Goods and Services Tax - Zero-Rating for Foodstuffs, Books, Newspapers and Magazines (P.169-2007) - amendment - comments.

STATES OF JERSEY

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GOODS AND SERVICES TAX: ZERO-RATING FOR FOODSTUFFS, BOOKS, NEWSPAPERS AND MAGAZINES (P.169/2007) – AMENDMENT (P.169/2007  AMD.) – COMMENTS

Presented to the States on 20th November 2007 by the Minister for Treasury and Resources

STATES GREFFE

COMMENTS

The intention of this amendment is to make GST less regressive and provide support to low-to-middle income families by excluding children's clothing from GST.

This amendment is not the best way to achieve this objective.

It will not aid the lowest income families at all because they will already be fully insulated from the effects of GST on children's clothing by the Income Support system approved by the States.

Excluding children's clothing from GST will, however, benefit low-to-middle income households by, on average, £3 a year. It will also benefit high income households by an average £7 a year.

The loss of tax from zero-rating children's clothing, after the saving in Income Support, would be approximately £190,000 a year. Of this sum, approximately £60,000 would go to households on low and middle-incomes and £130,000 to high-income households. This is because high-income households spend far more on children's clothing than low-to-middle income households.

This amendment helpfully includes an indication of the complexity of excluding children's clothing by attaching the 14  pages of guidance on zero-rating children's clothing produced by U.K. Customs and Excise. It includes the 4 criteria which must be passed for every single item in order to be defined as children's clothing and explains, for instance, that hooded rain covers for prams may, or may not, be children's clothing; that ice skates and nappies are children's clothing, but children's fur trimmed coats are not, unless the fur is made of rabbit, sheepskin or artificial fur; and that boys trainers size 6 are children's clothing, unless they are unisex and can also be worn by a girl, in which case they are not.

What appears simple in theory turns out to be complex in reality. With complexity comes the increased risk of error, or fraud.

Not surprisingly, there would be significant administrative implications to this amendment for both the States and businesses. The estimated additional cost to the States of administering this zero-rating would be in the region of £50,000 a year. Small businesses, particularly those that sold children's clothing and other goods, would require sophisticated accounting and till systems to collect the mix of zero-rated and 3% tax, and would probably require additional floorspace. The extra administrative cost would probably be added to prices.

Protection is already being provided for low-income families through the additional payment which will be added to Income Support when GST is introduced, and this provision will continue. A far more effective mechanism for targeting aid to families, above the level of Income Support, but not the very rich, would be to raise income tax thresholds.

As detailed in comments to the main Proposition P.169/2007, an increase in income tax exemption thresholds by a further 3.5%, to 6.5%, will be proposed in an amendment to this year's budget by the Minister for Treasury and Resources if the States indicates it would prefer this to GST exclusions (see the Minister for Treasury and Resources' comments on Senator Shenton's P.169/2007).

The financial benefit of the proposed raising of income tax thresholds would be approximately 3 times greater to low-to-middle income families than zero-rating children's clothing, and it would incur no administrative costs.

Accordingly, it is recommended that the States rejects this amendment to zero-rate children's clothing.

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