2017 Budget analysis
By Neil Rumford
This was of course a pre-Brexit budget, nevertheless the Chief Minister’s address retained an upbeat theme throughout. Few tax-related changes were announced – with relatively low tax rates and tax revenue showing a steady upwards trend, the phrase “if it ain’t broke don’t fix it” springs to mind.
Small, inflationary increases were made to allowances under the Allowance Based System (“ABS”), but no changes were made to the tax rates or bandings under this system, nor to the alternative Gross Income Based System.
As is the tradition, there were some tweaks to import duties, though less than usual. An initiative was announced for retailers who purchase high value items on consignment. Subject to conditions, duty is paid once the goods are sold, rather on importation. A decrease in duty on gold bullion to 1% and the removal of duty for classic cars were announced, with the potential for Gibraltar being used for storage of such items in mind. The budget address referred to the EU definition of classic cars; local classic car enthusiasts should note that the relevant Directive requires such a vehicle to be “historically preserved and maintained in its original state”.
The budget address presented a collection of economic and other data for the year ended 31 March 2017, together with an “interactive summary” of revenue and expenditure budgeted for the forthcoming year; this can be accessed on the Government’s Press Office webpage and is well worth a look.
From a combination of these numbers, we can get the following picture of the three main income streams for Government:
Revenue from corporation tax was particularly buoyant for the year just ended. Corporate tax revenue can be susceptible to fluctuation each year due to the timing of payments and profitability of a small number of large corporate taxpayers. I’m guessing that the budgeted decrease to £120m reflects what is felt to be a more sustainable level.
There was much focus in the Chief Minister’s address on tax refunds due to individuals, and why this had increased over the last decade. In terms of the amount, it seems likely that a significant part of the £29.1m of outstanding repayments – and a significant part of the increase - is due to companies, rather than individuals. Since 2011, in each financial year companies are required to pay an estimate of the tax due for that year. The final tax bill, based on the actual profits made, often turns out to be lower, resulting in an overpayment having been made. No doubt taxpayers will welcome the commitment in the address to “increasing the £10m budget [for refunds] next year”.
The steady increase in the number of persons employed in Gibraltar has boosted revenue from income tax over the years. A record figure of 27,073 employees was reported as at October 2016, representing an increase of 21.7% since October 2011. Of the 27,073, approximately 12,000 (40%) are frontier workers –highlighting the dependence of both Gibraltar and nearby Spain on a free-flowing border. To put this in perspective, Gibraltar’s total population was 33,573 in 2015 (the most recent figure available from published Government statistics).
Finally, one statistic that stands out is Gibraltar’s estimated Gross Domestic Product (“GDP”) per capita. This is the total monetary value of goods and services produced by a country, divided by its population. Gibraltar’s is quoted in the address as being $92,843 (being £56,612 translated at a $/£ rate of 1.64) - and ranked 4th in the world. A note of caution is quite rightly made in the address about such a statistic.
Also, its meaning should not be misinterpreted – it does not equate to the average income of the population. Many countries topping the list tend to be those with significant financial services activity and/or a high non-resident workforce – Gibraltar has both. Financial services can contribute to a high GDP, but it is unlikely that it will all flow through to individuals as income. Moreover, the “per capita” calculation divides GDP by population - without including non-resident workers.
Nevertheless, these underlying factors in themselves are of considerable benefit. Financial services usually result in higher income for individuals than many other sectors. Non-resident workers – and the business profits they contribute to - are certainly a significant contributor to Government coffers. So whilst we need to take this figure with a dose of salt, it is still of relevance. If you have it, flaunt it.
Neil Rumford is a partner in the tax services department at EY Ltd in Gibraltar