The recent radical changes in the Gibraltar tax system announced both in the pre-legislative briefing paper and this year’s budget have brought mixed feelings from Gibraltar businesses and individuals. As one who works in Gibraltar’s finance centre, I feel that the changes have for the most part been extremely positive for the future of the Finance Centre and, as this is one of the economic pillars of Gibraltar, for Gibraltar as a whole.

True, the Government has clawed back some of the tax benefits through increases in certain costs announced in the budget and the costs of compliance with the new, more complex, tax regime will be high, but as an accountant I can understand the need to be cautious and take prudent actions. If, as most of us in the finance centre believe, Government finances do not suffer as a result of the reduction in the corporate tax rate then future budgets can be more generous.

Unfortunately, the prudent actions will have an increased detrimental effect on those business who are struggling to make profits and hence won’t be able to take advantage of the reduction in tax. I hope Government will be supportive of those businesses that will legitimately be affected in the short term but who have a sustainable business plan as opposed to those that want to abuse or take advantage of the situation.

The change to a 10% corporate tax rate across the board is the final piece in the jigsaw to move Gibraltar away from its prior status as an offshore centre to a mainstream financial services centre. The challenge now is to project this image to our future customers and attract the businesses that will benefit the economy, provide decent careers for our young people and contribute positively to our community. It is an exciting challenge and finance centre players are certainly gearing themselves up for it. However, we must not forget that although designed to make Gibraltar attractive for new businesses locating here, the Act will directly affect every company and business already established locally. It is a complex piece of legislation and local businesses will need to invest time in understanding how it affects them and whether they need to amend any existing practices.

The new Act introduces the concept of self-assessment, brings in for the first time advance payment of tax, and for businesses changes the basis of taxation from a preceding year basis to an actual basis. The legislation also includes a clear message that the Government is serious about the timely collection of dues in the form of a much stricter compliance and payment regime with extensive penalties for non-compliance, stringent anti-avoidance measures and more narrowly defined business expenditure which can be deducted from taxable income.

There is an entire schedule of 45 pages dedicated to Benefits in Kind as the Government seeks to ensure that all benefits in kind are taxed on employees. Most of the measures seem to make sense and advisors will be glad of the greater clarity with regard to the quantification and valuation of the benefit. As with all exercises of this kind, sometimes the measures taken go a bit too far as is the case with the so called “party tax” where employees will be taxed as having received a benefit in kind if their employers spend more than £75 per head on parties or functions for them. One wonders what abuses may have occurred in the past in this area for the Government to feel it has to specifically legislate to curb them. The use of a sledge hammer to crack a nut? In a service based economy, having engaged and motivated staff is essential for a successful business and morale boosting and team building functions are not only essential but a legitimate business expense!

Businesses will also have to adjust to calculating and paying their own tax without first being assessed by the Income Tax Office. Companies will have to pay tax in respect of their accounting period during their accounting period. Payment dates for companies are 28th February and 31st August and on each one of these dates companies will have to pay 50% of the tax of the previous year as an advanced payment of the current year. A tax return and audited accounts then have to be submitted within 6 months of the accounting period end and any balance of tax will be due then. If you’ve overpaid during the year, you’ll get a refund, but no fixed payment dates for that refund from the tax office…and interest?....No chance!

Profits will have to be calculated in accordance with International Accounting Standards and only expenditure incurred wholly, exclusively and now necessarily can be deducted. The effect of this additional condition remains to be seen. Business entertaining expenditure is generally disallowed unless it falls within guidelines still to be published by the Commissioner of Income Tax in the Gibraltar Gazette. One hopes that the sledgehammer will not be brought out again, as Gibraltar businesses function very much on a relationship basis and business entertaining is an essential element of this. Capital allowances can also be deducted and although first year allowances remain unchanged, writing down allowances are reduced to 10% and private motor vehicles will receive no allowances.

All in all the new Act will be a significant challenge to introduce, not only for local established businesses and for previously exempt companies who will now be paying tax for the first time, but also for accountants, tax advisors and even the Income Tax office who all have to come up to speed with the new provisions. The changes introduced are substantial, transitional provisions are complex, and there is not much time available before 1st January 2011, when the new Act takes effect, to absorb these and change work practices to adhere to the new rules. Penalties for not doing so are draconian!