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Key points
- Current Jersey law treats the income of married women as belonging to their husbands.
- A proposition was made to introduce independent taxation in 2019.
- Problem created for couples to whom the marginal relief system applies.
- It seems unlikely that Jersey will take the opportunity to review its tax system as a whole.
Jersey’s embrace of social change has lagged behind that of the UK in some respects, including legislation on women’s rights. An issue that has thrown that time lag into sharp relief recently is the island’s approach to taxing married women.
It seems like something from another era – one when married women lost legal personality and the right to own property in their own names, before legislation including the Married Women’s Property Acts.
Imagine life as a Jersey female taxpayer. Her fiancé is a Jersey male taxpayer. Both partners both work and pay income tax separately on their individual incomes. So far, so familiar to UK taxpayers. Then they marry and their tax treatment completely changes.
When a Jersey female taxpayer marries, her income is deemed to be that of her husband for tax purposes. Her husband’s new increased income is what is assessed for tax. Her husband must fill in a tax return for both spouses, which, until this year, had to be done on paper and by hand. The female appears on the form only as ‘wife’. Until very recently, he had to give his consent for his wife to discuss ‘her’ tax affairs with the tax office, although there is now a presumption of deemed consent.
The relevant Jersey legislative provision is in Part 18 of the Income Tax (Jersey) Law 1961 (Income Tax Law), headed ‘special provision for married persons’. Under article 121(1):
‘A spouse B’s income chargeable to income tax shall, so far as it is income for a year of assessment or part of a year of assessment during which he or she is married and living with his or her spouse, be deemed for the purposes of this law to be spouse A’s income and not to be spouse B’s income.’
Spouse A is defined as:
(a) ‘in relation to a marriage between two persons of the opposite sex, the husband;
(b) ‘in relation to a marriage between two persons of the same sex, the elder of the persons.’
The definition highlights the quick-fix approach taken when Jersey introduced same-sex marriage: the elder of the two spouses becomes the ‘husband’ for tax purposes. The original 1961 version of article 121(1) read:
‘A woman’s income chargeable to income tax shall, so far as it is income for a year of assessment or part of a year of assessment during which she is a married woman living with her husband, be deemed for the purposes of this law to be his income and not to be her income.’
Article 121(2) of the Income Tax Law makes it clear that spouse B’s income is assessed as if it were that of spouse A:
‘Any tax falling to be assessed in respect of any income which, under paragraph (1) is to be deemed to be the income of a spouse A shall, instead of being assessed on spouse B, or on spouse B’s trustee, guardian or delegate, or on spouse B’s heirs, executors or administrators, be assessable on spouse A, or in the appropriate cases, on spouse A’s trustee, guardian or delegate, or on spouse A’s heirs, executors or administrators.’
A similar set of provisions in the Income Tax Law applies the same regime to civil partnerships.
If, as a married woman, or indeed as a married couple, readers think this is all rather archaic, the only other option is to opt for ‘separate assessment’ under articles 121A and B. This, however, does not result in completely separate tax affairs. The guidance on the government of Jersey website says:
‘Each spouse will receive their own tax return to declare their own income. Any joint income should be split in proportion, for example rental income from jointly owned property.
‘Your tax is calculated based on your joint income and the tax reliefs you get as a married couple. You then each receive your own tax bill which you’re liable to pay.
‘We can only assess what tax you need to pay once we have both of your returns. All separate assessments have to be calculated manually so you may need to wait longer for your tax bill.’
The key difference with separate assessment is that each spouse is liable for their own tax bill. If either wishes to dispute their liability, the government of Jersey website warns that the tax office cannot disclose to a spouse the basis on which it has been calculated because that would involve revealing details of the other spouse’s income.
The pitfalls of the current approach are as obvious as the solution is complicated. Apart from giving women the distinct impression that they have entered a 1950s time-warp on marriage, treating women’s income as that of their husband devalues women’s economic contribution to the island and exposes them to a risk of financial abuse or inadvertent criminal liability. Those risks also apply to the younger of same sex married couples and civil partners.
Lagging behind
Over the years, as similar jurisdictions have introduced independent taxation and women have taken a much more active role in the workplace, Jersey’s approach has begun to look more and more out of date. To give an example, it is more than 30 years since the FA 1988 abolished the UK’s equivalent regime and introduced individual taxation for married couples.
Matters came to a head in 2019 in Jersey with the long-awaited move to online tax returns, which focused minds on who had the right to fill them in. The minister for treasury and economic affairs took the unusual step of bringing a proposition (equivalent to a draft bill) which required her own government to introduce legislation to fix the issue. Unfortunately, the proposed interim solution is likely to make the situation worse in the short term.
Taking a step back, the main obstacle to independent taxation is a structural one. It all starts with Jersey’s system of income tax rates and reliefs. Above a specific annual income level, a flat tax rate of 20% applies, with a special regime for high net worth individuals. There is no personal allowance, so individuals are taxed on the full amount of their gross income. So far, so good for moving to individual taxation: each spouse would be in the same position as if they were taxed on a combined basis.
Marginal relief
The problem arises for a married couple to whom the ‘marginal relief’ system applies. Below that level of annual income, an entirely separate system applies with a personal allowance and a varying tax rate depending on how much their income exceeds that. Married couples have a personal allowance for the husband/spouse A and, if the wife/spouse B works, an additional allowance. The personal allowance for the husband is more than if he were single, but not double the single person’s allowance. Reliefs such as childcare relief and mortgage relief, which are not available to higher earners, are treated as split equally between spouses.
Individual taxation for a significant number of married couples falling within the marginal relief system would mean an increased tax burden. Based on data provided by the Tax Policy Unit, the highest levels of additional tax under an individual taxation system would be paid by couples with a joint income of £30,000 to £50,000, with the additional tax due becoming £0 if a couple has a joint income of about £110,000 or more. It is estimated that moving straight to individual taxation would lead to increased tax revenue of £10m, based on an increase of £13m paid by lower earners off-set against £3m not paid by a smaller number of higher earners who would pay less tax.
Clearly, this is a problem that needs to be solved. There is a tension between moving to an independent taxation system and the need to resolve the glaring gender inequality of the current one quickly, as acknowledged by Jersey’s corporate services scrutiny panel (akin to a UK select committee) in its report on the proposed changes.
Baffling interim proposal
The proposed interim measure has, however, caused widespread alarm. Contained within proposition P119/2019 and voted in by the States of Jersey on 4 February 2020, it aims to create joint and several liability for married couples and couples in civil partnerships from the 2021 tax year of assessment, with equal information rights and equal responsibility for filling in a joint tax return.
There is a suggestion that married couples will be able to choose who is spouse A and who is spouse B, but the basis of assessment will be the same as under the current system: spouse B’s income will be deemed to be spouse A’s. This is described as a first step towards independent taxation.
The introduction of joint and several liability is, frankly, baffling. The Jersey Chamber of Commerce in its comments on the proposal called it ‘totally unjustifiable’ and a ‘dangerous and regressive step’, advising its members to opt for separate assessment if the proposal became law.
Joint and several liability exacerbates the current situation. Imagine a wife whose husband has been concealing rental income from his tax return. Under the current system, he is liable if the tax office discovers that untaxed income. With the introduction of joint and several liability, the wife would also be liable.
The younger partner of a same sex couple would now be liable for the full tax liability for both of the partners should the spouse leave the jurisdiction or refuse to pay their share. This risk is compounded by the requirement under the new measure for both spouses to agree the contents of the tax return: what if one of the spouses refuses?
The risk was mitigated by the comments of the relevant minister during the proposition debate, when she confirmed that joint and several liability would not be retrospective and would apply only to the 2021 tax year. That was based on the assumption that independent taxation would be introduced for the 2022 tax year.
It is also important to note that there is no draft legislation as yet to bring in the new measure, so no detail on exactly what it will look like. Given developments since the approval of the proposition in February and the scale of the task ahead to reform the income tax system, introducing independent taxation may now not be feasible until after 2022.
Vision of independence
Looking further ahead, what might independent taxation look like? Will Jersey take the opportunity, especially if a recession follows the Covid-19 crisis, to take a fresh look at income tax as a whole?
All the indications are that it will not. The proposition refers to the aim of independent taxation as being the equal treatment of unmarried and married couples, with nothing more except a note that it would still be possible for the state to incentivise the creation of some types of family units. The accompanying report rejects the idea of transferrable allowances between married couples, for example.
Thankfully, it also rejects the idea of any form of ‘household’ taxation, which it notes would be administratively burdensome and cause practical difficulties – not least with the potential for false declarations.
If that does happen, it will be a missed opportunity. As was pointed out during the debate on the proposition, the Jersey income tax system has remained largely unchanged since income tax was introduced in 1928. Several disadvantages in the current system could be addressed as part of a wider reform. For example, one of the key disadvantages of the marginal relief system is that taxpayers towards the top end of the income bands to which it applies can pay more tax than they would on an equivalent income in the UK.
Given that the marginal relief system is supposed to mitigate the hardship of imposing a flat 20% rate on low and middle earners, this hardly seems fair. Introducing a band-based system of tax brackets similar to that of the UK, albeit adjusted for Jersey’s status as a finance centre, would seem to be a way to eliminate the disadvantages of the current system for a good swath of Jersey’s population.
Wait and see
Advocates for wholesale reform will, it seems, have to wait and see what is proposed in 2021. In the meantime, at least what the system described by one deputy as ‘the archaic inequality which has plagued this law for so long’ will one day be removed.
