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Tax
Success based on tax awareness and compliance
By Lynette Chaudhary, CTA, ATT, International Tax and Research Director, STM Fiscalis Ltd
landlord is registered with the UK tax authorities and has agreed to meet their tax responsibilities in respect of the rental income.
UK property owners
Many Gibraltar residents own UK property and perhaps unsurprisingly have not managed to keep up to speed with the deluge of UK tax changes in respect of owning UK property. This rapid pace of tax change has posed considerable challenges for non-UK resident owners and has led to many UK court cases focusing on failure to meet tax compliance obligations, with penalties being triggered accordingly.
Most notable is the lack of, or late filing of, the Non-Resident Capital Gains Tax (NRCGT) Return which is required to be filed within 30 days of sale of a UK property by a non-UK resident owner. In some cases, taxpayers have claimed reasonable excuse for their failure. In one of these cases a distinction was made between those obligations that a taxpayer might be expected to be aware of and those which are more obscure. In another case, the Judge stated “Holding property in a jurisdiction exposes the owner to the rules of that jurisdiction, and I consider that the hypothetical reasonable taxpayer would have attempted some enquiries.” This extolling the legal maxim “ignorance is no excuse!”
Tax transparency, exchange and compliance With increasing international tax transparency and information exchange, the pressure on taxpayers to be aware of, and comply with, their tax obligations in their country of residency and country where their investment is located or income is sourced, intensifies. Regularly reviewing a taxpayer’s position aids compliance, enabling the taxpayer to plan for the business model of the future whilst avoiding any nasty surprises!
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At the 10th anniversary meeting of the Global Forum of the Organisation for Economic Cooperation and
Development (OECD) held in Paris in November 2019, Gibraltar’s
Chief Minister, Fabian Picardo, was unequivocal “that the only business model that will work in future is one based on compliance and transparency”.
For someone who has worked in UK and Gibraltar tax compliance for just shy of 20 years, I completely support and embrace this. To achieve this, the first step is to ensure that there is an awareness of the relevant tax obligations, with communication being critical for success.
Gibraltar taxation
As many readers of this publication will know, Gibraltar generally taxes on a source basis of taxation i.e. its primary basis of taxation taxes income that accrues in or derives from Gibraltar, regardless of the residency of the recipient.
In my experience, there are differing levels of awareness, and in turn tax compliance, depending on the type of income and the residency of the recipient. For example, it is the norm for those employed in Gibraltar to be aware that PAYE (“Pay As You Earn” income tax) is to be withheld from their salary, and most employees will know that they have to file an annual Gibraltar individual tax return reporting their earnings and claiming their tax allowances, whether they live in Gibraltar or not. However, in comparison, when considering income from Gibraltar property (i.e. Gibraltar rental income) for example, there appears to be a much lower level of awareness of, and compliance with, landlords tax obligations, even more so when the landlords are not resident in Gibraltar.
Landlords of Gibraltar property should register appropriately with the Income Tax Office, they are liable to income tax on their Gibraltar rental profits, although a tax credit
is available for recently constructed property (upon satisfying conditions) which can extinguish any liability to tax for a period of time. Furthermore, capital allowances may be available, which can significantly reduce the taxable profit. Landlords are required to file a tax return reporting their profits, along with providing an Income and Expenditure Account. Corporate owners of Gibraltar property also have tax filing and payment obligations, although their rate of tax is set at the current company rate of 10%.
Many Gibraltar properties are owned by non-Gibraltar residents and often this makes knowledge of, and complying with, tax obligations even more challenging. These non-residents may not be aware that Gibraltar tax is payable on their Gibraltar rental profits. Therefore, whilst they may report these profits for tax purposes in their country of residence (where appropriate), Gibraltar does not receive its share of the tax, even though in these circumstances it should have the primary right to tax such income. For example, if a UK resident receives Gibraltar rental income, they may be reporting it in the UK for UK tax purposes, but they should also be reporting it in Gibraltar and claiming a foreign tax credit in the UK for the Gibraltar tax paid (to alleviate any double taxation). The recently agreed Gibraltar/UK Double Tax Agreement continues to give Gibraltar the right to tax Gibraltar rental income.
Welcome measures
Establishing a Register of Residential Tenancies, as proposed by the Government in June 2018, would certainly be a welcome measure to raise awareness and aid such compliance. Furthermore, for non-resident owners, perhaps Gibraltar could consider introducing a Non-Resident Landlord scheme, like that available in the UK.
This Scheme requires UK rental agents or tenants to withhold UK tax on rent payable to the overseas landlord, unless the
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