Regarding the low degree of taxation amongst current 1(1)(k) category residents

1240/5(5389)

WRITTEN QUESTION TO THE MINISTER FOR TREASURY AND RESOURCES BY DEPUTY T.M. PITMAN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY 25th MAY 2010

Question

"Will the Minister advise whether he views the low degree of taxation (as outlined in response to my question on 23rd March 2010) amongst current 1(1)(k) residents - several of whom are paying between £5,000 and £10,000 tax; and a further ten paying less than £5,000 tax - in comparison with many lower and middle earners as acceptable within the present, highly challenging economic climate, and what measures, if any, he is currently examining to tackle this within the agreed Strategic Plan commitment to creating a fairer, more equal society in Jersey?"

Answer

There is clearly a degree of misinterpretation and misunderstanding concerning the 1(1)(k) policy. In addition, I have received numerous questions on the subject even after making a clear commitment to a review ahead of the 2011 Budget.

However in order to further assist member's understanding, and clarify the position on the tax paid by those granted a 1(1)k consent since 1970, I will be publishing a document entitled History of 1(1)(k) policy' within the next few weeks. This should assist members and the public's understanding of 1(1)k's.

APPENDIX A HISTORY OF THE 1(1)K POLICY

1. I n 1970thepresentHousing Regulations wereadoptedandthoseseeking to retire or otherwise move to Jersey to take advantage of the Island'sfavourable tax arrangements,whohad entered Jersey in large numbers in the 1960's, were faced with the requirement that a consent topurchase a propertywas only possible  if they  satisfied  the  Housing Committee that  they  were  of economic or social  benefit  (i.e. Regulation 1(1)k).
2. I n theyears immediately followingthe introduction of the Regulations the controls were not too tightly applied andin1973,for example, there were 66 1(1)kconsentsgranted. Although there was a minimum tax requirementitwas at £3,000 in 1972and £4,000 in 1973, nottoomuchof a restriction.
3. I n 1974 there was the first of a succession of reports onimmigration policy and population growth restraint produced  by the Policy Advisory  Committee  initially  and subsequently  by the  Policy  and Resources Committee.
4. I n 1974itwasdecided that the numberof the new1(1)k's should be restricted to 15 a year, and to help to secure this limit the tax requirement wasraise to £10,000 per annum. During thedebateby the States in February, 1974of the Policy AdvisoryCommittee'sReport and Proposition on thescaleand pattern of development in the Island over the next five years(P2/74)anamendmenttooneof the Propositions was approved in the following terms –

" B  efore directing the Housing Committee in respect of the admission of wealthy immigrants, the States called for a Report and Recommendations from that Committee."

A   R  eport and Proposition regarding wealthy immigrants was presented to the States in May 1974, together

with a note by the Economic Adviser on the "costs" of wealthy immigrants.  That note concluded that "with proper restrictions over the type of property that can be acquired and over the redevelopment and extension of properties it is difficult to argue that 15 consents a year (in addition to the straight forward replacement of former wealthy immigrants who have died or left the Island) would be unacceptable, provided all those receiving consent have a certain minimum potential local tax liability which at the present time would be a figure of £10,000 per annum".

5. I n 1979 the States approved a report of the Policy AdvisoryCommittee and agreed that a greater degree of restraint should be exercised over the number of 1(1)k consents. The number of consents considered appropriate was closer to 10 a year rather than the 15 previously accepted, and the tax yield required was increased to some £20,000 per annum.
6. I n 1987 intheEconomicAdviser'sAnnualReporton the Budget reference wasmadeto the packageof proposals adopted by the States in January 1987whichincluded a significant reduction in the numberof consents to be granted bytheHousing Committee underRegulation1(1)k. Whereas for many years the policy had been to grant10-15consents a year, the policy then introduced restricted the numberofconsents to 5 a year.
7. I n 1989 thenumberofconsentsremained at 5 a year and theHousingCommitteein deciding whether or not to grant a consent took account of the following factors –

( i) th e extent and nature of assets held, and the degree of certainty with which a substantial income liable

to Jersey tax would arise;

( ii ) th e applicant's business and personal background;

( ii i)  t he number of children likely to establish residential qualifications in the future;

( iv )  t he age of the applicant;

( v )  t he likelihood and nature of any active involvement in business interests including business within the

Island.

T  o ensure that the number of consents remained at around 5 a year the minimum tax requirement was

increased at the end of the 1980's and into the 1990's firstly to £50,000 and then to £100,000.

8. I n the early1990'swhen a recessionwasexperienced there wassome flexibility introduced into the 1(1)k policy. The States in June 1992 adopted a proposition of the Policy and ResourcesCommittee requesting the Housing Committee to adopt a more flexible policy in considering applications for consent under Regulation 1(1)k with the numberof additional consentsnolongerbeing limited to 5 perannum.
9. T heBudgetReport presented to the Statesby the Chief Adviser in 1993 referred to the1(1)k policy as follows: –

" T h e number of immigrants granted consent under Regulation 1(1)k's was limited in number. In the past this policy was designed to limit the pressure on the Island from the demands those immigrants placed on the construction industry and other service trades in the Island which , in conditions of overfull employment, could only be satisfied by further immigration. In the current climate however the impact of the purchasing power of those concerned, and in particular the support given to the employment of local persons in the construction industry, retail distribution and service trades such as vehicle maintenance, should be more welcome.

T h e re is sometimes criticism of a process of selection of new immigrants according to their wealth, although

the fact that businesses new to the Island are also selected on grounds of economic benefit appears to be readily accepted. If however there are considered to be benefits from the granting of consents under Regulation 1(1)k in terms of the contribution to tax revenues and the "multiplier" effect of the spending power of those concerned, and at the same time there is a wish to limit the number of immigrants, it would seem to follow that other things being equal the higher the likely taxable income the greater the net advantage to the Island. It is on this basis that existing policy is founded.

T h e present requirement is for an applicant to have sufficient assets to yield an income liable to Jersey tax of

£500,000 or more per annum. This has the effect of limiting the number of consents to a level consistent with current States' policy.

W  h ile there have been one or two examples where adverse market conditions have affected the value of an

individual's assets and the return obtained on those assets, the evidence shows clearly that in almost all cases the contribution made to tax revenues significantly exceeds that expected when consent was originally granted."

10. A s the economy picked upagain and the immigration pressures recurred so a tougherpolicy on 1(1)k'swas re-established. The HousingCommitteein 1998 considered the tax benefits receivedby the Islandwhich resulted from the granting of consents under Regulation 1(1)k. The Committee noted that of the 21 consents granted between1992 and 1995 only 1 resident had underperformed. In total, forthe year of assessment in 1996, the 211(1)k residents had paid taxof £2.5 million. Ofthosewhohadtakenup residence in1996, and had finalised their 1997 tax, all had paid sufficient taxapart from 1 whowasabout 10% below target. The Housing Committee was advised at that time that there were no grounds for withdrawing a consent, as it was granted for a property, but that a person's tax contribution couldbe reviewed if they applied to move to another property. The Committee was also informed that 1(1)k residents were not legally required to makethe tax requirement,whichwas then £200,000 per year,but that the majority were keen to meetthe obligations and that any exceptions werereported to the Comptroller of IncomeTax. The Committeenoted that the minimumannualincomewhicheachapplicantundertook to meet wasexpectedtobeadjustedupwardseach year in line with the increase in the Retail Price sIndexplus 2.5%. This ensured that, where a consentwas granted on the basis of an undertaking from an individual's trustees that the required level ofincome would be paid to the 1(1)kresident, the Island benefitted from an adjustment which not only ensured that the sum involved increased in line with inflation, but also incorporated someelementof real growth.

11. T h ro ughout the 1970's,1980'sand1990'sthe tax requirement was used for the main part as a "rationing tool". The idea was that if the Statesonlywished to have, say, 15,10 or 5 consents granted the tax requirement should be set to achieve this number. That is, thosewhowere granted consentwerethosemost likely tomake the biggest contributiontotheIsland's tax revenues. The principle was that if only 5 consentsweretobe granted they shouldbethe best in termsof the tax contribution to be made.
12. T here has beensome misleading language used in describing the policy adopted in the 1970's,1980's and 1990's. There were no "deals" struck ornegotiations that led toanyagreement that a person paid less than 20% ontheincome they received that was liable to tax inaccordance with the provisions of the Income Tax Law. All applicants wererequired to show that they would have sufficient income liable to Jerseytaxat 20% tomore than meettheminimumrequirementsset. That requirement was set as the basis for limiting the numberofconsentseach year. Generally speaking the "hurdle" heights set hadthe desired effect of producing the numberof applications andsubsequentconsents in line with theStates' policy of limiting the total number of consents in eachyear. All applicants hadto satisfy the HousingCommittee, with advice from theEconomicAdviser and subsequently the Chief Adviser, that they would have sufficient taxable incometomeettherequirements. The objective wasalso to seek to establish a degreeof certainty by looking for a sufficient capital basewhich applying a conservative rate of return yielded a sufficient income liable to Jersey tax. Applicants whose incomewasin the form ofemploymentor trading incomewhichwas susceptible tothe influences of trading conditions wereunlikelyto obtain a consent. Most applicants were seeking toavoid a capital gains tax liability intheUnitedKingdomat a time when they were seeking to retire from business and selltheir businesses orpropertyassets. Because those individuals couldnotsell their assets before they took upresidence if they were goingtoescapetheUK tax liability the housing consents issued had to rely upon a written undertaking from the individual applicant that they would dispose oftheir assets and create the taxable incomerequired. From the analysis that wasundertaken subsequent to consents having been granted therewere few cases where this undertaking wasnot met.
13. S ome applicants had structured the dispositionoftheir assets prior to applying for a consent tolimit their exposure toUK tax. For example, manyyearsbefore thinking of taking up residence in Jersey someUK residents hadestablishedanoffshoretrust in a jurisdiction other than Jersey into which they had placed a substantial proportion of their assets ofwhich they and their family were beneficiaries. The Comptrollerof Income Tax had no ability to tax theincomeof the offshore trust whichwasestablished well before an individual had thought of taking up residence in Jersey unless the income of the trust was distributed tothe individual concernedwhenresident in Jersey. The effect of this was that the income received inJersey would have been relatively low unlessthe trustees of the offshore trusts gave an undertaking to pay an amount from the trust to the individual applicants sufficient to meet theHousingCommittee'sminimum tax requirements. The trustees were called upon to give a letter of undertaking that they wouldmake the required incomepayments. This arrangement wasoften better in some respects than wherean individual did not have an offshore trust because the undertaking from the trustees ensured that the incomepayments were madeand the incomereceivedwasless likely to be affected by the impacton an individual's assets and income arising from changesin the economic climate, falling interest ratesetc.
14. I n the recentyears the policy has shifted toone of being more encouraging of1(1)k applicants and the previous approachof relying onundertakingshas been replaced by a statutory requirementwherebythose granted 1(1)k status are taxedat the following rates:

• the first £1 million of foreign income at 20%;

• the next £500,000 of foreign income at 10%;

• the balance of foreign income at 1%;

• all Jersey's source income at 20%.

I t i s too early to say what the impact of this will be on each individual's contribution to tax revenues in

comparison with the position prior to 2005 when the new arrangements came into force. Certainly the position remains that if an individual has legitimate ways of reducing foreign source income the tax yield could be lower than that being paid by many who gave undertakings in previous years.

15. W henlookingat the tax receipts obtained from those granted consent under Regulation 1(1)ksince 1970 account mustbetakenofthe undertaking that those individuals wererequiredto give at the time the consent wasgranted. Thus, for examplethose granted consentin the 1970'sfaced the requirement of £3- £4,000 of tax initially and£10,000subsequently. Asmany of thosewho were taking up residence were doingsoon the backof the realisation of capital gains,and were in receipt ofincome derived from a certain capital sum, it should not be of surpriseif a number of thosewhocamein the 1970s are nowpaying tax of little if any more than that promised at the time. However, what the tax figures showed for 2007was that 30 1(1)k'swhowere granted consent in the 1970's produced tax of £1.75 million, an average of£58,000 per individual. This shows that many ofthose concerned were paying a sum in tax significantly greater than that which they gavean undertaking todowhen they were first granted consent. There were only 7 paying tax ofless than £10,000,and if someofthosecame in the early 1970s they were only require topay £3-4,000 per annum when granted consent. A numberofthose will have seen their capital eroded overtime through factors outside their control,andhaveseentheirincomeerodedby falling interest rates. Having been resident in the Island for more than 30yearsitmayalsobe questioned whether they should still be considered as 1(1)k's rather than residentially qualified.
16. I n the 1980's the tax requirement increased from £10,000to£20,000andsubsequently to £50,000at the end ofthe decade. The tax figures for 2007showed that the 341(1)k's granted consent in the1980's produced tax of £1.34 million, an average of some £40,000of tax per individual. The figures show that the average wasaheadof the undertakingsgiven. Of the 34, there were 12who were possibly falling shortof their initial undertaking.
17. I n the1990's the tax undertaking increased from £100,000to £150,000 andat the very end ofthedecade to £200,000. The tax figures for 2007show that the 38 1(1)k's granted consentinthe1990's produced tax of £3.77 million, an average of£100,000 per individual. Some 50% ofthoseconcernedfellshortofthe undertaking butthe economic conditions prevailing since they were granted consentcouldbeexpected to have hadthe effect ofreducing their taxable incomes. For those granted consent in the 2000's the tax figures for 2007 show an average tax payment for the14concerned of £120,000.
18. I t isto be expected that amongthose granted a 1(1)kconsentover the past 40yearsthere will bethosewho performed extremely wellwith tax returns very substantially greater than the undertakingsgiven at the time consent wasobtained,and those who will haveseen their circumstances changefor the worst particularly in the lightof recent events and whose taxable income will have reduced below that required toyieldthe tax that they gave an undertaking to meet.
19. T hereis no reason to suppose that in nearly all cases the undertakings given werenotgivenin good faith. However,at the endofthedayanindividual cannot be taxed other than on that income that is liable to Jersey tax of20%. The capital sum in the possession ofmany individuals may not havechangedbut the return on that capital sum can have reduced quite significantly becauseoflowerinterestrates and dividend payments A reduction in the capital values from whichincomewas generated couldalsohavehadan effect on an individual's liability to Jersey tax. The fact that on average the figures for tax in 2007 showed that the majority of those granted consent were more than meeting their undertakings should be seen as indicative of the success of the policy pursuit over the past 40years. In the past consideration wasgivento the adoption of a different approach to the grantingof consents, such asidentifying a limited numberof properties that couldbepurchased on the basisoffirstcome first served, but it was thought unlikely that this would have yielded a tax contribution from the 1(1)k'sasgood as that obtained through the policy pursued over the past40 years.
20. T hrough the 1970's,1980'sand1990'sthere were no "deals" struck. The undertakingssought,and the evidence that hadtobe provided tosupport the undertakings, wasintended to achieve the States policy of limiting the numberofconsents against the background of a wish to ensure that those granted consentwere those most likely to make a significant contribution to the Island's tax revenues. A gentleman's undertaking wasgivenby the individuals concerned that they would meet that obligation but this was no legal requirement. The figures show that for the most part the undertakings were honoured by those concerned. Individual cases canno doubt be referred to asevidence that an undertaking wasnotcomplied with butit would bewrong to use the particular asevidenceof a general failure onthe part ofthose granted

consent under 1(1)k. In addition, before criticising those who have fallen short of their undertaking, regard

should be had for the reasons for this outcome. For example, it is known that some granted consent in the early years were Lloyds names who suffered from major calls on their assets as a result of major insurance claims; others suffered from stock market collapses as in 1987; and one or two saw their capital reduced through divorce settlements.

21. F uture policy regarding1(1)kconsents should be determined having regard to thecosts/benefitsof those making application currently. The fact that information provided with regard to past1(1)k's shows the following picture on the payment of tax –

U p to £20,000 - 3 2

£2 0 -£50,000 - 2 9  

£5 0 -£70,000 - 5

£7 0 -£90,000 - 1 3  

£1 0 0,000 plus  - 3 8  

T o t al - 117

n e e ds to be related to the fact that of those covered by this analysis – 3 0 were granted consent in the 1970's

3 4 were granted consent in the 1980's

3 8 were granted consent in the 1990's

1 4 were granted consent in the 2000's

a n d account taken of the undertakings required, and given, at the time a 1(1)k consent was granted and the

personal experience of the individuals concerned subsequent to their being granted consent.