The Tax Review will help ensure we can invest in what matters to you, for generations to come.

The shape of our population is changing. We’re living longer and having fewer children.

That means fewer people working and paying taxes and more people using public services, especially pensions, health and care services in our later years pushing the cost of public services up a lot.

The funding shortfall is forecast to rise to around £85m a year.

For future generations, this shortfall will impact the services that we rely on, unless we take action now.

How do we support islanders?

The States are responsible for ensuring that every islander gets good access to essential services, support and opportunities, such as education, healthcare, pensions and much, much more. But these services need to be funded, and for some the cost will rise significantly as the shape of our population changes. Explore more on what we do below.

Health and Care Services

Health and care services are the most widely accessed services the States provide and one that people need to rely on more and more as they get older.

Guernsey’s care services include not only the hospital and its related services, but also include a subsidy on accessing your GP or practice nurse; mental health services; support for those struggling with addiction; social workers who protect the young, the old and the vulnerable from harm; social care services which provide people with care in their own home; substantial grants which will meet the majority of the cost of a nursing or residential care placement and much more.

The annual budget for health and social care services, including long term care is £207m. Long term care costs alone are expected to increase by more than £17m by 2040. There are some reserves available to help support some of this cost and at the moment more money is being paid into this scheme than is being paid out but this will change as costs increase further, which means the reserve will run out unless more money is provided to support the scheme or we reduce either the amount of support with care costs people are entitled to or restrict who is eligible for support.

Forecasting other health and care costs is more difficult but this could increase by as much as £60m a year by 2040.


The States’ public pension scheme forms an important source of income for the majority of pensioners in Guernsey and it is the largest single item of expenditure in the overall budget.

Because the population is getting older, and people are living longer into retirement the number of people the pension scheme supports is increasing. Since 2010 the number of pensioners has increased by around a quarter and is set to increase by a further 18% by 2040.

In 2020 the States’ pension scheme cost £134m, and it is estimated that it might cost more than £184m a year by 2040.

The States have built up reserves which are available to help pay for pensions and help mitigate some of the cost increase. However, more is being paid out in pensions each year than is being received in contributions, which means the reserve will run out if more money is not provided to support the scheme.


Even in a small community like ours, the States-maintained education system is broad and diverse, covering early years, primary, secondary, post-16, special needs and adult learning, as well as a number of support services across numerous sites. Throughout our education system lies the common purpose of ensuring the best possible outcomes for all learners, to make tangible differences to their lives and the community as a whole. From 2024, all States post-16 education will be delivered from one campus, ensuring parity of esteem across traditional academic, professional and vocational pathways, reflecting both the changing world of work and the types of skills required by local industry.

In 2020 the States spent £81m on education, sport, and culture.

Public Transport and Roads

Traffic & Highway Services maintains and improves the condition of the island’s public highways and looks to enable options for Islanders when it comes to getting around the island through contracting a public bus service, expanding walking and cycling infrastructure and improving road safety. It is also a facilitator of works needed within the road so that businesses can ensure essential services, such as utilities, are continuously provided to residents and other businesses. Driver & Vehicle Licensing also sits within this service area and processes all enquiries involving vehicle licences, ownership and permits, as well as providing practical and theory driving tests.

In 2020 the States spent £2m on road resurfacing and reconstruction and £8m on other highway services and public transport.


The need for urgent action on climate change is widely recognised and Guernsey is alive to the pressing need to take action. Multiple service areas work to deliver emissions reduction, climate change mitigation and adaptation and the long-term management to preserve and enhance nature in Guernsey. At the same time, maintaining and facilitating public access and engagement with the natural environment aims to increase community awareness of nature, its overall importance and its health and wellbeing benefits. Through these services, Guernsey will ensure it is sustainable and resilient to possible future climate change impacts.

We know that in the long term we are going to need to make capital investment to deal with some of the consequences of climate change and to ensure that we have the appropriate infrastructure to deal with things like the move to electric vehicles.

Law and Order

Bailiwick Law Enforcement provides policing services throughout the Bailiwick; with officers permanently based on the islands of Guernsey and Alderney. With a comparatively low crime rate, Guernsey Police Force and the Guernsey Border Agency strive to maintain security and protect the community from harm by working in partnership with both statutory and voluntary organisations. By proactively preventing and detecting crime and disorder, Bailiwick Law Enforcement aims to reduce the negative impact on the quality of life of Bailiwick residents and visitors alike. These are supported by the court, prison and probation services which are also integral to our justice system.

Law enforcement, and the court, prison and probation services that support it cost £26m in 2020. The fire and rescue service cost a further £4m and £1m a year is spent on the Joint Emergency Services Control Centre.

Facebook Live Q&A

Below is a recording of the Tax Review - Live Briefing that was broadcast live to the States of Guernsey Facebook page on Tuesday 26th April 2022.

Facebook Live Press Briefing

Below is a recording of the Tax Review - Press Briefing that was broadcast live to the States of Guernsey Facebook page on Thursday 10th February 2022.

Statistics & Data

In 2010 we spent £158m on health and care services, in 2020, this cost was £207m. This cost will continue to rise.

The average taxpayer pays £7,000 in tax. Which covers just 2 days in neonatal care.

We have one of the smallest public sectors, costing just 22% of GDP, but we face an £85m shortfall in funding public services.

The tax paid in a year by the average taxpayer covers a nursing care placement for just 7.5 weeks.

It costs £11,000 per person per year to run public services and we’re using those services more. The average taxpayer pays just £7,000 per year.

Between 2009 and 2019 the number of working age Islanders fell by 1,500. That’s a significant drop in tax revenues.

In the last 10 years the number of over-65s has risen by 2,500. By 2040 it will rise by another 5,500.

By 2040 the cost of providing States’ pensions could be £184m per year, that’s a rise of £50m from now.

How do we raise an extra £85m for public services?

We’re looking at a range of options. That includes delivering savings through the reform of the public service but our forecasts assume significant savings from this even before identifying the shortfall of £85m.

We are also considering if some services can be cut, or if we should restrict who can access them. But the amounts that could be found this way are small compared to the overall shortfall. And while some services can be cut or restricted, there is pressure to provide more in other areas especially those that are directly linked to our ageing population – after all, we all want good quality health and care services in later life.

We therefore need to look at raising more revenue through taxes. Some types of tax could deliver smaller amounts, like changes in taxes on motoring or property. But the two main options for raising significant amounts are through taxing our income more than we currently do, or by introducing a Goods and Services Tax.

Increasing Income Tax

Increasing taxes on income is one way in which more revenues could be raised, either by increasing the amount of income tax people pay or increasing social security contributions or applying an income-based ‘health tax’.

Many people may think this is fairer, but we already get about two thirds of revenues this way. Most of these types of taxes are paid by people who are working, and we know that this group will make up a smaller portion of our community in the future.

Relying on these taxes to raise all the additional revenue we need only increases the reliance on our island’s workers. Each 1% of additional income tax would raise roughly £13m but if the pool of people in work shrinks, you would need to raise it by more to generate the same amount of revenue.

The Policy & Resources Committee and the Tax Review Steering Group believe this would be the wrong option because of its over-reliance on the working population and because it would mean our income tax rates are higher than jurisdictions we compete with for business and could damage our economy.

Introducing a Goods and Services Tax

A Goods and Services Tax is a tax on things you buy, so unlike income-based taxes, which are proportional to what you earn, a Goods and Services Tax is proportional to what you spend.

Almost all jurisdictions have a Goods and Services Tax because it distributes the tax in a different way to income taxes so having it as part of the mix makes the overall tax base broader.

For example, at a 5% rate it would capture about £6m of revenues from visitors to the island. It also captures a tax contribution from those people who for example, have sold a big property and are living off the proceeds but do not have much income. This means that less of the revenue has to come from working Islanders.

On its own a goods and services tax is harder on lower income households. But if combined in a package with other measures, such as increased allowances for income tax and social security contributions and adjustments to pensions and benefits to allow for the increase in prices, many low-income households could be made better off than they are now.

We believe a Goods and Services Tax is better, if it is combined with measures to support lower income households, such as increasing personal tax allowances and introducing allowances for social security contributions.

Increases in Personal Tax Allowance

The personal tax allowance is a portion of your income which you don’t have to pay any income tax on. One of the ways we can support lower income households is to increase this, so they pay less income tax. This can be used to balance the impact of households paying more tax in other ways so overall the package of measures applied is progressive.

Reforms in Social Security

Our Social Security contributions system has evolved over many years and it no longer treats people equally. For example, some people pay contributions only on their employed income, while others pay on all their income. Some people get an allowance, similar to a tax allowance but the majority don’t. This means different people with similar incomes can pay quite different amounts depending on how they are classified.

We have an opportunity to address this so that everyone is assessed on the same basis with the same allowances and limits. This would mean that everyone would get an allowance which would reduce the amount they need to pay in social security contributions. The rate of contributions for both individuals and employers might need to increase to balance this, but most low- and middle-income working households would pay less in contributions compared to now.

Making our social security system more progressive in this way could help balance the impact of a Goods and Services Tax for low-income households.

Changes to Taxation of Large Companies

World governments have been working on an international framework for taxing big multinational companies. This aims to ensure there is a minimum internationally recognised tax rate (15%) for very large groups with a global revenue above EUR 750m.

It would also mean the biggest groups (with turn over above EUR 20bn) are taxed where their customers are, not necessarily where the company is based. Developing this framework is ongoing, and Guernsey is playing an active role in international discussions. But the final outcome may not be clear for some time to come so it is too soon to know how this area of taxation will affect the shortfall that is forecast in funding public services locally.

However in response to feedback from States Members and the community, additional work is being carried out to provide independent analysis of all the options for raising more revenue from businesses.  It’s very unlikely that the full £85m shortfall could be met in this way, but there may be ways to increase the contribution made by businesses.  It is vitally important that the Bailiwick remains competitive as a jurisdiction, and a place where businesses want to be based and employ people.

Case Studies

When the States first looked at the Tax Review in 2021 it developed three scenarios for different types of tax models to show how they would affect different people. One option looked at an additional 3% tax on income, in what was dubbed a ‘health tax’. The others looked at different levels of Goods and Services Tax, combined with measures to offset the impact on lower income households. These are not the only three possible options, but they help to illustrate some of the choices we need to make.

The Three Scenarios

Option 1

  • Apply an income-based health tax at 3%
  • Change the Social Security contribution system so that it is fairer and more progressive and use this to raise more money
  • Average Impact On All Households - 1.5%

Option 2

  • Apply a Goods and Services Tax (GST) that will gradually increase to up to 8% with mitigating measures to protect low-income households
  • Increase the personal Income Tax allowance
  • Change the Social Security contribution system so that it is fairer and more progressive but without raising any more money
  • Average Impact On All Households - 0.6%

Option 3

  • Apply a Goods & Services Tax (GST) that will gradually increase to up to 5% with smaller mitigating measures to protect low-income households
  • Make a smaller increase in the personal income tax allowance
  • Change the Social Security contribution system so that it is fairer and more progressive and use this to raise more money
  • Average Impact On All Households - 0.9%

As can be seen from the average impact of each option, they will all mean most people pay more, which cannot be avoided if overall significantly more money is needed to fund essential services. But in these case studies, we show how much more different Islanders would be affected in each these scenarios, compared to the current system of tax and social security, and some have a much bigger impact. Also for some lower income households, wider reforms to tax and social security contributions would mean they pay less in total than they do now.

These case studies are real households, drawn from our Rolling Electronic Census data, but they will not exactly reflect everyone’s circumstances as the tax and contributions we each pay is dependent on a range of factors.

You can view the case studies here:

How would this affect me?


Why do we have a shortfall in funding for public services?

There is an increasing gap between the revenues that the government receives from taxes and the cost of the services and infrastructure that these taxes pay for. This is largely because Guernsey has an ageing population, meaning that more and more people are needing the long-term health and care services and pensions that the States provide. At the same time, as more people reach retirement age, there will be a decrease in Guernsey's working population, whose income tax and social security contributions cover a lot of the cost of public services. The health and social care services being put under pressure are some of the most important services that the States provide but they are also expensive. As such, this gap is forecast to increase and presents a long-term issue for the States. It is currently foreseen that the gap in States finances could reach £85m a year unless action is taken.

Some of these effects are already being felt. We are already seeing smaller surpluses, which means less money is available to invest in Guernsey’s infrastructure. We have some short-term solutions for that, but we need to find a sustainable and long-term solution.

What does an ‘ageing demographic’ mean?

The ageing of the population is something that began back in the 1940s. After the end of the second world war there was a period where fertility rates were high and people had a lot of children. Health care was also improving so more of those children survived into adulthood creating a big generation known as the 'baby-boomers'. In the early 1970s, with wider access to contraception and improving living standards, people stopped having so many children. The number of children born per woman fell below 2 (the fertility rate required to maintain a stable population) and it has stayed below that level ever since. The very long-term implication of this change is a fall in the size of the population, but it takes many decades for that to work through. This means there are more people in the baby-boom generation who are currently retiring, than there were in their parents' generation, or are in their children or grandchildren’s generations.

That means that the number of people below pension age will fall (unless it is topped up by migration) because there are fewer young people entering the workforce than the number of people retiring. It also means the number of people above retirement age is increasing, particularly since improved living standards and healthcare also means that people are living longer in retirement.

In 1965 when the States' pension in its current form was introduced average life expectancy was about 72 years. Today, the average life expectancy in Guernsey is 83 years. That presents a challenge because generally, people pay the most taxes while they are working, and they need the most support from public services towards the end of their life.

As more people retire, we need to provide more pensions and health care services. For example, between 2010 and 2020 the number of people claiming a States' pension increased from 15,000 to 18,700 and it might reach 22,000 by 2040. As a result, the annual cost of paying pensions increased from £82m to £134m between 2010 and 2020 and this cost will keep going up, unless changes are made to what people are entitled to.

We see similar impacts in health care provision because we need to provide more procedures like hip and knee replacements and community care services. This isn't the fault of older people, who are valued members of the community and are entitled to care and support when they need it.

However, it does mean the cost of providing that support is increasing. At the same time the downward pressure on people of working age places pressure on the amount of taxes we raise from our community. Over the next 20 years that could mean a reduction in tax revenues of up to £30m a year.

This workforce will also need to deliver the increased volume of care services, and that will mean that more nurses and carers are required. The potential for a fall in the size of the working population is therefore a further issue that needs to be addressed.

Why do we have to pay more tax?

There are limited options for decreasing the States’ funding gap. In general terms the three main ways are:

  1. economic growth - which would mean there is more activity in Guernsey to generate tax income
  2. expenditure savings and service cuts which would reduce the amount the States spends; and
  3. increase in revenue through taxation.

None of these will be the solution alone. To meet a shortfall of £85m, we’ll need to use all three of these options. The most reliable way to raise a large amount of extra revenues is through raising taxes on people’s income or introducing a Goods and Services Tax, both of which the general public would be liable for. As such, these are the mechanisms that have been looked at the most by the Tax Review so far and they each have advantages and disadvantages. The other main source of income is through corporate tax. However, this is something that would have to be considered in relation to changes to international standards currently being negotiated.

This is why it is being treated as a separate workstream, but it will likely contribute a bit more to States revenue than it currently does, but not enough that we won’t need to look at changes to other aspects of the tax system.

Who is going to pay?

Everyone is likely to contribute a bit more to the States than they do now including households and businesses. This is because the main ways that the States can increase revenue is through an increase in taxes on income or the introduction of a Goods and Services Tax.

This may be supported by smaller changes to other taxes such as corporate tax or TRP. However, this does not mean that everyone will be worse off. The first Tax Review report which was discussed as a ‘green paper’ by the States in 2021, put forward models where some people, particularly lower earning households, may be better off. This is because the models recommend measures to protect low income households.

This includes a restructure to the social security contributions system, which is currently not as progressive as it could be, and an increase in personal tax allowances so people pay out less in taxes from their income. It could also include measures to increase pensions and benefits to pre-empt the impact that a Goods and Services Tax might have on inflation.

Can’t rich people pay more?

The package of measures we favour which includes a Goods and Services Tax would be progressive, which means that those with higher incomes would, in general, be expected to pay more as a percentage of their income. Higher rates of taxes on high earners have been considered but they need to be set at quite high rates and begin at quite low thresholds to raise significant amounts of revenue.

The richest 6% of households in Guernsey already pay around 25% of all the tax revenue we receive from households. Higher tax rates for higher earners would focus the majority of the additional revenue raising on this group and this would further increase our reliance on this small group of households while at the same time making Guernsey a less attractive place for them to live. As a strategy this would be quite high risk and place our tax system out of step with our closest competitors.

Can’t companies pay more?

A review of company tax is happening as a parallel work stream. World governments have been working on an international framework for taxing big Multinational Groups seeking to address issues that are linked to the increasing globalisation and digitalisation of the economy. This aims to ensure there is a minimum internationally recognised tax rate (15%) for very large groups with a global revenue above EUR 750m.

It would also mean the biggest groups (with global revenue above EUR 20bn) are taxed where their customers are, not necessarily where the company is based. It is expected that some changes to taxation of companies will be needed as a result. Developing this framework is ongoing and Guernsey is playing an active role in international discussions.

At this time, more progress is needed on the international agenda before it will be possible to confirm what this may look like. We are expecting that some additional revenue will be raised through changes to taxation of companies and that will help address the shortfall, but at this stage we don’t think it will be anywhere near enough on its own.

Can the States stop wasting money so we don’t have to increase taxes?

Certainly the States must not waste taxpayers’ money. But the services it spends money on are services people rely on and services they expect in a modern society with a good quality of life.

Some of States’ spending is on large one-off capital projects, like redeveloping a hospital or building a new school. Capital projects often come with a big price tag, but they don't need to be done very often and the investment in things like the modernisation of the hospital is vital to our ability to provide services. Where we are forecasting the real increase in costs is on annual running costs, the routine expenditure which we have to spend every year to make sure people get the services and benefits they need.

Increases in annual expenditure often sound much smaller, but because it needs to be paid for every year the costs mount up. For example, the introduction of NICE drugs is expected to cost an estimated £8m a year by 2025. That £8m will need to be met every year, which means between 2025 and 2034 it will have cost a total of £80m - more than many States' capital projects. It is these annual costs that are the primary source of financial pressure. For example, between 2010 and 2020 the number of people claiming a States' pension increased from 15,000 to 18,700 and it might reach 22,000 by 2040.

As a result, the annual cost of paying pensions has increased from £82m to £134m between 2010 and 2020 and this cost will keep going up unless changes are made to what people are entitled to. We see similar impacts in health care provision because we need to provide more procedures like hip and knee replacements and community care services. What tends to happen is that, when our budget is under stress, the amount set aside to meet capital costs is cut because we can't just stop providing people with services like health and education because we had a difficult year.

This is fine as a temporary solution, for example during 2020 and 2021 when COVID-19 meant we needed to spend a lot of money to support businesses. But in the long-term it's like putting off repairing your roof - eventually it will spring a leak and it will probably cost more to fix it.

Can we cut the number of ‘overpaid civil servants’?

It is important to remember that 2 out of every 3 people employed by the States are not what people would consider “civil servants”.

More than 1 in 4 are nursing and other medical staff and the rest cover a wide range of functions including teachers, police officers and the staff who keep our public spaces clean and tidy. Steps are being taken to manage staff numbers but is important to remember that many of these staff are essential for delivering frontline services like medical and community care that are in increasingly high demand.

The number of nursing and medical staff in the public sector increased by approximately 350 between 2010 and 2020 this reflects where the majority of the pressure on public services is coming from. The increase in the number of civil servants is much smaller (about 30) and this has been offset by reductions in the number of staff in other areas. The States have increased the pay of nurses and care staff who deliver many of our most visible services, reflecting the increasing specialisation and qualification required in these areas.

These staff have seen a 12% rise in pay in real terms (above inflation) over the last decade. However, pay awards to other staff are much smaller and the cumulative pay awards to civil servants were approximately 8% less than median earnings and 6% less than inflation over the same period.

Can we bring in more working age people into Guernsey?

A separate work stream of the States is reviewing the Island’s population and immigration policies. This seeks to ensure that the Island is maintaining the working population that it requires. That review is still underway and it is too early to know what its findings and recommendations will be.

Increasing inward migration of working age people could provide a boost to tax revenues but that comes with many considerations such as the Island’s small geography, the impact on housing and infrastructure and the impact a larger population might have on the cost of providing services. Whatever happens its certain the population policy and the new tax system will need to work hand in hand to deliver a sustainable solution.

Can’t we be more efficient and spend within our current means?

It is the responsibility of the Committees across the States to identify efficiencies and to ensure value for money where possible. Public Service Reform is the States wide transformation programme which includes looking at making savings through introducing efficiencies where possible, such as digitisation of some public services. The projected funding gap already includes an assumption that this program will deliver some significant savings.

However, while these efficiencies will reduce costs by several million pounds each year, they would need to be many times larger to make the kind of savings required to close the States’ future funding gap. The States are looking at what further action might be taken to reduce costs, but to make very significant reductions in the size of the funding gap, this will need to make serious consideration of reducing the level of services the States provide to the community.

Why are you considering a Goods and Services Tax?

A decision on introducing a Goods and Services Tax would be made by the States Assembly as a whole and that hasn’t happened yet. But the Policy & Resources Committee, which is responsible for overall public finances, raising revenue and setting budgets, believes it may be the best solution if it is accompanied by other tax reforms to make the overall system more progressive. That includes restructuring social security contributions and better tax allowances for those on lower incomes.

A Goods and Services Tax is one of only two options that can realistically deliver the scale of revenue needed to fill the shortfall. The other option would be increasing the taxes on Islanders’ income. Income tax and social security contributions (both of which are calculated base on people’s income) are already our biggest sources of revenue, and we lean very heavily on them. That makes our tax system vulnerable to certain economic shocks and it also puts most of the burden on the working population, which has shrunk over the last decade and is forecast to continue shrinking.

A Goods and Services Tax would distribute tax revenues differently, spreading taxes out more widely to more people, including visitors to the Island, those who support their lifestyle using their capital rather than their income and businesses, all of which spend money on goods and services and therefore would contribute more in tax. The more they contribute, the less needs to be raised from working Islanders.

Guernsey is one of the very few places in the world that doesn't have some form of Goods and Services Tax at the moment. Because many other jurisdictions like Jersey and the Isle of Man have a Goods and Services Tax of some form, introducing one is the least likely of the suggested tax options to damage Guernsey's competitiveness, which is important for local businesses and local jobs.

Is a Goods and Services Tax regressive?

On its own a Goods and Services Tax can have a disproportionately negative impact on low-income households, which is why jurisdictions usually introduce supporting measures to counteract these effects and to maintain a fair tax system.

Alongside a Goods and Services Tax, the Policy & Resources Committee also proposes measures such as increases in personal tax allowances, the restructure of the social security system, adjusting pensions and benefits to reflect the impact a Goods and Services Tax will have on inflation, and setting aside a sum of money to provide additional support grants to households who are outside the Income Support system.

Will a Goods and Services Tax mean more admin and more cost for businesses?

The Goods and Services Tax being discussed is an input/output tax. This means businesses would charge the tax on the products that they sell, and remit that amount, less any tax they paid on their supplies to the States. This means that while the actual cost of the tax is ultimately paid by customers, businesses are involved in its collection and that means some administrative cost. Because this is common around the world, modern accounting and till systems have modules to help businesses manage this.

In most systems, very small businesses are not required to register for Goods and Services Tax. This means that they don't need to submit quarterly returns or charge the tax to their customers, but they also can't claim back the tax that they pay on their supplies.

In the UK the threshold for VAT registration (a GST equivalent) is a business turnover of £85,000; in Jersey it is much higher at £300,000. This high registration threshold helps protect smaller businesses from the cost of administration and is something that will need to be considered further in the next stage. Keeping the system simple, with a single rate and a limited number of exemptions could also make the quarterly returns process easier for both businesses and government.

Will a Goods and Services Tax disadvantage local retailers competing against online retail?

Imported goods will be subject to a Goods and Services Tax if they are above a certain threshold (known as a de minimis). This will ensure that, for many goods, local businesses will be at no more of a competitive disadvantage than they are now.

The threat to high-street purchasing is a concern for all jurisdictions, but there are still different contributing factors to be considered and there are reasons why consumers will still continue purchasing goods on the high-street rather than online.

The States have already started consulting with businesses and will continue this engagement to ensure the least possible negative impact on local businesses. This will include determining what the right de minimis threshold should be.

Why is it a choice between taxing income or a goods and services tax?

Income tax, as well as social security contributions, are the main sources of income for the States right now. Company tax is also a significant contributor, despite the Island’s low company tax rate. Taxation of companies is being looked at as a separate workstream, in relation to changing international standards that the Island will have to comply with.

It’s very possible that this could help generate some more revenues and contribute more towards the overall shortfall, but at this stage given the ongoing international discussions, we have less clarity on how much this might raise. Other sources of tax are either too small or unsustainable to manage the long-term finance issues that the Tax Review seeks to resolve.

They might raise some additional money and support larger changes. Some States Members have argued for a ‘mosaic’ approach where lots of small taxes are used together to make up the shortfall, but to meet the whole of the shortfall in this way would be very challenging and it would be difficult to predict how people would be affected.

It’s very likely that there would still be a need for one larger source of revenue, but a range of other, smaller taxes could form part of the solution. That larger source of income could be simply taxing people’s income more than we currently do. Or it could be a form of consumption tax, in other words, a Goods and Services Tax.

This would make us less reliant on people’s income as our primary source of revenue, but it would need to have mitigating measures in place to offset the regressive impacts.

If corporate tax rules are changing globally, should we not wait to see if we can raise money that way?

The Tax Review assumes that some additional income will be gained from global changes to corporate tax rules so it will be part of the solution. But at this stage, the final outcome may not be clear for some time. Currently we think it is unlikely to be enough to fill the shortfall.

That’s why the States can’t afford to wait any longer in making a decision on how to meet the shortfall. That decision has been delayed several times before and is already overdue. The impacts of an ageing population are being felt now. The more time that is lost in agreeing a solution, and beginning to implement, the bigger a problem it will become.

Currently the global changes on corporate tax rules seem very unlikely to raise enough to solve our forecast shortfall, and if we wait and see our community will then have a far more urgent problem and no agreed way of solving it.

But that is not to rule out the possibilities there may be in raising more revenue from businesses that could contribute towards the shortfall and reduce the reliance on other types of tax.  For that reason the Policy & Resources Committee is commissioning a piece of independent analysis to provide the latest analysis on what options are realistic and what they could raise.

Can we just undo zero-10?

Company tax is an important factor for many businesses when deciding where to locate and who to do business with. It is important for Guernsey to retain a tax system that is competitive with other jurisdictions. Before Zero-10 was introduced, Guernsey had a 20% company tax rate but with some exemptions for non-residents.

However, as international standards changed this system was deemed non-compliant with international rules and could no longer be continued. Guernsey, as well as other jurisdictions, had to decide how it was going to change its tax system whilst remaining attractive for existing and prospective businesses. When the Isle of Man made the decision to introduce a 0% headline company tax rate, Guernsey and Jersey followed, whilst retaining a 10% or 20% rate for a small number of businesses such as banks real estate and regulated utilities.

If we had not Guernsey could have lost a lot of its financial service sector, now the largest economic sector in the Island which generates the most jobs for Islanders. Since the introduction of Zero-10 many changes have been made to offset its consequences (including the expansion of the 10% rate to most regulated financial services businesses) and have meant the States have been able to regain a large amount of revenue from corporates, whether directly or indirectly by increases in commercial TRP rates and employer contributions to Social Security.

Can we introduce environmental taxes?

Environmental taxes, as the name suggests are intended to help meet environmental objectives. They can be effective in these objectives, but they are not likely to raise significant revenues.

This is because as they drive more environmentally-friendly behaviour, the revenue they generate reduces. This also tends to make them less sustainable. However, they could make a smaller contribution to filling the gap and they are being investigated further.

Can we use other forms of tax, like motoring or property tax to raise revenue?

Motoring tax faces similar problems to environmental taxes. For example, the amount of revenue we raise from duty on motor fuels has fallen as people switch to more fuel efficient and electric cars. A workstream to examine motor tax, and how we make it more sustainable, is on the agenda and is due to be considered by the States Assembly in 2023.

This might make a small contribution to the solution but it’s not going to be enough on its own. Tax on Real Property (TRP) is already a reliable and steady income stream for Guernsey and its an income stream that has already been increased quite a lot in recent years. Whilst other jurisdictions apply higher property taxes, this has some disadvantages, in that they do not adjust to households’ circumstances and can therefore be difficult for households or businesses under stress when set at a high rate.

Domestic TRP increases can be particularly difficult for older people who own larger properties but whose income is relatively small. The States have previously agreed to a phased increase in TRP between 2015 and 2025. This was paused in the 2021 and 2022 Budgets because of the pandemic and the fact that it could put added strain on already struggling households and businesses.

Completing this phased increase would raise about another £3m a year. Reducing the States’ funding gap through changes to a number of smaller taxes, as opposed to drastic changes to a single tax measure, such as increasing income tax, may seem like a better option, but it may be more difficult to predict the effect of lots of small changes and protect vulnerable households than a package centred around one or two larger changes. There are limits to what changes can be made and it is not expected that this approach could achieve the revenue the States requires.

What’s happened to all the contributions we’ve put in for our pension?

Guernsey's States' Pension is the largest single item of expenditure in the States annual budget costing more than £130m in 2020. The scheme is operated on a contributory basis so each time you pay your social security contributions it entitles you to a contributions credit which builds up the amount you are able to claim in a pension when you retire. There is not, and never has been, individual pension pots for each person.

The system is essentially pay-as-you go. That is, the money paid in by today's contributors, is used to pay today's pensioners. But for several decades the scheme was run at an annual surplus so that money was set aside to build a fund to support future pension payments. This means that there is a sizeable fund which supports the States pension. This fund, which also supports some much smaller benefits like unemployment, held £677m at the end of 2020. This money is invested and the investment return is used to help support the scheme. However, because the number of pensioners has been rising since about 2011 and is going to keep rising for many years to come, the amount coming in as contributions is now less than the amount paid out in pensions each year. This means that we are drawing on the fund to pay for people's pensions and the amount held in the reserve is going down. Incorporating all the people who will become eligible for a pension in coming years, the forecast is that the reserve will be empty by 2039 unless something is done to slow the rate at which it is being used up.

Why can’t we just remove the tax cap?

There are actually a number of tax caps applied in Guernsey, which apply in different circumstances.

  • A standard charge of £40,000 which people can opt to pay if they spend between 3 and 6 months in Guernsey and also spend more than 91 days in another jurisdiction
  • A temporary £50,000 limit on tax liability on qualifying income which people can apply for if they live in Alderney available until 2025
  • A short term £50,000 limit on tax liability on qualifying income which can be claimed by new residents moving to Guernsey for up to 4 years if they purchase open market property incurring £50,000 of document duty (equates to property valued at above £1.3m)
  • A £130,000 cap on tax liability on qualifying income arising outside of Guernsey
  • A £260,000 cap on tax liability on all income arising from both outside and within Guernsey

These are reviewed on a rolling basis in the annual budget process and periodically increased.

Note that these limits do not cover income from land and property in Alderney or Guernsey; tax is payable on this income in addition to the cap. The caps are also expressed as tax liability, not on income. For the £260,000 tax cap to be beneficial, you would need an annual income of at least £1.3m. To provide a comparison someone on median earnings would expect to pay less than £4,800 a year in income tax.

Very few individuals have an income high enough to justify applying for a tax cap. The exact number varies every year because people’s income moves above and below the level at which these are beneficial, but generally 20-30 people each year elect to pay the standard charge and 20-30 are affected by the various forms of tax caps. That means that very few people would be affected by removing them and for those that would be, it would make living in Guernsey far less attractive. Some may choose to stay, but others may not and there is a risk that in removing the tax caps that we could lose revenue, not gain it.

Why can’t we just remove the cap on contributions?

Caps on national and social insurance contributions are a common feature of these types of schemes. The upper earnings limit on contributions in Guernsey for both employers and individuals was increased as part of the package of measures put in place when zero-ten was introduced. Guernsey’s limit is much higher than is typical for such schemes and at more than £150,000 is more than 2.5 times the standard limit applied in Jersey. In fact only about 2% of Guernsey individuals have earning higher than the cap. This means anyone earning more than about £60,000 pays contributions at the full rate on much more of their income than they would in Jersey or the UK for example. Removing the limit on contributions entirely could make it difficult to attract good and experienced candidates to the very senior roles in our economy.

There are things under consideration in this area which might raise some more revenue. For example we could look at contributions made by employers above the Upper Earnings Limit, but its not going to raise a very large amount of money, because there are very few businesses with many employees paid at this level.

How much would it cost the States to administer a Goods and Services Tax

If a Goods and Services Tax were introduced, we would expect the administration to be split between the Revenue Service for the primary administration and the Border Agency in relation to the application of the tax to imports. Both areas would need to employ some additional people and invest in technology.

Based on the experience of administering the Goods and Services Tax in Jersey, it is estimated that it would cost in the region of £800k-£1m per annum for government to administer.  If the Goods and Services Tax were set at 5%, that would be less than 2% of the revenues raised by the new tax.

There would also be a one-off capital cost to purchase and/or develop IT systems.

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