This week saw the release of the Tax Reform Policy Letter, and I’m sure you’re all dying to know the answer to the question nobody asked:
What does Di from DNA think?
First and foremost, I understand why many people would prefer Guernsey not to introduce GST.
I would too.
But I also think we have to be realistic. We need to broaden our tax base and address the structural funding challenge facing the island rather than simply passing the problem on to the next generation.
The demographic issue hasn’t gone away. We have an ageing population, increasing demands on health and social care, and a tax system that relies heavily on a shrinking proportion of working-age people. Doing nothing isn’t really an option.
What I find interesting about this policy letter is the softer approach.
Rather than introducing GST at 5% immediately, the proposal is to start at 3%, put the mechanisms in place, and continue to assess the longer-term funding position as other revenue sources emerge and become clearer. Pillar Two revenues, potential wind farm income and wider economic developments could all change the picture over the coming years.
From an inflation perspective, I think there is real merit in that approach.
I always find it easier to understand these things by looking at where the money is actually coming from.
- £28m – Personal tax reductions
The package includes around £28m of income tax reductions benefiting employees, self-employed individuals and personal taxpayers generally.
The headline changes are:
This is effectively the redistribution element of the package.
Guernsey has long relied heavily on a flat-rate tax system and this introduces greater progressivity.
Will it help those who need it most?
Perhaps.
Will it solve the challenges facing many middle-income families trying to afford housing and raise children?
I’m less convinced.
- £8m – A social security allowance
The introduction of an £11,122 social security allowance for employed and self-employed individuals is, in my view, a genuinely positive reform.
The current system creates a cliff edge. Stay below the threshold and pay nothing. Go £1 over it and suddenly contributions apply to all of your income.
That has never felt particularly logical.
Applying an allowance creates a fairer structure and helps offset increases in employee and self-employed contribution rates.
So far, for employees and the self-employed, there is some good news.
+ £10m – Employer social security
The other side of that equation is employer social security.
The revised package raises around £10m through employer contributions.
Importantly, this is considerably softer than the original proposal and returns to the previously agreed path of reaching 7.6% (but by 2029 instead of 2031). So not really new funding – this was agreed back in 2021.
There is also a new 2.5% contribution on earnings between the Upper Earnings Limit and £300,000.
As accountants we often dance around the terminology, but the reality is that Guernsey social security is partly a social insurance system and partly a tax.
For higher earners, this proposal recognises that reality.
Social security reform – good intentions, unanswered questions
One of the most controversial aspects of the original GST+ package was the proposal to charge social security on all income, including investment and rental income.
That element has now been deferred.
ESS, however, has made it clear that it would like the issue revisited in future.
I understand the argument.
There are genuine inconsistencies in the current system and some people contribute very differently despite having similar overall incomes.
But I would also suggest that if the objective is to tax income fairly, perhaps we should do that through the income tax system rather than by continually expanding the scope of social security.
I struggle to think of many jurisdictions where social security or national insurance contributions are charged at anything close to Guernsey rates while also applying extensively to unearned income.
The drive to reform social security is admirable.
That doesn’t mean every aspect of the current proposal is beyond challenge.
The self-employed question
One issue I have been raising throughout this process remains unresolved.
For as long as I have been an accountant, self-employed contributions and the combined employee plus employer burden have broadly aligned on an after-tax basis.
The first version of GST+ would have changed that significantly, making self-employment comparatively cheaper.
Now, following the welcome reduction in employer contribution increases, the pendulum appears to have swung the other way.
For higher earners, self-employment may become more expensive than employment.
I don’t necessarily object to that outcome.
In fact, it creates another reason for some businesses to operate through limited companies.
What I cannot find is the policy rationale.
If we are deliberately changing the relationship between employment and self-employment, then we should be able to explain why.
At the moment I am struggling to see that explanation.
The non-employed puzzle
Another aspect that I find difficult to understand is the treatment of non-employed individuals below pension age.
Their contribution rate falls to 8.5%.
That reduction originally sat alongside the proposal to charge social security on a wider range of income.
Now that wider reform has been deferred, the rate reduction remains.
Why?
Of all the groups in society, are non-employed individuals below pension age really the ones facing the greatest financial pressure?
Perhaps there is a rationale.
If there is, I would like to see it explained more clearly.
+ £7m – Transport taxes
The package raises approximately £7m through transport-related taxation.
I don’t have particularly strong views on this element.
However, if fairness and behavioural change are objectives, it is worth asking whether the structure does enough to encourage the transition towards lower-emission vehicles.
Many jurisdictions use tax incentives to encourage that shift.
The policy letter appears relatively neutral.
+ £55m – GST
This is, of course, the big one.
GST arrives at 3%.
The lever finally exists.
Will it stay at 3% forever?
Probably not.
Could it eventually move to 5%?
Possibly.
But starting lower is undoubtedly less inflationary and gives the island time to understand the real-world impact before moving further.
The package also retains the International Services Entity scheme, which is expected to continue generating approximately £10m-£12m annually.
+ £6m – Corporate tax changes
The extension of the 10% corporate tax rate to all prescribed businesses, including accountants, lawyers and estate agents, is expected to raise around £6m.
I must admit I am slightly sceptical about the figure.
For many locally owned businesses this is largely a timing difference because profits are ultimately extracted and taxed anyway.
The long-term yield feels less obvious than the headline suggests.
+ £20m – Savings
And then we come to the number that perhaps deserves the most scrutiny.
£20m from savings and efficiencies.
Could it happen?
Absolutely.
There are undoubtedly efficiencies available.
Technology should improve productivity.
Processes can be streamlined.
Waste can be reduced.
Projects can deliver the benefits they were designed to deliver.
But if I am being asked which number in the package carries the greatest execution risk, it is probably this one.
Even optimists are allowed a little scepticism.
Final thoughts
Overall, I think this is a more balanced package than many expected.
The softer introduction of GST has merit.
The new social security allowance is fairer.
The scaling back of employer contribution increases is welcome.
The package also keeps options open while the island gains greater clarity around future revenue sources.
But I would still like to see some of the social security questions answered properly.
Why should self-employed and employed contributions no longer align on an after-tax basis?
Why is the reduction in the non-employed contribution rate still appropriate now that wider social security reform has been deferred?
And perhaps most importantly, can we finally have a meaningful conversation about where social security rates stop?
They cannot simply keep rising forever.
If Guernsey successfully broadens its tax base, creates new revenue streams and improves the sustainability of public finances, I would like to think that future generations might one day see social security rates stabilise – or perhaps even fall.
Now there’s an optimistic thought.
