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Prior Year Basis Tax Reform

David Osborne Aug 10, 2020

Persons who registered for tax in Jersey before 2006 will be on a prior year basis (PYB) instead of a current year basis (CYB) of tax. This means these persons pay their tax each year in respect of the previous year’s liability and not the current year. For example, in 2020 PYB taxpayers are currently paying for their 2019 tax liability. There has been a concern that many taxpayers who are on a PYB of tax are unaware that they may have a latent tax liability that will need to be paid at some point in the future.

Furthermore, as many persons will have reduced take home pay in 2020 due to the Covid-19 pandemic, their 2020 ITIS may not be sufficient to cover their 2019 tax liability. Revenue Jersey acknowledge that there are persons who have already switched from PYB to CYB by ‘catching up’ the shortfall. Simply writing off the 2019 tax liability for PYB persons is therefore seen as unfair both for CYB persons and those that have previously ‘caught up’.

As trailed in the 2019 Government Plan, Revenue Jersey has been tasked with bringing everyone in Jersey on to a CYB of tax rather than remaining on a PYB. Several options were being considered. The recent period of lockdown and the ongoing situation with the Covid-19 pandemic has brought this squarely into focus.

Revenue Jersey are now accelerating the implementation of this transition and a consultation has been launched into a proposed course of action to address the position. Letters have been sent to all taxpayers, including both CYB and PYB persons, to inform them of the phases of PYB tax reform and what action is required.

The two phases of PYB Tax Reform Proposal

The proposed reform would be delivered in two phases:

Phase 1

Subject to passing an amendment to the Income Tax (Jersey) Law 1961, to be debated in October 2020, Revenue Jersey will make the following changes from December 2020: 

  • ‘freeze’ all PYB taxpayer 2019 tax bills until January 2023, when payments would begin; 
  • move all PYB taxpayers’ payments made this year to count towards their 2020 rather than their 2019 tax bill; and
  • calculate and confirm the exact liability for PYB taxpayers for 2020 in 2021, once PYB taxpayers have completed and submitted their 2020 return

From January 2021, all Islanders would pay tax on a CYB. 

Phase 2

Details would be set out in Regulations how PYB taxpayers would pay their frozen 2019 tax liability. A customer feedback survey launching on 3 August, and customer focus groups in November, will help inform the work to finalise the payment plan Regulations. 

During 2022, all former PYB taxpayers would be asked to choose from a range of payment plan options to repay their 2019 tax bill. They would then begin paying their 2019 bill from January 2023 over a manageable number of years.

Benefits for customers with reduced 2020 income - Income Tax Instalment System (ITIS) taxpayers 

The main reason for accelerating the transition from PYB to CYB is because many taxpayers may have lower 2020 earnings because of the Covid-19 pandemic. This means that paying off a 2019 tax liability, when a person would have been assessed on a ‘normal’ year’s earnings, using ITIS monies collected in 2020, from reduced earnings due to the Covid-19 pandemic, could create a shortfall in tax. To address this shortfall either the person’s ITIS rate would need to be increased accordingly, or a catch-up payment would be required, which could cause hardship for persons at a difficult time.

Under the proposal, all ITIS payments made this year would go towards the tax on their income they have earned in 2020, not 2019, so they would no longer have an imminent shortfall to worry about.

Benefits for customers with reduced 2020 income - 'Pay on Account' taxpayers

Anyone who receives most of their income from non-employment sources (such as rental income, self-employment, investment income, etc.) pays their tax in two instalments, one in May and one in November. 

Under the changes, these taxpayers would: 

  • defer the payment due in November 2020 until the end of May 2021 (the final deadline for payment would stay at November 2021) 
  • the November 2021 payment would be the first payment towards their 2021 liability 
  • the May 2022 payment would be their second payment towards their 2021 liability 
  • in November 2022 an adjusting payment would settle any remaining 2021 liability (very limited in most circumstances) and a first instalment would be required for the 2022 tax liability

Payment of any tax this year will be deferred for the whole year if the person wishes. It would be prudent for those who can afford it to make a November 2020 balancing payment to reduce future tax bills.

Persons receiving a pension

Islanders who are no longer in employment, and whose income is primarily from a pension or other sources such as property rental or investments, will be largely unaffected by the proposed changes.

Payment options

From January 2023 PYB taxpayers would need to start repaying their 2019 tax laibility. Several different payment options are being considered to ensure these payments are manageable, including:

i)   payment of the full amount as one payment when the payment scheme starts

ii)   payment of the amount with a monthly direct debit over a 5 year period

iii)   payment of the amount with a monthly direct debit over a 10 year period

iv)   If the monthly amount repayable over 10 years is unaffordable, then subject to an affordability test and    regular reviews, smaller payments equivalent to a longer payment period would be permitted.

To cover the situations were a person’s circumstances change, the payment options would offer the flexibility for taxpayers to:

  • switch between payment plans during the payment period
  • pay off the balance at any time

Disclaimer: Statements and opinions expressed in articles, reviews and other materials herein are those of the author(s).

While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur.

Baker Tilly Channel Islands Limited will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any inform

If you would like to discuss how the above proposals affect you please contact David Osborne.
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David Osborne
Client Director

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