A Deputy-elect has warned that P&R’s recent claims that they’ve closed a loophole to prevent tax avoidance has “only addressed a narrow corner of the problem”.
A majority of members of the current Policy and Resources committee will leave the political stage tonight, before the newly elected States members are sworn in.
David Goy is one of the newcomers elected earlier this month who will be sworn in for his first term of office tomorrow morning.
His campaign focused on closing tax loopholes and making the wealthiest residents pay more before introducing new charges on the general public like GST.
When P&R announced last week that it had “agreed action to prevent an avenue of tax avoidance to ensure that everyone pays their fair share”, Mr Goy said that it was just “a small step forward”.
P&R had acknowledged that some individuals set up personal investment companies making non-commercial shareholder loans to the companies so that they can then draw down on this through loan repayments, paying 0% tax.
To address this, an additional example has been added to the Statement of Practice M45 ‘Legal avoidance’ to make it clear that repayments of non-commercial shareholder loans are classed as dividends, where the company has income taxed at less than 20%.
P&R said “this will require the company to report and pay tax on behalf of the shareholder at 20% on these repayments”.
In one of its last duties as a committee, P&R also approved a proposal to amend the Income Tax (Guernsey) Law, 1978, so that repayments of non-commercial shareholder loans are classed as dividends, with the intention that this will be included in the 2026 Budget.
“This will ensure that the relevant tax is reported and paid by the company in a timely manner,” said the outgoing committee.
Retiring P&R President, Deputy Lyndon Trott added that changes have already been made to the 2024 company tax return to ensure that such loan repayments are easily identified to enable the Revenue Service to make targeted enquiries.
“When it comes to income tax, we have to ensure that everyone is paying their fair share, including businesses and individuals. But we are even more acutely aware of this at a time when we as a government have a £44 million deficit.
“This isn’t the panacea for our financial woes, but we’re taking action to close this loophole to make sure that we’re collecting tax that belongs to the public purse to contribute towards essential services that benefit our community.”
Deputy-elect Goy agrees that Guernsey needs to ensure everyone is paying their fair share, but he also believes much more can be done to achieve that.
“The Policy & Resources Committee’s recent media release claims they’ve ‘closed’ the loophole that allows individuals to extract tax-free cash from their companies,” he said.
“But let’s be clear… they’ve only addressed a narrow corner of the problem. The main avenue remains wide open. So what exactly did they address?
“They’ve amended Statement of Practice M45 to say that repayments of non-commercial shareholder loans can now be taxed as dividends, meaning the company must withhold 20% tax when repaying those loans.
“That’s a small step forward. But it’s not new policy. It’s just a clarification of how the Revenue Service interprets existing law. And crucially, it only applies when a loan is clearly non-commercial.
“Here’s what they failed to address… The ‘commercial loan’ loophole.”
Deputy-elect Goy said “this is the real tax avoidance game”.
“If a shareholder simply adds a token interest rate and a vague repayment clause, the loan can be classified as ‘commercial in nature’… and completely exempt from the 20% tax,” he explained.
“There’s no automatic withholding. There’s no real enforcement. And since the lender and borrower are usually the same person or under common control, the loan may never be repaid or enforced, but it still looks perfectly legitimate on paper.
“In reality, all it takes is a legit-looking ‘loan agreement’ and the tax office won’t question it.”
Deputy-elect Goy said this type of “legit-looking ‘loan agreement’ ” allows someone to:
- “Borrow” millions from their own company
- Avoid income tax (because the loan is ‘debt’, not income)
- Avoid dividend withholding
- Appear “poor” on paper while spending tax-free money
“The truth is, the system relies on self-declarations, has weak enforcement, and allows those with insider knowledge and wealth to quietly sidestep Guernsey’s tax system,” Deputy-elect Goy continued.
“And this isn’t the only loophole left wide open,” he added.
“For example, Revenue Service still hasn’t addressed how trust distributions can be classified as ‘capital’… allowing the wealthiest in our society to receive large payouts while avoiding personal income tax entirely.
“If we want fairness, we can’t just patch one hole and declare the ship watertight.
“It’s time we face the bigger picture and close ALL the tax loopholes PROPERLY, not symbolically.
“There’s still a lot of work to be done.”