incentive to work for spouses who do not work.

9. PRACTICAL/OPERATIONAL IMPLICATIONS

Changing the way that married couples are taxed would inevitably have a significant impact on the practical process of tax collection.

1. Interaction with other initiatives

The Taxes Office have committed to a number of other initiatives as part of the modernisation process that has already started to be implemented, such as online filing. This is part of the recommendation from the Taxes Transformation Programme which includes a number of modernisation measures for example, self-assessment.

In addition the Taxes Office will be collecting the Long Term Care charge which will be affected by a move to independent taxation.

As noted in section 4, there are a number of other issues such as prior year/current year basis, which need to be addressed and it could be beneficial to address these before moving to independent taxation.

All of the above will need to be taken into account when making major changes to the tax collection system.

The Tax Policy Unit is in the process of developing a long-term tax policy programme aligned with the existing tax strategy and the principles established last year in the Medium Term Financial Plan (see Appendix 8). This will include modernisation of the personal tax regime and a move toward independent taxation will form part of that. This strategy will be published in 2014 and will set out a timetable for the modernisation programme.

2. Taxes Office resource

From the perspective of the Taxes Office administering a system of independent taxation, there are a number of areas to consider:

Firstly, there is an obvious cost of administering and processing additional tax returns. The production of an additional 18,000 tax return forms to issue, receive, process and then to issue assessments and process tax payments would have an impact.

However there are a number of points that could mitigate this. Firstly the introduction of online filing could substantially reduce these costs. Secondly one option the Taxes Office is considering as part of the modernisation process is reducing the number of tax returns that are issued to some taxpayers and to potentially remove the tax return filing obligation from certain taxpayers. This could be because they pay all of their income tax via ITIS on their sole source of income. This work is ongoing and it is not possible at this stage to estimate how many taxpayers this will affect.

Secondly there is the additional burden on the ITIS tax collection, as additional ITIS rates will need to be issued.

In conclusion introducing independent taxation cannot be done in isolation, but steps can be taken to facilitate it and to introduce it in line with the long-term tax programme.  

10. KEY FINDINGS AND RECOMMENDATIONS

There is a desire to modernise the tax regime, which would include the introduction of independent taxation.

There are a number of unintended consequences of the current regime that may be addressed by independent taxation and the system would benefit from simplification.

While it is possible to move to independent taxation, due to the complexity of the current regime, the financial implications are likely to be substantial either to the taxpayer (and hence the economy) or to the States revenues, neither of which is ideal during this economic climate.

More work is needed to identify ways of simplifying the regime and taking steps towards independent taxation to minimise the financial impact.

The findings of this review demonstrate that there is no quick and easy route. Simply replacing the married couples income tax exemption with two single persons allowances would create a significant net cost to taxpayers and could have a detrimental financial impact by removing over £8million from the economy.

The following next steps are recommended:

• Given the interaction of independent taxation with other aspects of the tax regime that require modernisation or simplification, a first step should be to establish a detailed long term tax programme for the personal tax regime. This should identify all aspects of modernisation/simplification with an indicative timetable and should cover the next 5 to 10 years.

• Take a step in the 2014 Budget toward simplification by reducing the marginal rate by 1% and consider further reductions in future Budgets

• Continue reviewing the exemption thresholds and allowances and determine how these can be changed in the short term to deal with the anomalies and help move towards independent taxation.

• Start to reduce the increases in exemption thresholds and allowances to reduce the growing discrepancies between married and cohabiting couples.

• Work will continue on designing a detailed step plan to introduce independent taxation to the following timetable:

o Review completed and recommendations included in the 2016 Budget at the end of 2015.

o Commence of implementation in 2016

o Implementation completed by 2020

This timetable is based on the assumption that the cost (there is an inevitable cost to either the States or to taxpayers) of introducing independent taxation will be acceptable to the States.

In addition, a long-term tax programme will be published in 2014 alongside the 2015 Budget which will include the independent taxation review as well as matters such as self- assessment and current year basis. Consideration will be given to including further changes in the 2015 Budget.

APPENDICES - SUPPORTING RESEARCH

Appendix 1: General principles and background behind the introduction of independent taxation in the UK

The 1988 Finance Act introduced the separate taxation of husbands and wives on their income and chargeable gains – known as independent taxation. This means the income and gains of each spouse within a married couple is entitled to their own personal allowance or annual exemption and is then taxed separately.

Under independent taxation, income generated from jointly owned assets is regarded as accruing equally to each spouse. If the property is held in anything other than equal shares, the husband and wife may make a joint application to effect that the income generated should be apportioned between them on the basis they hold the property. Special rules apply to joint bank accounts. This applied to tax years 1990-91 onwards.

Prior to that the UK operated an income tax system in which a husband was assessed on his and his wife's income jointly. From a capital gains tax perspective, the gains of each spouse were added together and also assessed on the husband.

There was a key campaign of women's movement in the UK in the late 1970s and early 1980s for legal and financial independence'. This included a specific demand for the independent treatment of women within the income tax system. Simultaneously a wider group of women were increasingly protesting about a situation in which their husbands received letters about their wives' tax affairs because at that time the husbands were legally responsible for the payment of tax on their wives' income as well as their own.

Wives could get a personal allowance if they were in employment – a wife's earned income allowance' – and most tax was deducted through PAYE (Pay As You Earn). If the wife's income exceeded her allowance she would pay tax at a rate determined by both her own and her husband's income i.e. this was a system based on the aggregation of couple's income. There was also a married couple's allowance, which was only payable to the husband.

The Conservative Government published a Green Paper in 1986 on the reform of personal taxation. This covered a wide range of issues but a key issue was the discussion of women in the income tax system.

One key issue identified was the balance between single earner and dual earner couples – i.e. they did not want to disadvantage a traditional single earner family on the assumption the non working spouse was doing valuable voluntary work.

One option considered at the time was the transferability of personal allowances between spouses – applying to couples both with and without children. There was a concern that joint taxation and transferable personal tax allowances have been shown to act as a disincentive to employment amongst the potential second earners in couples.

There was then an argument that it would be wrong to reward a husband just for being married with a married couples allowance when the money might be better spent on improving child benefit for example.

Independent taxation was subsequently introduced without the option for the transferability of personal allowance but the married mans allowance remained under the guise of the married couple's allowance.

Although under independent taxation each spouse in a marriage is treated as separate persons for income tax purposes, with their own personal allowances etc., under the tax credit system, in general, tax credits are given based on family income – be this married household/cohabitees or single parents. Married couples are required to make joint claims for tax credits and the claim is based on joint income. The new rules regarding the restriction on child benefit for higher income earners apply to cohabiting and married couples alike.

There is a concern in the UK that independent taxation is being compromised by the joint assessment of couple's income for tax credit purposes.

The operation of independent taxation does generate some tax planning opportunities for married couples that are not available to cohabiting couple (although a cohabiting couple could of course take advantage of these if they decided to marry). The majority of these opportunities are around utilising allowances or the basic rate tax band via the transfer of income generating or capital assets.

UK Prime Minister's recent announcement regarding tax breaks for married couples

In early July 2013, the UK Prime Minister David Cameron announced he would bring forward plans for tax breaks for married couples, by considering allowing non working spouses to transfer part of their tax free allowance to their partners.

It was suggested that £750 of the personal allowance, for income tax purposes, would be transferable between adults that are part of a married couple (provided the higher income spouse is not a higher rate taxpayer).

The potential measure has already received a significant amount of criticism from the media and other interested parties.

Firstly, only a minority of married couples would benefit. The type of couples who will not benefit would be couples where the lower income spouse was in receipt of income which utilises their personal allowance where they have to work for financial purposes, couples where the higher earner pays tax at the higher income tax rate, and low income households where both partners receive income less than the level of the personal allowance.

Secondly, there is a question of how effectively targeted this would be. One of the claims is that it will assist those lower/middle income families with children but in reality a significant percentage of the married couples that will be eligible will be pensioners and so unlikely to have dependent children.

Thirdly, from an administrative perspective this would be extremely complex for HMRC to administer. Furthermore it is not clear how this reallocation of part of the personal allowance would work in cases where the individuals involve do not file self-assessment tax returns.

On a more conceptual level this announcement has been met with a significant amount of criticism. The idea of a £150 tax saving (utilising £750 of excess personal allowance at an income tax rate of 20%) encouraging marriage has been questioned and also that marriage should be its own reward. There has also been criticism of the discriminatory social engineering nature of the measure. The Director of the Don't Judge My Family' campaign criticised the measure as being out of step with modern family and as promoting a "...fantasy 50s family, that's a married couple with a breadwinner and a homemaker. It's out of step with modern families who come in all shapes and sizes and discriminates against families with single parents, widows and widowers, couples who both work and couples who choose not to marry."

Finally, this announcement has resurrected the on going argument that recognising the value of marriage in society does not mean you have to give it preferential treatment i.e. just because don't give something an advantage over something else doesn't mean you don't support it. It just means being equitable.

Further details will be announced in the UK Autumn Statement, the date of which is to be advised.

Appendix 2: The current tax regime – joint taxation and separate assessments Joint taxation

Income Tax (Jersey) Law 1961:

SPECIAL PROVISIONS AS TO MARRIED PERSONS

121 General rule as to income tax on husbands and wives

1. Subject to Articles 121A and 121B, a woman's income chargeable to income tax shall, so far as it is income for a year of assessment or part of a year of assessment during which she is a married woman living with her husband, be deemed for the purposes of this Law to be his income and not to be her income:

Provided that the question whether there is any income of hers chargeable to income tax for any year of assessment, and, if so, what is to be taken to be the amount thereof for the purposes of this Law, shall not be affected by the provisions of this paragraph.430

2. Subject to Articles 121A and 121B, any tax falling to be assessed in respect of any income which, under paragraph (1) of this Article, is to be deemed to be the income of a woman's husband shall, instead of being assessed on her, or on her trustee, guardian or curator, or on her heirs, executors or administrators, be assessable on him, or in the appropriate cases, on his trustee, guardian or curator, or on his heirs, executors or administrators:

Provided that nothing in this paragraph shall affect the operation of Article 74.

The Taxes Office published guidance

"Marriage or civil partnerships

If you are getting married or registering your civil partnership then your tax affairs will be combined under one reference number.

Tax information for civil partners

However, you can choose to have separate tax returns and bills if you require privacy or autonomy in conducting your own finances. This is called 'separate assessments'. There is no cash advantage or disadvantage to this - the total of the two bills added together will be the same as the joint bill you would have received."

Separate assessments Income Tax (Jersey) Law 1961:

121A Election by husband or wife for separate assessment432

1. A married woman living with her husband, or her husband, may elect, by written notice delivered to the Comptroller, for separate assessment in accordance with Article 121B.
2. Subject to paragraph (3), an election delivered before 31st October in any year of assessment shall have effect for that year and ensuing years, unless revoked.
3. In the year of assessment in which a husband and wife marry, an election delivered –

1. before 31st October in that year; or
2. within one month following the day of their marriage,

shall have effect for the part of that year during which they are married and for ensuing years, unless revoked.

4. The husband or wife who made the election may revoke it, by written notice delivered to the Comptroller.
5. A revocation of an election delivered before 31st January following a year of assessment shall have effect for that year and ensuing years, unless a further election is made.
6. The Comptroller shall inform a husband or wife of the delivery by his or her spouse of a notice under paragraph (1) or (4).
7. In this Article and in Article 121B, "election" means an election under paragraph (1) of this Article.

121B Effect of election for separate assessment433

1. Subject to this Article, an election shall have the effect that –

1. the wife's income is not deemed, for the purposes of this Law, to be her husband's income; and
2. the husband and wife are separately assessed and charged under this Law.

2. The husband and wife's incomes shall be aggregated for the purpose of determining their entitlement to any allowances, exemptions and reliefs. Income Tax (Jersey) Law 1961 Article 122

Revised Edition – 1 January 2013 Page - 159 24.750

3. The sum of the allowances, exemptions and reliefs to which the husband and wife are entitled shall not exceed the sum of such amounts to which they would have been entitled if the election had not been made.
   4. Subject to paragraph (5), any allowances, exemptions or reliefs (notwithstanding Articles 92B(2), 95(4) and 98A(4)) shall be apportioned between the husband and wife in proportion to the amounts or their respective incomes.434
   5. The husband and wife may jointly, in accordance with paragraph (6), notify the Comptroller in writing that any allowances, exemptions and reliefs to which they are entitled, by virtue of the election, are to be apportioned and transferred between them in the manner specified in the notice.
   6. An apportionment notice delivered to the Comptroller before 31st January following a year of assessment shall have effect for that year and, unless replaced by a further apportionment notice or revoked, for ensuing years.
   7. The husband and wife may jointly revoke an apportionment notice by written notice delivered to the Comptroller.
   8. A revocation of an apportionment notice delivered before 31st January following a year of assessment shall have effect for that year and ensuing years unless a further apportionment notice is delivered.
   9. The husband or the wife may prepare and deliver the statement required by Article 16 on behalf of both of them, unless the Comptroller requires otherwise.
   10. An election shall not affect the operation of Article 74.
   11. In this Article, "apportionment notice" means a notice under paragraph (5).

The Taxes Office published guidance  

"If you are a married couple or a couple in a civil partnership you can request separate assessments - but there is no financial advantage to this.

There is no independent taxation in Jersey. However, if you are a married person or a person in a civil partnership and you currently complete a joint tax return, you may elect for separate assessment. This also applies to couples who marry or register a civil partnership during the year. Separate assessments allow spouses and civil partners to have autonomy and privacy in conducting their tax affairs.

How do I request a separate tax assessment?

Either spouse or civil partner can make a request in writing to the Comptroller of Taxes by the end of October and it will then apply for that year of assessment onward. If you marry or register a civil partnership later in the year and wish to apply, you have one month from the day of your marriage or civil partnership registration. The claim can be revoked by the end of January following any year of assessment, but only by the spouse or civil partner who made it originally. How will it work?

Two separate tax returns are issued and it is your individual responsibility to declare income received in your own right and any joint income, which should be split. You will each receive a bill and will be solely liable for the tax due.

Marginal relief is calculated by reference to your joint income and proportioned between you in accordance with that income. Two single exemption limits are not available.

Is there a financial benefit to separate assessments?

There is no cash advantage to separate assessments. In other words, there is no difference to the total income tax liability had you not made the election.

What if I have now permanently separated from my spouse or civil partner?

If you have permanently separated you need to advise us and let us know the separation date. There is no need to make an election for 'separate assessments'. "

Appendix 3: The marginal rate band

Extract from the Taxes Office website regarding the operation of the marginal rate tax band: "Tax exemption thresholds

There are tax exemption thresholds to prevent liability to tax for individuals or families on low incomes. These are as follows for 2012:

• single person £13,370
• married persons / civil partners £21,440
• single person over 63 years of age £14,920
• married persons/civil partners over 63 years of age £24,540

These exemption thresholds are increased if the single person or married couple is entitled to any of the following allowances or reliefs:

• lower child allowance (child at school) £3,000
• higher child allowance (child in higher education) £6,000
• additional personal allowance (single parent) £4,500
• wife's earned income allowance (wife working) £4,500
• civil partner earned income allowance £4,500
• child care tax relief £6,150
• enhanced child care tax relief (pre-school age children) £12,000 max per child
• qualifying maintenance payments
• qualifying interest tax relief

Low and middle earners - marginal band

Taxpayers who are sometimes called low and middle-income earners whose total income is in excess of their exemption threshold fall into what is termed the 'marginal band'. The calculation of their liability to tax at the marginal rate of 27% ensures that there is no disproportionate increase in their tax bill if their income exceeds their exemption threshold.

Because of these exemption thresholds being used in the calculation of tax (increased as appropriate by the above allowances or reliefs) it is only those with high incomes who do not benefit from them.

This means that if in any year your total income is less than the exemption threshold, the percentage of tax you will pay on that income will be 0%. As your income increases or your circumstances change, the percentage of tax you pay will increase as the marginal relief gradually tapers away until you are paying the maximum 20%."

Appendix 4: Rationale for the existing allowance

Extract from the proposition lodged in 2006 regarding the introduction of the '20 means 20' concept.

"INCOME TAX: ALLOWANCES, RELIEFS AND EXEMPTION THRESHOLDS ("20 MEANS 20") Lodged au Greffe on 19th May 2006

by the Minister for Treasury and Resources

Concerns have also been expressed by taxpayers about the loss of certain allowances and reliefs to which they had been accustomed and which they had taken into account in their financial planning.

In the light of those concerns, and the higher yield, it is now proposed that the earlier proposals for raising more tax from those on higher incomes are amended in the following manner –

"Tax relief for children, including those in higher education, will be retained for all taxpayers.

Retaining tax relief for children will ensure that all taxpaying families will continue to receive allowances in respect of their children. Furthermore, bearing in mind the growing cost of higher education, tax relief will continue to be provided for all taxpayers with children receiving full time higher education at universities or colleges of further education."

Appendix 5: Comparative illustrations of married vs cohabiting couples under existing regime

(NOTE: Based on 2013 income tax thresholds and allowances. Married couple: assumes wife's income' is always earned' income. Cohabiting couple: assumes higher earner claims allowances.)

Part 1 – aged under 63, no children,

Scenario 1: married Marginal rate taxpayer

Scenario 2: cohabiting Marginal rate taxpayers

Married couple is £758 better off

Scenario 3: married Marginal rate taxpayer

Scenario 4: cohabiting Marginal rate taxpayers

Cohabiting couple is £262 better off

Scenario 6: cohabiting

20% taxpayer and exempt taxpayer

Cohabiting couple of £421 better off

Scenario 7: married 20% taxpayer

Scenario 8: cohabiting

20% taxpayer and exempt taxpayer

Neutral

Part 2 – aged under 63, 2 children,

Scenario 9: married Marginal rate taxpayer

Scenario 10: cohabiting

Exempt and marginal rate taxpayers

Cohabiting couple £457 better off

Scenario 11: married Marginal rate taxpayer

Scenario 12: cohabiting Marginal rate taxpayers

Cohabiting couple £1,477 better off

Scenario 14: cohabiting 20% taxpayer and exempt

Cohabiting couple £901 better off

Scenario 15: married 20% taxpayer

Scenario 16: cohabiting One 20% taxpayer