Gibraltar’s budget 2021, in detail
By Neil Rumsford
The 20th July was awaited with a certain amount of trepidation. From 2016’s first “Brexit budget” onwards, tax measures have been largely on a “steady as she goes” basis. However, since the last full budget in 2019, we have of course had the impact of the “revenue wrecking pandemic”, as our Chief Minister put it. We also face a “deal or no deal” scenario, though that has of course been the case in one shape or another since 2016.
Tuesday’s budget announcements saw few changes made to personal tax, other than for those with a special tax status (“HEPSS” or Category 2), of which more later.
For us “common garden” taxpayers, there were no changes to tax rates or tax bands. Eschewing the customary across-the-board increases in allowances, we saw instead a small number of increases. These focused on taxpayers likely to need help more than others, for example, allowances in respect of senior citizens, disabled individuals, blind persons, single parent families, as well as increased allowances for nursery fees and for a child studying abroad.
There was of course an increase in social insurance rates already announced in late June, ahead of the budget.
The main changes of substance were for companies, with an increase in the standard corporate tax rate from 10% to 12.5%. The consensus so far seems to be that this is not a bad move. Neither was it a big surprise. It should raise some more revenue, but I doubt that it will deter companies from doing business in Gibraltar.
In an environment where we are continually called upon to demonstrate that we are internationally compliant, that small increase puts us amongst more mainstream countries - or at least Ireland, with its 12.5% rate. This change takes effect for any company commencing its financial period after the date of the budget speech – i.e., it should apply to the first accounting period starting on or after 21st July 2021.
The Chief Minister then announced a series of measures to encourage investment by companies. These are to generally apply from the date of the budget until 30 June 2023, although clarification is probably needed as to some aspects of the timing. They include the following.
An increase in capital allowances: companies often include depreciation of fixed assets in their accounts as an expense, but they cannot claim a deduction for this against their income for tax purposes. Instead, capital allowances calculated based on tax law are given as a deduction against income.
In Gibraltar, initial allowances are given for purchases in the year. These are restricted to a maximum of £30,000 for plant and machinery, and £50,000 for “computer equipment” (which in practice may be taken to include software). These limits for initial allowances have been doubled to £60,000 and £100,000 respectively – or if it would result in a larger amount – 50% of the actual expenditure in the year.
What’s left in the “pool” after claiming such allowances is then given an annual allowance of 15% each year, with the pool being reduced by this amount. This annual allowance is to be increased to 25%. In the case of utility and fuel supply companies who pay tax at 20%, their pool allowance increases from 20% to 30%.
Although over time the total allowances given should in theory work out the same, these increases mean that companies will obtain tax deductions for their capital spending sooner rather than later.
A general “wear and tear” allowance of 1% of the cost of acquiring a property, presumably to be given on an annual basis, was introduced. This applies to property from where the business of the company is conducted. It does not include industrial buildings, which already attract a 4% allowance.
An additional deduction for salaries of new employees: companies will receive an additional deduction of 50% of the fixed salary cost of any new employees taken on. This deduction is in addition to any deduction the company would already receive for those costs.
A similar additional 50% deduction for marketing costs was announced. This applies provided that the Income Tax Office is satisfied that the costs are “validly incurred in marketing for the purposes of its business”. I can imagine this will be of particular interest to gaming companies, given their marketing spend.
Given the above incentives, it would not be difficult to imagine a scenario where a company actually pays less tax overall after the budget, despite the new 12.5% tax rate.
There was a surprise lurking in the budget for Category 2 individuals (often referred to as “Cat 2’s”) and for High Executives Possessing Specialist Skills (“HEPSS”).
Category 2 are “high net worth” individuals who relocate to Gibraltar, and who currently pay between £22,000 and £27,560 of tax per annum, subject to certain conditions. Based on the budget speech, they will now pay between £32,000 and £37,310. There is known to have been a significant demand for Category 2 status in recent months, and it may well be that this increase does little to deter further interest. There has not been an increase in these amounts for many years (if any), though some existing Cat 2’s may have been surprised by the rather sudden announcement. Government has signalled that no further increase is planned for the foreseeable future.
HEPSS individuals are senior executives who relocate to Gibraltar, bringing skills and expertise not generally available in the local market, and whose presence should help to stimulate growth and employment in the local economy. To qualify, they must earn a basic salary of at least £120,000 per annum, and they pay tax only on income up to this threshold. The threshold is to be increased to £160,000 per annum and that increased amount will now be the basis of their tax bill. In short, their annual tax will increase from £29,940 to £39,940.
There will be transitional arrangements for existing HEPSS individuals who currently earn less than £160,000. Again, it is understood that this is a one-off increase, with no further increases planned.
In an unusual turn for Gibraltar’s budgets, it was announced that those tax measures requiring changes to Regulations will be reflected in Regulations to be published in the same week (on Thursday). Measures requiring changes to primary legislation (i.e. Acts) are to be reflected in the Bill passing the Budget as opposed to legislation taking literally years to catch up as in the past. That is welcome as it should help to clarify the detail behind the measures.