Budget Statement 2016 (as adopted as amended)

BUDGET STATEMENT 2016

(P127/2015)

(AS AMENDED FOLLOWING DEBATE

AT THE STATES SITTING COMMENCING ON 15 DECEMBER 2015)

Proposition

Budget Statement 2016

(as adopted on 15 December 2015)

The States are asked to decide whether they are of the opinion:

1. to  approve,  in  accordance  with  the  provisions  of Article  10(3)(a)  of the  Public  Finances (Jersey) Law 2005, the estimate of income from taxation during 2016 of £622,121,000 as set out in Summary Table A of the Budget Statement, with the sum to be raised through existing taxation measures and the proposed changes to income tax, impôts duty, stamp duty, land transactions tax and vehicle emissions duty for 2016 as set out in the Budget Statement;
2. to  approve,  in  accordance  with  the  provisions  of Article  10(3)(d)  of the  Public  Finances (Jersey) Law 2005, a capital head of expenditure for each of the capital projects for States funded bodies to be started or continued in 2016 (other than States trading operations) as set out in the recommended programme of capital projects in Summary Table C totalling £26,691,000;
3. to  approve,  in  accordance  with  the  provisions  of Article  10(3)(e)  of the  Public  Finances (Jersey) Law 2005, each of the capital projects that are scheduled to start during 2016 in the recommended  programme  of capital  for  each  States  trading  operation,  as  set  out  in Summary Table D that require funds to be drawn from the trading funds in 2016.

Minister for Treasury and Resources

Contents

ADDENDUM  4 PART A – INTRODUCTION  6

1. Foreword  7

PART B – BUDGET STATEMENT 2016  14

2. Tax Proposals  15
3. Income Tax Proposals  16
4. Impôts Duty Proposals  25
5. Vehicle Emissions Duty Proposals (as amended)  28
6. Stamp Duty and Land Transactions Tax Proposals  30
7. On-going and Future Reviews  32
8. Financial and Manpower Implications (as amended)  34

PART C – PROGRAMME OF CAPITAL PROJECTS  36

9. Proposed/Indicative Capital Programme 2016-2019  37

PART D – ALLOCATION OF GROWTH FOR 2016  52

10. Allocation of Growth for 2016  53

PART E – FINANCIAL FORECASTS  55

11. Financial Forecasts – 2015 position  56
12. Financial Forecasts – 2015-2019 (as amended)  59

PART F – THE ECONOMIC CONTEXT  70

13. The Economic Context  71

PART G – SUMMARY TABLES  82 Summary Table A – States Income 2016 (as amended)  83 Summary Table B – Proposed Capital Programme for 2016 (funding sources)  84 Summary Table C – Proposed Capital Programme for 2016  85 Summary Table D – Proposed Capital Allocation to States Trading Operations for 2016  86 Summary Table E – Consolidated Fund Forecast for 2016 (as amended)  87

PART H – APPENDICES  88 Appendix 1 – IFG: Income Tax Forecast Update 2015-2019  89 Appendix 2 – IFG: GST and ISE Fee Forecast Update 2015 – 2019  98 Appendix 3 – IFG: Impôts Duty Forecast Update 2015 – 2019  101 Appendix 4 – IFG: Stamp Duty Forecast Update 2015 – 2019  104 Appendix 5 – Other Income Forecast Update 2015 – 2019  107 Appendix 6 – Economic Assumptions (September 2019)  111

Addendum to Budget 2016

Addendum

At the conclusion of the States debate of the 2016 Budget on 15 December 2015 the States had approved two amendments to the original proposition lodged by the Minister for Treasury and Resources.

Amendments Agreed

Second amendment (as proposed by the Constable of Grouville )

The effect of the amendment is to retain a VED exemption for cars over 50 years old at the time of first registration. Until 31 December 2015 there was a VED exemption for cars over 25 years old; at the time of first registration. It was proposed that this exemption was completely removed in the Budget.

Third amendment (as proposed by the Deputy of St Mary)

The effect of the amendment is the exclusion of agricultural tractors limited to 26mph from the changes to VED rates and bandings applicable from 1 January 2016 (i.e. such agricultural tractors will continue to apply the VED rate and bandings applicable in 2015).

Summary

The approved amendments to the 2016 Budget will reduce the estimate of income from taxation during 2016 by £34,000 from £622,155,000 to £622,121,000.

Correspondingly the balance on the Consolidated Fund at the end of 2016 is estimated to be £16,927,000.

PART A – INTRODUCTION

1. Foreword

The measures proposed in this draft Budget for 2016 form a package that is designed to secure longer term  sustainable  public  finances  while  allowing  investment  in  the  health,  education,  social  and environmental policies of the Council of Ministers.

In addition, the capital investment programme focuses on the delivery of IT and infrastructure laid out in the Medium Term Financial Plan (MTFP).

This Budget is focused on the longer term. It does not introduce sudden change but takes a phased and considered approach to the introduction of measures which will help us strengthen our structural financial position and our need for sustainable public finances.

It raises £1.8 million in 2016 above the income forecasts used for the MTFP and will provide us, later in this MTFP period, with greater flexibility on the levels of any additional public charges that will be needed, such as a health charge. In addition the amount we need to draw from our reserves will be reduced if current financial forecasts are maintained and Budget measures raise additional revenue.

We need to mitigate the impact of our ageing population and protect ourselves against the risk of lower levels of future income. This Budget aims to provide that flexibility in our contingency measures.

The approved MTFP means that departments now have to make savings, so we can deliver a Budget which protects taxpayers with relatively neutral measures while still enabling us to invest in health, education, environmental and social policies.

It  aims  to  maintain  our  tax  revenue,  with  modest  growth,  while  outlining  our  direction  and commitment to continue to support the economy in line with Fiscal Policy Panel (FPP) advice in the short-term and the long term approach we need to take to further secure Jersey's financial prosperity.

We are already investing and developing new policy in healthcare, education and a number of other priority areas, such as housing and sewage treatment works but we need to ensure that this can continue.

We do need to maintain the real value of our overall revenues and also to improve our collection of them  –  while  keeping  taxes  low,  broad,  simple  and  fair  to  encourage  investment  and  economic growth.

We have been clear throughout the formation of the new Strategic Plan and MTFP 2016-2019 that we will  focus  on  delivering  efficiencies  in  the  public  sector  and  remove  unnecessary  costs before introducing additional public charges. The working partnership between the Treasury, Social Security and Health and Social Services Departments will continue to play a vital role in making sure that our resources, taxation system, allowances and benefits processes are aligned so that we target affordable and sustainable support to help people according to their needs.

Economic outlook

Globally, the advanced economies have continued their recovery in 2015 while emerging economies have continued to slow down. The next few years are expected to see some improvement but there are risks to this outlook, particularly given developments in the Euro area and China.

Jersey's economy returned to growth in 2014, with gross value added (GVA) growing by 5% in 2014. The financial services sector grew by 9%, driven by a significant increase in banking profits, with non- finance recording 2% growth. Employment hit record levels in June 2015, while earnings grew in real terms for the third successive year. The headline indicator of the Business Tendency Survey has remained positive over the last year, although the latest survey points to business activity not increasing at the same rate in the second half of 2015. It is too early to draw firm conclusions from this survey.

Budget 2016 reinforces the approach taken in the MTFP to lay the foundations for future economic growth and raise Jersey's productivity performance. The States will continue to support the economy while global conditions remain fragile, as recommended by the FPP to ensure that recent economic growth can gain momentum. It maintains previous investment of £14 million from the first MTFP in areas such as Back to Work, financial services, the digital sector and skills. It also goes further in facilitating extra investment in education, health and infrastructure – all of which are supportive of future economic growth. In addition, the MTFP provides a new £20 million drawdown provision for economic growth and productivity policies that cannot be funded from existing resources and will make a significant contribution to raising our economic performance.

The Income Forecasting Group (IFG) have produced an update to our income forecasts using the latest economic assumptions from the FPP which shows that the outlook has not changed and that current income is broadly in line with earlier forecasts. For 2015 we are expecting a small increase on our recent MTFP forecasts and over the period of the plan a small improvement. This means we can continue to build on the foundations agreed in the MTFP 2016-2019 and return to balanced budgets by 2019.

Long term approach

The proposals in this Budget are set against the guiding principles of the Council of Ministers' fiscal framework which aim to balance the States' current budget over the economic cycle, keep the Social Security Funds on a sustainable medium-term footing, monitor the States' net asset position over the cycle and listen to FPP advice.

We have five clear principles that guide the development of the Island's long term tax policy and, in addition to achieving our current strategic priorities, the proposed taxation measures have also been considered within the framework of these principles, namely:

• Taxation must be justifiable, necessary and sustainable
• Taxes should be low, broad, simple and fair
• Everyone should make a contribution to the cost of services, while those on the lowest incomes are protected
• Taxes must be internationally competitive
• Taxation should support economic, environmental and social policy

In simplifying the processes we have, we will address inequities, such as the gender bias in child care allowances, that exist within the tax system and some of the measures in this Budget begin that process.

Exemptions and allowances

We all need to pay our fair share according to our means – that is the basis of our tax system. Currently,  around 17,000 individuals  and  married  couples  and  civil  partnerships  in  Jersey  pay  no income tax at all. Our tax allowances mean that the 40% of lowest-earning people contribute just 3% of the £354 million of personal income tax raised in 2014 in order to fund Jersey's public services. 80% of taxpayers enjoy effective rates of tax ranging from 7% to 15%, well below the headline rate of 20%.

There are, however, inconsistencies in our current tax system which are not in keeping with our desire for a system which is low, broad, simple and fair and can no longer be justified given changes in demographics, improved health and life-expectancy.

I have, therefore, decided gradually to align the income tax exemption thresholds for people under 65 and people 65+, which currently deliver a tax benefit of £442 to single people aged 65+ and £858 to married couples/civil partnerships where at least one of the partners is aged 65+. These higher exemption thresholds currently cost the States approximately £4 million per annum.

To achieve this alignment gradually, I propose to maintain the exemption thresholds for people aged 65+ until such time as the standard exemption thresholds for people under 65 reaches the same value.

The income tax forecasts used in the MTFP assume that all income tax exemption thresholds will increase annually and by maintaining the exemption thresholds for people aged 65+ will save us approximately £200,000 in 2017.

This  is  a measure  which aligns  with  broader  policies  to  provide  support  to  the members of our community who are most vulnerable. A range of measures, including the benefits that are available through the Long Term Care Scheme and our additional funding for the 65+ health scheme, which is open to older people on a low income, and our investment to provide greater healthcare in the community will ensure that our pensioners are properly supported as they live increasingly longer.

I further propose that Islanders who currently receive the enhanced exemption thresholds will continue to do so until such time as the alignment highlighted above is achieved, but that they will not be available to people who turn 65 from 2017 onwards, limiting the future cost of the enhancement. This step will save an additional £300,000 from 2019.

During the MTFP debate the Council of Ministers reiterated their commitment to the 20% standard rate of income tax. However there are ways of asking those with higher incomes to contribute more without changing the headline rate of tax. I therefore propose to continue the gradual removal of nearly all the remaining allowances from taxpayers who pay tax at the 20% rate.

In 2016 we will start phasing out the standard child allowance and the additional person allowance (which is primarily given to single parents); with both allowances removed from standard rate taxpayers by 2018.

This proposal will not impact low income households who will be protected by the availability of marginal relief. For example: a married couple with one child under 16 would need a joint income of £106,000 before they would be impacted by this measure. A single parent household would need an income of £78,000.

I have decided not to phase out the £6,000 allowance provided to standard rate taxpayers who are parents of students in higher education at this time and this will be maintained alongside the £9,000 allowance that we give to marginal rate taxpayers who have children in higher education.

A Ministerial oversight group will consider how we can assist Islanders with the cost of higher education and allow the Chief Minister to fulfil his commitment back to the States Assembly on this matter during the first quarter of 2016.

The education that our students receive is also supported by the funding that we have committed to providing for future infrastructure. Funding for the feasibility survey for Les Quennevais School is included in this Budget and over the period of the MTFP funding for the schools ICT strategy, £40 million for a new Les Quennevais School building and £15 million for improved facilities at St Mary's and Grainville Schools are being made available. These projects continue the commitment to improving our schools' infrastructure as seen this year with the opening of the new St Martin's School.

One of the priorities of this Council of Ministers is to make sure that Islanders have the support they need to access employment and reach their full potential. We are aware that the cost of child care is an important consideration for parents and still need to fully understand the barriers that it can create for working age parents.

While these matters are being explored, I have proposed an increase to the relief available on regulated child care for pre-school age children from £12,000 to £14,000. This measure will cost £100,000. In addition, we will maintain the maximum tax relief available on child care for older children at £6,150. About 1,600 marginal rate taxpayers claim relief to help with the cost of child care.

A reduction in the currently generous – and inequitable - £1,000 tax exemption given on benefits in kind to £250. As a result those in receipt of a small amount of benefits in kind will continue to receive them tax free; but those in receipt of more generous benefit packages will be asked to contribute a little bit more. I have also asked the Taxes Office, in conjunction with the Social Security Department, to complete a full review of the taxation of benefits in kind.

I am also proposing that non-residents relief is removed from 2016. This will result in non-resident individuals paying tax at 20% on any income they generate from Jersey properties.

Mortgage Interest Tax Relief

Research by the OECD[1] and work by PWC for the Property Tax Review has pointed out that Mortgage Interest Tax Relief (MITR) is inefficient and counterproductive. There seems to be little supporting evidence for such subsidies, not least because they do not appear to impact on home ownership rates, and many advanced countries have consequentially removed such reliefs.

MITR is likely to increase housing demand and – with no compensating increase in housing supply – is likely to be capitalised (at least partly) in higher house prices. It encourages higher mortgage debt and tends to be regressive in nature (although the distributional consequences are complex, particularly in Jersey where the relief is only available for marginal rate tax payers) and may be disadvantageous to first time buyers. In addition, such relief will distort households' investment and consumption choices, working against economic efficiency.

We will seek to phase out MITR slowly. Starting in 2017 the tax relief provided will gradually diminish over a 10-year period. By outlining clear plans for the future of the relief, existing mortgage holders and potential first time buyers will be able to plan accordingly. Furthermore, due to the gradual withdrawal proposed, this measure will only impact on a limited number of taxpayers during this MTFP period, raising modest amounts of additional revenue.

Significant moves have already been made by the Housing Minister to implement policy changes which are fair and sustainable for all sectors of the housing market. The recently published draft Housing Strategy  aims  to  improve  housing  supply  and  standards  and  the  launch  of  the  tenancy  deposit protection scheme ensures that we have a robust system for protecting people at all levels of the rental market.

To help all of those who are saving up for a new home, I am proposing a reduction in the Stamp Duty/Land Transactions Tax payable on the registration of mortgage debts. Anyone buying a home costing not more than £450,000 will now be able to benefit from reduced rates of duty/tax on the registration of their mortgage.

In 2014, the Treasury issued the Property Tax Review green paper. The aim of consultation was to look at all property-related taxes in Jersey. It asked Islanders for their opinion on principles which could be used to bring them into a coherent and fair system. There were 208 responses to the consultation and the results will be published prior to the Budget debate on 15 December 2015.

Impôts and VED  

The proposed increases in impôts signal the ongoing commitment of the government to pursuing wider health, social and environmental policies.

Combined impôts and GST additional cost in pence

Spirits – litre bottle at 40% ABV  90p

Wine – 75 cl bottle of table wine  2p

Strong beer – pint  3p

Strong cider – pint  3p

Standard beer – pint  1p

Standard cider – pint  1p

This Budget also contains measures to adjust the rates, bandings and discounts associated with Vehicle Emission  Duty.  The  changes  are  designed  to  incentivise  the  purchase  of  less  polluting  vehicles; simplifying the duty while creating a longer term environmental benefit for the Island.

The proposals include adjustments to the rates and bandings, together with the removal of the discounts currently offered on older vehicles. These discounts currently create an incentive to purchase older vehicles which tend to be more polluting than new vehicles following States debate (exemption retained for vehicles over 50 years old on first registration, in addition agricultural tractors limited to 26mph were excluded from the changes to the VED rates and bandings applicable from 1 January 2016). I am also proposing to remove the discount given to hire car operators from 1 January 2017, giving them more than a year to adjust their fleet of cars accordingly. Taken together the changes to VED are expected to raise an additional £688,000in 2016.

Preparing for Same-Sex Marriage and independent taxation

In September this year, the States Assembly made the historic decision to approve the preparation of legislation to allow same-sex marriage in Jersey. A programme of work has already commenced within the Taxes Office which will help us prepare the income tax system for the introduction of same-sex marriage in 2017, and a number of initial measures are proposed in this Budget. Further amendments will be required in next year's Budget to ensure that the income tax system is ready in time.

The States have supported the timeline for the introduction of same-sex marriage and the Taxes Office's are now focusing on making the necessary changes to the income tax system to meet that.

I have also requested that the Taxes Office bring forward an options paper alongside next year's Budget for the implementation of independent taxation. This will need to be clear on the potential costs associated with independent taxation and must reflect any decisions made regarding the preparation of the income tax system for same-sex marriage. The introduction of independent taxation must dovetail with the modernisation of the Taxes Office's administrative procedures to ensure that the procedure is efficient for both the Taxes Office and the taxpayer.

The initial steps included in this Budget involve changing Wife's Earned Income Allowance and Child Care Tax Relief from the 2016 year of assessment so that they are given in respect of the second earner in a married couple regardless of their gender. In addition, we will start the process of working towards introducing the concept into the tax law of joint and several liability for the tax debts of married couples/civil partnerships.

Business Taxes

Jersey knows the value of a healthy and growing business sector and seeks to maintain a tax structure which encourages investment, growth and creates significant job opportunities, particularly for our young people.

However I will take appropriate steps to address planning which reduces the amount of corporate income tax payable in the Island. From today, we will introduce changes which prevent the repayment of tax credits to companies taxable at the 0% rate. Furthermore, a small number of changes are proposed to the distribution rules in order to improve their operation while the Taxes Office will continue to work with the tax adviser community to determine whether significant simplification of the rules can be brought forward in next year's Budget.

Administration changes

If we are to keep taxes low it is important that we all pay what is due under the law – the right tax at the right time. Alongside a significant investment in modernising the Taxes Office computer systems, over the coming two years I will be proposing measures to simplify and strengthen the tax code to ensure that the Taxes Office is able to do the best job possible for Jersey and to ensure fairness of treatment for all taxpayers.

As a result of our participation in numerous international tax treaties, an increasing amount of data will be available to the Comptroller of Taxes from overseas tax authorities and financial institutions. I will propose similar measures to enable local financial institutions to provide equivalent data to the Comptroller. The Taxes Office will more easily be able to detect error and evasion and to correct it more quickly.

I will propose a Jersey Tax Disclosure Opportunity for 2017 which will enable people who believe they may have been getting their taxes wrong to set their affairs in order.

Developments through the eGov programme are central to public sector reform and the ease with which the public can engage with government. As a priority, the States will invest to enable personal taxpayers to make tax declarations online through a self-assessment process. We will also consider collecting other charges, for example social-security contributions, through this system.

Conclusion

This is a Budget that makes some hard choices to support the Medium Term Financial Plan [MTFP] recognising that longer term planning is essential to building sustainable Public Finances. It clearly recognises the financial challenges the Island faces in a rapidly changing and highly competitive global environment.

It seeks to balance the need for short term fiscal support to maintain the economic recovery with longer term policies to underpin economic growth, diversification and job creation.

It brings together our stated policies on health, on education, on housing and on reforming the public sector but also takes measures which will achieve our goal to develop our tax system so that it is simple and more equitable. This Budget begins to provide some of the much needed flexibility that will be required over the period of the MTFP. Flexibility that will be needed to manage the variations which may occur and enable us to protect the investment we intend to make in our priority services.

I commend this Report, Budge 2016 and associated papers to the States Assembly.

PART B – BUDGET STATEMENT 2016

2. Tax Proposals

The Minister for Treasury and Resources considers annual Budget measures within the context of spending plans,  the  economic  situation,  current  income  forecasts  and  the  States  strategic  priorities.  The  spending proposals for 2016 were set out in the MTFP which was adopted in October 2015.

The tax proposals included in the 2016 Budget are based on the long term tax policy principles agreed by the States during the Strategic Plan debate in April 2015. Those long term tax policy principles are:

1. Taxation must be necessary, justifiable and sustainable.
2. Taxes should be low, broad, simple and fair.
3. Everyone should make an appropriate contribution to the cost of providing services, while those on the lowest incomes are protected.
4. Taxes must be internationally competitive.
5. Taxation should support economic, environmental and social policy.

In addition, the individual proposals have been informed by the Minister's aims for the Island's tax system during the course of this MTFP. These aims are:

• Achieving long-term sustainable public finances
• Simplification
• Stability
• Addressing inequalities and anti-avoidance
• Flexibility to adapt to changing circumstances
• Supporting economic growth
• Improved, efficient administration

Consistent with the aim of maintaining a stable tax system, creating the certainty that the Island's economy needs in order to be successful, no changes are proposed to the key elements of the tax system namely:

• the 20% standard rate of personal income tax;
• the  corporate  tax  regime  which  delivers  a  tax  neutral  vehicle  in  a  transparent  and  internationally acceptable manner; and
• a low, broad and simple GST, with low income households compensated through the benefits system where appropriate.

The  Minister  also  considers  administrative  changes  as  part  of  the  Budget  to  improve  the  efficiency  and effectiveness of the tax system.

The following pages outline the changes proposed to the tax system.

3. Income Tax Proposals

Proposed personal income tax measures

Income tax exemption thresholds

The income tax exemption thresholds are the amount below which taxpayers have no liability to income tax.

The practice in recent years has been to increase the exemption thresholds by reference to the lower of the most recent RPI figure and the most recent annual increase in earnings figure available at the time the Draft Budget is lodged. In Budget 2014 the exemption thresholds were increased by 1.5% which was in line with the June 2013 RPI figure produced by the Statistics Unit. For Budget 2015 the exemption thresholds were increased by a further 1.7% based on the March 2014 RPI figure produced by the Statistics Unit (the most recent RPI figure available at the time that Budget 2015 was lodged).

Despite the challenges facing the States, highlighted in the MTFP, the Minister proposes to continue with this policy by proposing to increase the exemption thresholds for the 2016 year of assessment in line with the June 2015 RPI figure of 0.9%. This increase maintains the real value of the exemption thresholds in 2016.

Taxpayers  aged  65+  at  the  start  of  a  year  of  assessment  are  entitled  to  an  age  enhanced  exemption threshold. The tax benefit of this enhancement is highlighted in the table below:

FIGURE [1] – Current tax benefit of age enhanced exemption thresholds

Married  couple/Civil  £22,800  £26,100  £3,300  £858 partnership

Due to the ageing demographic the number of taxpayers eligible for the age enhanced exemption thresholds increases by approximately 700 taxpayers per annum. This increase in the cohort of eligible claimants costs other taxpayers approximately an additional £300,000 per annum. This over time is a significant challenge to the sustainability of the tax system, faced with expenditure increases also arising from an ageing population.

Consistent with the Strategic Priority of creating sustainable public finances, the Minister is proposing two measures to address the increasing cost of the age enhanced exemption thresholds. The first proposal is that the age enhanced exemption thresholds are maintained at the current level for the 2016 year of assessment, reducing the differential between the standard exemption thresholds and the age enhanced exemption thresholds.

Over time the Minister's intention is that the standard exemption threshold should be brought into parity with the age enhanced exemption thresholds, removing the differential and removing the current inequity between these groups of taxpayers. For the avoidance of doubt the Minister does not propose to reduce the age enhanced exemption thresholds currently being enjoyed by eligible taxpayers.

The second measure is that it is proposed that eligibility to the age enhanced exemption thresholds will be limited with effect from the 2018 year of assessment. Only those taxpayers who turn 65 years old before 1 January 2017 will continue to be eligible to the age enhanced income tax exemption thresholds in 2018 and later years. Those taxpayers who do turn 65 before 1 January 2017 will continue to benefit from the age enhanced exemption thresholds until such time as they are aligned with the standard exemption thresholds.

Raising the standard exemption thresholds by 0.9% represents a saving of £2.2m against the latest income forecasts presented as part of this Budget which assume a 2.0% increase in all exemption thresholds for the 2016 year of assessment (Budget Year 2017) and the remaining years of the MTFP.

As indicated above the saving from limiting future eligibility to the age enhanced exemption thresholds is estimated at £300,000 per annum from the 2018 year of assessment (Budget Year 2019). The effects of these proposals are outlined in Figure 2:

FIGURE [2] – Income tax exemption thresholds for 2015 and 2016

Single Person (aged 65+)  £15,900  £15,900 Married Couple/Civil Partnership  £22,800  £23,000 Married Couple/Civil Partnership (aged 65+)  £26,100  £26,100

In  2016  those  in  receipt  of  age  enhanced  exemption  thresholds,  will  continue  to  receive  exemption thresholds in excess of the working age population:

FIGURE [3] – Proposed tax benefit of age enhanced exemption thresholds in 2016

Married  couple/Civil  £23,000  £26,100  £3,100  £806 partnership

Phasing out tax allowances from standard rate taxpayers

Following the completion of the "20-means-20" policy initiative which aimed to phase out allowances from standard rate taxpayers during the 2007 – 2011 years of assessment, there are 3 allowances still available to standard rate taxpayers namely:

• £3,000 allowance in respect of each child under the age of 16 or over the age of 16 and still in full-time school (standard child allowance)
• £6,000 allowance in respect of each child who is over the age of 17 and in full time higher education (higher child allowance)
• £4,500 allowance to a single parent household which is entitled to one of the allowances listed above (additional personal allowance)

The Minister proposes that these allowances are phased out from standard rate taxpayers only over the period of the MTFP with the exception of the £6,000 higher child allowance. The intention is to maintain the higher child allowance, until firm proposals have been identified and approved to help Islanders with the costs of sending their children on to higher education.

It is proposed that the standard child allowance and the additional persons allowance will be phased out as shown in Figure 4:

FIGURE [4] – Proposed phasing-out of child allowances from standard rate taxpayers

Allowance  2015 YOA  2016 YOA  2017 YOA  2018 YOA

(current year)

Standard child  £3,000  £2,000  £1,000  £0 Additional person  £4,500  £3,000  £1,500  £0

This proposal will not impact the vast majority of taxpayers that pay at the marginal rate who will still be entitled to the standard child allowance, the additional personal allowance and the enhanced higher child allowance  (under  which  the  higher  child  allowance  is  increased  to  £9,000). The  Minister  will  not  be proposing to phase out these allowances from marginal rate taxpayers.

Figure 5 provides an indication of the level of taxable income that a household will require in order to be impacted by the withdrawal of the allowances from standard rate taxpayers (i.e. households with lower income levels will not be impacted by the withdrawal of these allowances). Many will earn higher than this and will still not be impacted if their circumstances qualify them for other reliefs available to marginal rate taxpayers – such as Child Care Tax Relief:

FIGURE [5] – Household income required to be impacted by proposed phasing-out

Household description  Household  Income  required  in  2016

YOA[2]  to  be  impacted  by  proposed phasing-out

Married couple, one under 16 child, no other allowances  £106,000

Married couple, two under 16 children, no other allowances  £112,000 Married couple, three under 16 children, no other allowances  £118,000 Married  couple,  one  under  16  child,  one  child  in  higher  £125,000 education, no other allowances  

Single  parent  household,  one  under  16  child,  no  other  £78,000 allowances

Single  parent  household,  two  under  16  children,  no  other  £84,000 allowances  

Single parent household, one child in higher education, no other  £91,000 allowances

It is estimated that this proposed measure will raise approximately £1.9m per annum once the standard child and additional personal allowances are fully phased out. This represents additional revenue of £645,000 per annum for each year during the phase out period:

• 2016 year of assessment (Budget Year 2017): £645,000
• 2017 year of assessment (Budget Year 2018): £1,290,000
• 2018 year of assessment (Budget Year 2019): £1,935,000

Modernise wife's earned income allowance ("WEIA")  

Jersey currently operates a system of joint taxation for married couples. Under this system of joint taxation, the husband is treated as "the taxpayer" and the wife's income is deemed to be his income for tax purposes. One of the allowances available to the husband is WEIA, an allowance which is available at the marginal rate provided his wife is in receipt of earnings. The financial value of the WEIA is £4,500 per annum (or the amount of her earnings if less than £4,500).

Due to the way in which the allowance is structured (i.e. given in respect of a wife who has earnings) households with similar income can pay differing amounts of tax.

Example

Each of the households below has a joint income of £45,000. Each household is only entitled to the income tax exemption threshold and WEIA (where applicable):

Two  £45,000  £nil  No  £22,800  £5,772 Three  £5,000  £40,000  Yes  £27,300  £4,602 Four  £nil  £45,000  Yes  £27,300  £4,602

In this example household four clearly has a tax advantage compared to household two; demonstrating that a household within which the husband does not to go out to work has a tax advantage over a household within which the wife does not to go out to work. This is inequitable and unfair.

As part of work to remove inequities from the personal income tax system, the Minister therefore proposes to change the WEIA so that, from the 2016 year of assessment, it is only available where both spouses are in receipt of earnings, with the amount of relief being determined by the lower earner in a married couple irrespective of their sex. Following this change, in the example above household four would be brought into parity with household two, removing the current inequity between these households.

This change is also required in order to prepare the income tax system for the introduction of same-sex marriage.

It is estimated that there are approximately 100 households which will be fully impacted by this proposed measure. The maximum additional income tax payable by a married couple as a result of this specific measure is £1,170 (£4,500 @ 26%). It is estimated that this proposed measure will raise approximately £100,000 per annum from the 2016 year of assessment (Budget Year 2017).

Modernise child care tax relief (CCTR)  

Similar to the above analysis of WEIA, CCTR is given in respect of the earned income of the wife, resulting in discrepancies and inequalities between those households in which the husband does not go out to work and those households in which the wife does not go out to work. The Minister therefore proposes to make a change to CCTR to address this inequity and prepare the income tax system for same-sex marriage. As with WEIA, CCTR will be given in respect of the lower earner in a married couple/civil partnership irrespective of their sex. No other changes to the availability of CCTR are proposed.

Taxes Office data indicates that a very small number of marginal rate married taxpayers claim CCTR where the husband does not have earnings and hence will see a full withdrawal of the CCTR that they are currently claiming as a result of this proposed measure. In light of the small number of impacted taxpayers, this specific measure is regarded as broadly revenue neutral.

Increased tax relief for child care costs

The Minister proposes that the maximum tax relief available to marginal rate taxpayers in respect of childcare costs incurred on child of pre-school age is increased from £12,000 to £14,000 per year, with effect from the 2016 year of assessment. This increase will help hard working families who incur professional childcare costs which enable the parents to work and contribute to the economy.

This proposal is anticipated to benefit about 175 current households and to cost approximately £100,000 from the 2016 year of assessment (Budget Year 2017).

Although a relatively minor amendment, this is just one part of a wider comprehensive policy that the Council of Minister is committed to developing.

Phasing out of mortgage interest tax relief (MITR)

MITR acts as a public subsidy for home ownership. The relief currently costs about £11m per annum. No equivalent to MITR exists for those who cannot afford to buy, or who are not allowed to buy, and who are therefore required to rent their homes. In effect, this means those on the lowest incomes and struggling the most to get on the housing ladder do not benefit in the same way as those who can afford a mortgage and to own their own home.

From an economic perspective, the existence of MITR merely acts to increase the price of properties, as it means that prospective buyers are in a position to afford to borrow more, as the additional interest payments will be met through tax relief. The unintended consequence of MITR is to push up property prices, which does not help people to buy homes.

The amount of tax relief given for mortgage interest in Jersey has been reduced over the last decade. In 2004 a cap was introduced on the total amount of borrowing in respect of which interest relief was available ("debt cap"). At the time, the limit of £300,000 represented the average price of a three-bedroom house and the introduction of the debt cap affected a relatively small number of taxpayers. However by the second quarter of 2015 the average price of a three-bedroom house had grown to £503,000 and in the 2013 year of assessment approximately 1,800 eligible claimants had their MITR restricted by the application of the debt cap.

Through the implementation of the "20-means-20" policy initiative (when allowances were phased out from standard rate taxpayers during the 2007 – 2011 years of assessment) MITR was gradually phased out for standard rate taxpayers, such that only marginal rate taxpayers are now able to benefit from MITR.

The 2015 Budget then introduced a £15,000 cap on the amount of interest that is available for relief annually ("interest cap").

Consistent with both this long-term trend to reduce the value of MITR and with the approach adopted in Guernsey, the Minister proposes that MITR is phased out completely in a steady and structured manner over a 10 year period, commencing from the 2017 year of assessment and ultimately concluding in the 2026 year of  assessment.   By  announcing  the  proposed  phasing-out  period  the  Minister  intends  to  give  existing mortgage holders and prospective first-time buyers a clear understanding of the MITR they will receive over the phasing-out period.

The Minister proposes that the phasing-out of MITR is achieved through the reduction of the interest cap as outlined in Figure 6:

FIGURE [6] – Proposed reduction in the interest cap 2016-2026

Year of Assessment  Applicable interest cap

2016  £15,000 (unchanged) 2017  £13,500

2018  £12,000

2019  £10,500

2020  £9,000

2021  £7,500

2022  £6,000

2023  £4,500

2024  £3,000

2025  £1,500

Primarily due to the low interest rate environment, a relatively small population of taxpayers are currently claiming MITR in excess of £12,000 per annum; therefore the revenue implications of the phasing-out of MITR across the period of this MTFP are minor. Based on the latest available data from the 2013 year of assessment and assuming stable interest rates and a stable population of eligible claimants, it is estimated that the phasing-out will raise approximately £100,000 in the 2017 year of assessment (Budget Year 2018) and £200,000 in the 2018 year of assessment (Budget Year 2019).

Removal of non-residents relief

Most sources of Jersey income (e.g. bank interest, social security pension) are exempt from Jersey tax in the hands of non-resident individuals. However income from Jersey property and other forms of Jersey pension income remain taxable in Jersey when received by a non-resident individual. Non-resident individuals in receipt of these forms of taxable income are entitled to a proportion of the allowances and reliefs available to Jersey resident individuals (this proportion being determined through a detailed calculation).

The Minister proposes that from the 2016 year of assessment non-residents relief is withdrawn, with the effect that non-resident individuals will pay tax at an effective rate of 20% on their property and pension income (excluding social security pension income).

This proposed measure will impact less than 500 non-resident individuals in receipt of taxable Jersey source income and would raise approximately £500,000 per annum from the 2016 year of assessment (Budget Year 2017).

Reducing the benefit in kind (BIK) exemption

Currently all taxpayers in receipt of BIKs from their employer are entitled to deduct a maximum of £1,000 from the  value of  the  BIKs  received  when  calculating  the  amount  that  is  subject  to  income  tax. This deduction is inequitable, generous and provides the most relief to those in receipt of large amounts of BIKs. The Minister proposes to reduce the maximum deduction to £250. Maintaining a deduction ensures that those taxpayers in receipt of a small amount of BIKs continue not to pay any tax on those BIKs, whilst those in receipt of significant amounts of BIKs will pay slightly more tax on the benefits they received (the maximum additional tax payable by a taxpayer under this proposal is £195 per annum (£1,000 - £250) @ 26% = £195)).

Approximately 4,200 marginal and standard rate taxpayers are in receipt of taxable BIKs and it is estimated that this proposed measure will raise approximately £360,000 per annum from the 2016 year of assessment (Budget Year 2017).

Removal of remaining pension relief

Pension relief was a specific form of relief that granted standard rate taxpayers in receipt of pension income from certain overseas jurisdictions a 10% credit against their Jersey tax liability on that pension income provided they had paid some tax on the pension income in the jurisdiction from which the pension arose. The availability of pension relief was removed from the Income Tax Law in the 2004 year of assessment; however the relief was concessionally grandfathered by the Taxes Office for those individuals who were claiming the relief at that time.

The rationale for the continued grandfathering of pension relief has been weakened over time by the steady development of the Island's double tax treaty network, reducing the number of situations where a Jersey resident individual will pay tax on pension income in more than one jurisdiction.

The Minister has therefore requested that the Comptroller of Taxes ceases the grandfathering arrangement from the 2017 year of assessment, with no further relief being given in that year of assessment or any subsequent years.

The interval before the grandfathering arrangement ceases should provide impacted taxpayers with the opportunity to investigate and make any appropriate claim under a double tax treaty that may be advantageous in their personal circumstances.

It is estimated that approximately 80 taxpayers who pay income tax at the standard rate and have been given pension relief since 2004 will be impacted by this proposed measure. It is estimated that this proposed measure will raise approximately £350,000 per annum from the 2017 year of assessment (Budget Year 2018).

The Comptroller will contact the affected taxpayers early in 2016. Minor amendment to pension rules

The 2015 Budget included a significant rewrite of the rules relating to pensions and pension schemes. Since the rule changes were implemented the Taxes Office has been working closely with the Island's pension industry to ensure that the rules are operating as intended and that they are clear and unambiguous. As a consequence of this process the Minister proposes that a small number of minor amendments are made to the pension rules. The proposed changes do not have any financial implications.

Changes to the distribution rules

The distribution rules were introduced in the 2013 Budget to ensure the appropriate taxation of distributions from Jersey companies to Jersey resident individual shareholders. During 2015 the Taxes Office has been working with the Island's tax adviser community to undertake a post-implementation review, with a clear focus on simplification of the rules. The tax adviser community has helpfully suggested a number of potentially significant amendments to the rules, particularly in the context of multi-layered structures, which the Taxes Office are continuing to examine. It is anticipated that a further discussion paper regarding these suggestions will be shared with the tax adviser community before the end of the year.

In the meantime the Minister has proposed a number of relatively minor amendments to the distribution rules in order to improve their operation. In particular the changes seek to ensure that the payment of a preference share dividend to a non-resident cannot result in a repayment of a tax credit to that non-resident. This change will apply to any preference share dividend received by a non-resident on or after the day that the Draft 2016 Budget is lodged, Furthermore, the amendment prevents the repayment of tax credits on preference share dividends to non-residents for earlier years of assessment) where a claim for repayment has not been lodged with the Comptroller of Taxes before the day that the Draft 2016 Budget is lodged. Although not common, this approach of changing the Law with effect from the date the Draft Budget is lodged has been used previously (for example when changing the exemption available to non-residents in the 2013 Budget).

The Minister emphasises that any claims made before the 20 October 2015 for the repayment of income tax due under the Income Tax Law will be determined, and permitted, in accordance with the Income Tax Law as it existed prior to that date. Any claims made on or after the 20 October 2015 will be dealt with under the Income Tax Law, as amended.

These proposed changes are not expected to have significant financial implications, except to prevent repayments of tax in unjustified circumstances.

Proposed corporate income tax measures

Non-payment of tax credits to companies taxable at 0%

Under the current rules an investment holding company is entitled to claim management expenses. Where an investment holding company is in receipt of a dividend from another Jersey company which carries a tax credit (i.e. a dividend which has been paid out of profits subject to the 10% or 20% tax rates) the investment holding company can set off the management expenses against the dividend and receive a repayment of the tax credit. This rule has been utilised by, amongst others, external investors to create acquisition structures which can result in significant amounts of corporate income tax being repaid.

To address this type of structuring the Minister proposes that no tax credits will be repaid in respect of any dividend received by a company taxable at 0% on or after the day that the Draft 2016 Budget is lodged. This immediate cut-off is required in order to prevent dividends being paid between the date that the Draft 2016 Budget is lodged and the date of the debate.

The Minister emphasises that any dividends received before 20 October 2015 will be treated in accordance with the Income Tax Law as it existed prior to that date. Any dividends received on or after 20 October 2015 will be dealt with under the Income Tax Law, as amended.

Furthermore under the current rules a financial services company receiving a dividend from which tax has been deducted by another Jersey company is entitled a tax credit. The Minister proposes that the calculation of the tax credit available to a financial services company in these circumstances is amended so as to limit the credit to the lower of the tax deducted from the dividend or the gross dividend at the rate of 10%.

Corporate residence tie-breaker test

Jersey's internationally renowned company law results in Jersey incorporated companies being utilised all over the globe, generating company fees and legal work for the Island's financial services sector. Under Jersey's domestic tax law, a company incorporated in Jersey is considered taxable in Jersey unless it is managed and controlled outside Jersey in a country or territory where the highest rate at which a company may be charged to tax on any of its income is 20% or higher.

In the UK's most recent budget the Chancellor of the Exchequer announced that the UK's headline corporation tax rate would be reduced from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020. Without a change in Jersey's domestic tax law, this reduction in the UK's headline corporation tax rate could result in some Jersey incorporated companies, which are currently taxable in the UK, inadvertently also becoming taxable in Jersey, which may impact adversely on their overall tax position.

The Minister therefore proposes to change the corporate residence tie-breaker test in Jersey's domestic income tax law so that the "status quo" is maintained and these companies do not inadvertently become taxable in Jersey simply because of a change in the UK's headline corporation tax rate. As this proposed measure maintains the status quo it does not have any financial implications.

Proposed administrative measures

Minor administrative measures

The Minister also proposes the following, administrative measures within the income tax system:

• Removing the obligation on the Comptroller of Taxes to attend all Commissioners of Appeal hearings personally, allowing for other officers to attend instead.
• Changes to facilitate greater data sharing between the Taxes Office and certain members of the Income Forecasting Group in order to improve the income tax forecasting process (subject to appropriate safeguards).
• Formalising the submission deadline for the company income tax return as midnight on 31 December in the year following the relevant year of assessment.
• Revising the right for an employee to elect to make ITIS payments at an effective rate, or a combined effective rate, that exceeds the rate that would otherwise apply in his or her case.

4. Impôts Duty Proposals

Background

Each year, in advance of the Budget, the proposals for impôts Duties are reviewed against the prevailing economic conditions, the Island's financial position and the States strategies on alcohol and tobacco and for the environment.

The Minister's proposals for 2016 take all the above factors into account. To help inform his decision the Minister has considered the following:

• The most recent rate of inflation
• The States existing tobacco and alcohol strategies, as well as the States environmental and transport objectives.
• Consultation with the Council of Ministers and in particular the Ministers and Officers from Health and Social Services, Home Affairs, Transport and Technical services and Economic Development.

It is proposed that any increases in duty will take effect at midnight on 31 December 2015.

The Budget proposals are set out in detail below and will raise additional revenue as indicated below: Alcohol

The Minister is proposing the following increases to alcohol duty rates.

FIGURE [7] – Proposed increases in alcohol impôts duty

Wine – 75cl bottle of table wine  1.3  2p Pint of Beer/Cider exceeding 4.9%abv (Strong)  4.9  3p Pint of Beer/Cider exceeding 2.8%abv but not  2.8  1p exceeding 4.9%abv (Standard)

As a result of these Budget proposals, the forecast is that the annual duty collected on all alcohol will total £19,261,000 in 2016. This would be an additional £525,000 on the 2015 alcohol forecast and £245,000 more than the 2016 Budget forecast update.

In addition to the duty rate increases, the Minister also proposes some minor amendments to the Customs and Excise (Jersey) Law 1999 regarding the definitions of a "small independent cider maker" and a "small independent distiller of spirits". These definitions are important because where they are met the producer is able to benefits from reduced impôts duty. Although not limited to local producers it is anticipated that the proposed changes will primarily benefit local producers.

From 1 January 2016 the Minister proposes that the number of litres that a "small independent cider maker" will  be  able  to  produce  annually  will  increase  from  20,000  litres  to  500,000  litres. Whilst  a  "small independent distiller of spirits" will be amended from a distiller who does not distil more than 2,000 litres of alcohol per year, to a distiller who has not distilled more than 10,000 litres in total during the preceding five years.

Based on 2014 production figures the cost to the Treasury will be approximately £5,000. Tobacco

It is proposed that the policy of increasing duty on tobacco at a level above the cost of living is continued. As a result the Minister is proposing to increase the rate of duty on all tobacco products by 6.7%. After the GST effect of the raised price, this amounts to 35p on a packet of 20 cigarettes.

As a result of the Budget proposals, the forecast is that the annual duty collected on all tobacco will total £14,773,000 in 2016. This would be an additional £43,000 more than on the 2015 tobacco forecast and £649,000 more than the 2016 Budget forecast update.

Fuel

The Minister continues to consider all issues regarding the duty for fuel including the current worldwide price of hydrocarbon oil and the retail price of fuel at garages in the island.

Having taken this into account and having considered the fact that there have only been minimal increases in fuel duty in recent years, it is proposed to increase the duty on fuel to a level that will result in a 0.9 pence increase on a litre of unleaded petrol.

As a result of the budget proposals, the forecast is that the annual duty collected on all fuel will total £22,022,000 in 2016. This would be an additional £452,000 more than the 2015 tobacco forecast and the 2016 Budget forecast update.

Customs Duties

It is calculated that the duty collected on goods imported from outside the EU will total £145,000 in 2016. This is in line with the 2016 MTFP forecast.

Detailed Duty Increases for 2016

FIGURE [8] – Duty increases proposed for 2016

2015 impôts duty  Proposed  Proposed 2016

increase %  impôts duty

Litre Bottle of whisky at 40%  £12.97  6.6  £13.83 Bottle of table wine  £1.45  1.3  £1.47

FIGURE [9] – Impôts duty increases plus GST

Impôts duty  GST on impôts  Total additional increase  duty increase  tax cost for good

p  p  p

Spirits – litre bottle @ 40% ABV  85.7p  4.3p  90.0p Wine – 75cl bottle of table wine  1.9p  0.1p  2.0p

FIGURE [10] – 2015 retail price margins – comparisons with the UK (June 2015)

Pint of standard beer  £3.54  £0.34  £0.17  £3.03  14%  £2.96  £0.47  £0.49  £2.00  33%

20 King Size cigarettes  £7.64  £4.99  £0.36  £2.29  70%  £8.89  £5.23  £1.48  £2.18  75% Litre of unleaded petrol  £1.12  £0.45  £0.05  £0.62  45%  £1.16  £0.58  £0.19  £0.39  67%

FIGURE [11] – Comparison of typical 2015 tax and duty levels for a range of commodities (June 2015)

Jersey Duty  Jersey GST  Guernsey  UK Duty  UK VAT at

at 5%  Duty  20%

Litre of whisky at 40%  £12.97  £0.99  £11.71  £11.06  £3.68 Bottle of table wine  £1.45  £0.31  £1.63  £2.05  £1.67

Note: The figures above are before the impact of the 2016 Budget proposals. The prices shown are based on a narrow range of sources but are for equivalent products. There will be considerable price variations in each jurisdiction. Fuel prices are also subject to rapid change.

5. Vehicle Emissions Duty Proposals (as amended)

Background

Vehicle Emissions Duty ("VED") is charged on motor vehicles when they are first registered in Jersey. The duty is structured with a range of bands according to the vehicle's emissions or engine size; whilst discounts are given for older vehicles and hire cars.

The duty is intended to incentivise the choice of less polluting vehicles, with the least polluting vehicles currently paying £0 in VED and the highest polluting vehicles being charged VED of £1,473.

The revenue received from VED has reduced from £894,000 in 2011 to £761,000 in 2014. Analysis of this  reduction  indicates  that  it  has  primarily  been  caused  by  a  fall  in  the total  number of  new registrations  and  an  increase  in  the  importation  of  older  vehicles,  rather  than  a  switch  to  less polluting vehicles.

Changes to the VED bands

The States Energy Pathway 2050 recognised that more punitive VED bands are likely to be required if the current bands are not effective in encouraging the use of low emissions vehicles. The threshold of the nil rate band is currently set at 120gmCO2/km. As technology advances and vehicles become more efficient, this emissions level is considered too high when looking at thresholds applied in other jurisdictions;  furthermore  it  is  inconsistent  with  Transport  and  Technical  Service's  eco-permits scheme which offers half-price parking for vehicles with emissions less than 100gmsCO2/km. The Minister therefore proposes to adjust the VED bands and rates in order to further encourage the purchase of less polluting vehicles. These adjustments will take place from 1 January 2016.

Under the current VED rules "cars" are banded by their CO2 emissions, whereas all other vehicles (notably commercial vehicles) are banded by their engine size. Almost all new vehicles, including commercial vehicles, have a CO2 emissions specification and therefore the Minister proposes that from 1 January 2016 CO2 emissions are used to band all vehicles for VED purposes, except where a CO2 emissions specification is not available. Under this approach most commercial vehicles should be charged less VED.

Removal of discounts and exemptions

VED discounts are currently given for older vehicles (35% discount for vehicles aged between 1 to 2 years and 50% discount for vehicles over 2 years old), with a full exemption given to vehicles more than 25 years old when first registered in Jersey. These discounts create an incentive for purchasers to opt for older vehicles, which tend to be more polluting than new vehicles.

Following an amendment lodged by the Constable of Grouville the age at which a motor vehicle is fully exempt from VED has increased from 25 years old to 50 years old as at the time the motor vehicle is first registered in Jersey.

Following a further amendment from the Deputy of St Mary an exclusion from the new VED rates and bandings will apply to agricultural tractors limited to 26mph. These agricultural tractors will continue to apply on the 2015 VED rates and bandings.

In  addition  an  85%  discount  is  currently  given  on  the  registration  of  vehicles  used  by  hire  car operators. Most hire cars registered in 2014 fell within the nil rate band and hence did not benefit from this discount, this is due to the fact that hire car operators tend to utilise small, modern cars in their fleets (this discount cost the States less than £5,000 in 2014). Although the evidence indicates that hire car operators are already opting for less polluting vehicles, the Minister proposes that hire car operators should be incentivised in an identical way to the general public to opt for less polluting vehicles and hence the 85% discount should be removed. However to provide hire car operators with the opportunity to adjust their fleets accordingly, it is proposed that the 85% discount should not be removed until 1 January 2017.

Proposed VED bands and rates (excluding agricultural tractors limited to 26mph) FIGURE [12] – Proposed VED bands and rates from 1 January 2016

GmsCO2/KM  VED rate £

100g or less  0

101 – 125  50 126 – 150  150 151 – 175  250 176 – 200  400 201 – 225  750 226 – 250  1,250 Over 250g  1,800

1,001 – 1.400  200

6. Stamp Duty and Land Transactions Tax Proposals

The Minister proposes the following amendment to the Stamp Duties and Fees (Jersey) Law 1998 and the Taxation (Land Transactions) (Jersey) Law 2009:

Reduction of stamp duty/land transaction tax on mortgage debt

Where a mortgage is secured on a property in the Island there is ordinarily a stamp duty/land transaction tax ("LTT") charge payable on the registration of that mortgage calculated at 0.5% of the amount registered. This stamp duty/LTT is payable by the person requiring the mortgage.

In Budget 2015 a decision was taken to reduce the stamp duty/LTT payable on the registration of mortgage debts. In Budget 2016 it is proposed that a further step is taken to reduce the stamp duty/LTT payable on the registration of mortgage debts, reducing the stamp duty/LTT differential between cash buyers and those requiring a mortgage to buy property in the Island. The proposed measure is focused on those purchasing property worth not more than £450,000 (average house price), targeting the relief at those who need it most.

Under the proposed measure provided the purchaser is buying a property worth not more than £450,000 they will be entitled to a reduced rate of stamp duty/LTT on the mortgage debt registered. On the first £350,000 of mortgage debt there will be no stamp duty/LTT, whilst on the next £100,000 of mortgage debt stamp duty/LTT will be payable at the reduce rate of 0.25%.

The impact on taxpayers is highlighted in the table below:

FIGURE [13] – SD/LTT saving compared to standard 0.5% SD/LTT on mortgage debt

£325,000  £292,500  £1,463  Nil  £1,463 £350,000  £315,000  £1,575  Nil  £1,575 £375,000  £337,500  £1,688  Nil  £1,688 £400,000  £360,000  £1,800  £25  £1,775 £425,000  £382,500  £1,913  £81  £1,832 £450,000  £405,000  £2,025  £138  £1,887 £475,000  £427,500  £2,138  £2,138  Nil

FIGURE [14] – SD/LTT saving compared to current reduced rate on mortgage debt applicable in 2015

£325,000  £292,500  Nil  Nil  Nil £350,000  £315,000  £38  Nil  £38 £375,000  £337,500  £94  Nil  £94 £400,000  £360,000  £150  £25  £125 £425,000  £382,500  £1,913  £81  £1,832 £450,000  £405,000  £2,025  £138  £1,887 £475,000  £427,500  £2,138  £2,138  Nil

Based on historical trends in the housing market it is estimated that this proposed measure will reduce tax revenues by approximately £220,000 per annum from Budget Year 2016.

7. On-going and Future Reviews

This section of the Budget Statement provides a high level indication of a number of work streams that will be undertaken by the Taxes Office over the near future to improve the operation of the Island's tax system:

High value residents

The  previous  Minister  for  Treasury  and  Resources  was  committed  to  reviewing  the  High  Value Residents (HVR) regime every 3 years to ensure that the annual tax contribution made by those individuals that came to Jersey under a 2(1)(e) license, (previously referred to as a 1(1)(K)), is set at the appropriate level.

This commitment will be met and in addition, the review will also consider the wider contribution that those individuals have brought to the Island. The tax rules were amended in July 2011 to specifically  encourage  more  inward  investment  to  the  Island  by  incoming  HVRs  creating  new employment and investment opportunities, and thereby further encouraging economic growth.

This review will cover the three complete tax years (2012-2014). The relevant tax information will be available in the first half of 2016, hence the timing of the review.

The interim review that was published by the Tax Policy Unit in 2013[4] indicated that the new regime was  working  well  and  that  there  was  a  perception  that  Jersey  is  open  for  business'  therefore encouraging  more  economically  active  applicants  into  the  HVR  regime  than  had  been  the  case previously.

This report will be published in 2016. Same-sex marriage  

On  22  September  2015  the  States  Assembly  approved  the  proposition  to  introduce  Same-Sex Marriage to Jersey in 2017. In order for the current joint system of taxation to work effectively, the Tax Policy Unit will perform a review of the Income Tax legislation to ensure that the tax law will work for same-sex couples in the same way as it does for different-sex couples.

There are some proposed measures in the 2016 Budget which have been introduced to equalise the tax treatment of men and women within the tax system; these relate to the availability of the wife's earned income allowance and child care tax relief.

In addition, a commitment has been made to ensure that the tax system recognises both spouses in a married couple through the introduction of joint and several liability of the couple's tax bill. Under the current law a married man is personally assessed to tax on his wife's income and is liable to pay that tax. Therefore if the wife left the Island, the husband would be required to continue to pay tax on her income. Whereas in the reverse scenario, the wife would only be required to pay tax in respect of her own income. Also a married woman currently needs the permission of her husband in order to discuss her own taxation affairs with the Taxes Office. Each of these factors is outdated and inconsistent with the modern tax system that the Minister is seeking to develop.

The concept of joint and several liability for married couples will be advanced during 2016, together with the other legislative amendments required in order to facilitate the introduction of same-sex marriage.

Independent taxation

The introduction of independent taxation would facilitate same-sex marriage within the income tax system. However a full system of independent taxation cannot be introduced by 2017; the timeline for same-sex marriage committed to by the States. Furthermore introducing independent taxation in advance of the significant administrative changes identified for the personal income tax system (online tax returns, self-assessment of liability, risk based assessing) would result in the Taxes Office having to issue and assess an additional 18,000 returns.

Therefore alongside the 2017 Budget an options paper for independent taxation will be published, together with an updated indicative timetable for its introduction which aligns with the planned administrative changes.

Review of taxation of benefits in kind

The Taxes Office will work with the Social Security Department to complete a review of the taxation of the benefits in kind provided by employers to their staff, with the aim of producing a single set of rules that are consistent across both departments.

Current year payment basis

The current year payment basis is beneficial for both the Taxes Office (reduced risk of arrears) and for taxpayers (no latent tax liability which crystallises on retirement, redundancy, career break, etc.). Therefore the Taxes Office will complete a review looking at the options for moving cohorts of taxpayers who currently pay tax on a prior year basis on to the current year payment basis. As part of this review, and aligning with the administrative changes proposed within the Taxes Office, consideration will also be given to the tax payment dates applying to all taxpayers (e.g. companies, individuals who pay on account rather than through ITIS).

Simplification of the distribution rules

During 2015 the Taxes Office worked with the tax agent community to review the application of the distribution rules. As part of this review a number of ideas for significant simplification of the distribution rules were proposed. The Taxes Office are currently working through these ideas and intend to release an issues paper later this year in order to obtain further feedback from the tax agent community. Any changes ultimately arising out of this review will be included in the 2017 Budget.

8. Financial and Manpower Implications (as amended)

Estimated financial implications of 2016 Budget proposals

FIGURE [15] – Estimated financial implications of 2016 Budget proposals on 2016 (as amended)

Estimated impact on Measure 2016 Taxation Revenue (£)

Impôts Duty:[1]

- Alcohol duty increases  245,000

- Tobacco duty increases  649,000

The income tax measures relate to year of assessment 2016. These will impact on the tax revenues to the States in 2017. However, most current year basis taxpayers under ITIS will see the benefit of these measures during 2016. This is because the measures will impact on the calculation of their provisional ITIS effective rate.

FIGURE [16] – Estimated financial implications of 2016 Budget proposals on 2017-2019 (as amended)

Income Tax

The proposals within the Budget Statement 2016 will be implemented without any increase to current approved staffing levels.

PART C – PROGRAMME OF CAPITAL PROJECTS

9. Proposed/Indicative Capital Programme 2016 - 2019

Introduction

A Long Term Capital Plan (LTCP) was developed in advance of the first Medium Term Financial Plan (MTFP) to identify capital project requirements over a 25 year planning horizon. This allows for adequate sight of the requirements to enable effective financial and operation planning to manage affordability and the impact on the local economy. The LTCP forms the basis for the MTFP capital programme. The MTFP set out the indicative capital programme for each of the years 2016 - 2019 and the debate on the MTFP approved the capital programme, in total, for each of these years. The Budget for each of these years then approves the detailed list of projects. To comply with the Public Finances (Jersey) Law 2005, therefore, the States is asked to approve the detailed list of capital projects for 2016.

The MTFP approved a total allocation in 2016 of £26,691,000. The 2016 programme includes funding for essential IT investment in e-government, HR systems and Taxes Office systems, all of which support the aims of the Public Sector Reform project to deliver a more innovative, efficient and lower cost government. There are also allocations to maintain essential equipment in accordance with replacement schedules to ensure all services are delivered safely, efficiently and effectively. Further funding is also provided to maintain the Island's road, sewer and sea defence networks including the next stages of funding required for the replacement of the ageing and inefficient sewage treatment works at Bellozanne.

It is important to stress that this excludes the funding requirements for the Future Hospital and the Office Consolidation project – options for which are under separate consideration and will require a subsequent approval, to include the source of funding.

FIGURE [17] – Proposed/indicative capital programme 2016-2019

Proposed  Indicative  Indicative  Indicative Programme  Programme  Programme  Programme

2016  2017  2018  2019 £'000  £'000  £'000  £'000

Chief Minister's

Desktop Upgrades  737    -  -  1,000 Income/Payment Management System  379    -  -  - Corporate Web Platform Refresh  300    300  326  500 Web Search Engine Upgrade  105    -  -  100 Content Management System Refresh (SharePoint  105    -  -  

Upgrades)

Hardware Refresh  200    200  201  281 Citizen Database Upgrade  -    -  316  325 Business Database Creation  -    -  211  217 Open Data Platform Refresh  -    -  53  77 Data Warehouse Platform Refresh  -    -  -  487 CRM Platform Refresh  -    -  316  - Talentlink Replacement  -    -  474  - Finance System - JD Edwards Upgrade  -    -  474  - Taxes Office System Renewal  579    3,408  2,463  2,507 E Government (Previous Rephasing)  2,200    -  -  - T&R JDE System (HRIS) (Previous Rephasing)  1,238    -  -  - Replacement Assets - CMD  -    -  451  430

Minor Capital  300    381  169  505

Education, Sport and Culture

Grainville Phase 5 (Inclusive of provision for Music  -    8,234  1,995  - Service) *

St Marys School Refurbishment *  -    -  5,500  - Replacement Assets and Minor Capital - ESC  200    200  200  250 Jersey Heritage Trust - Archive Store Extension *  3,500    -  -  -

Equipment, Maintenance and Minor Capital  -    12  -  12 Fisheries Vessels  -    -  54  - Met Radar Refurbishment / Upgrade  372    -  -  -

* Signifies projects where the budget will be allocated to Jersey Property Holdings to deliver.

FIGURE [17] – Proposed/indicative capital programme 2016-2019 (continued)

Replacement Assets (Various)  2,510    3,100  3,000  3,500 Replacement Assets RIS / PACS IT assets  -    -  -  1,900 Refurbishment of Sandybrook (Previous rephasing)  1,699    -  -  -

Replacement Assets  1,661    1,637  4,089  5,102 Infrastructure Rolling Vote  8,373    8,165  14,164  12,688 Waste: La Collette Cell Construction  -    -  500  1,148 Backlog Infrastructure Works  -    -  -  1,750 Transport and Technical Services Total  10,034    9,802  18,753  20,688

Treasury and Resources

Replacement Assets - T&R  -    86  -  17

Replacement Assets - Non Mins  33    50  44  179