Chancellor's Pre Budget Report 2008 - What's in it for the Channel Islands?

Review of Crown Dependencies and Overseas Territories
The Chancellor has announced that HM Treasury is to commission a review of the British offshore financial centres, their role in the global economy and their long-term business strategies. The review appears to have been prompted by concerns that the UK government could be expected to provide financial support following the failure of an offshore financial institution. Although the Chancellor's speech referred only to a review of regulatory arrangements, the proposed scope of the review is much broader, encompassing financial supervision and transparency, taxation issues relevant to financial stability, sustainability and future competitiveness, financial crisis management and international cooperation. However, the review will not consider the existing constitutional arrangements with the UK, and as a result the Channel Islands' ability to set its own laws is unlikely to be affected.

The Chief Ministers of both Jersey and Guernsey have said that the review will give an opportunity to demonstrate how strong the regulatory regimes in each Island are.

Taxation of foreign profits
The 2009 budget will contain long-awaited measures which will exempt foreign dividends received by large and medium UK groups from tax. Supporting this will be worldwide thin capitalisation restrictions, measured by reference to a group's consolidated net external finance cost, and anti-avoidance provisions to prevent exploitation of these provisions.

Controlled Foreign Company (CFC) rules, originally designed to prevent diversion of UK profits to lower tax regimes, will also be reformed. Any proposed new rules will look to improve the effectiveness of the way the UK taxes those profits earned in lower tax jurisdictions under bona fide commercial conditions. Reforms will include a repeal of the current CFC exclusions for holding companies and where an acceptable distribution policy is operated.

Personal tax
The main rates of income tax for 2009/10 will remain at 20% for basic rate taxpayers and 40% for higher rate taxpayers. However, there are changes on the horizon. From April 2010 the level of personal allowance will be restricted for those with income above £100,000. From April 2011 there will be an additional higher rate of income tax of 45% introduced for individuals with income above £150,000. There will be a 0.5% increase across the rates of national insurance. No further changes have been made to the taxation of non-UK domiciled individuals.

There will be another opportunity in 2009 for offshore account holders to voluntarily disclose if they have any unpaid UK tax or duties relating to those offshore accounts and to settle any debts. There is no mention of an amnesty regarding any overdue tax liabilities, although a further announcement is due in early 2009.

Offshore funds
Following consultation on the draft regulations for the new Offshore Funds Reporting Regime, the PBR confirms the intent to introduce legislation in Finance Bill 2009. No comment was made on the outcome of the consultation process which closed on 11 July.

VAT
There will be a temporary reduction in the standard rate of VAT from 17.5% to 15% from 1 December 2008 to 31 December 2009.

You can access the full briefing paper via the link below.

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You can discuss any of the issues in the report with your usual PwC Tax contact or call Wendy or Mark on the numbers to the right.