to the Employees Tax Instalment Scheme (the ETI Scheme) Contents Part 1 Part 2 Part 3 Part 4 Part 5 Part 6 Part 7 Part 8 Part 9 Part 10 Part 11 Part 12 Part 13 Part 14 An overview of the ETI Scheme Payments subject to the ETI Scheme Payments not subject to deductions under the ETI Scheme Practical problems How do I complete and submit my ETI returns? Coding Notices Direction Notices Late payment surcharges Penalties Employers with 80 or more employees Failure to operate the ETI Scheme correctly Benefits in Kind Provision of Labour only Statements of Practice relating to Employment
PART 1 An overview of the ETI Scheme What is the ETI Scheme? Essentially it is a scheme where you as the employer deduct income tax from your employees and pay this over to the Income Tax Office. The ETI Scheme applies to all employers except private householders who employ domestic staff, although (with the agreement of their domestic staff) private householders may elect to operate the ETI Scheme. It also applies to persons who make payments to sub-contractors and the like in respect of the provision of labour (see Part 13). Such persons are deemed to be an employer for the purposes of the Scheme. What is an employee? An employee is an individual holding or exercising an office or employment. This includes a company director, a part-timer and a casual worker. It also includes a sub-contractor who provides labour only (see Part 13). How does the ETI Scheme operate? The ETI Scheme operates on a quarterly basis:- Quarter 1 January, February, March Quarter 2 April, May, June Quarter 3 July, August, September Quarter 4 October, November, December Throughout each quarter, the employer should deduct tax from their employees in accordance with the individuals coding notice, on each payday. Details of the gross weekly or monthly wage and deductions made must be recorded and returned with the relevant remittance by the 15 th of the month following the end of the relevant quarter e.g. tax deducted during the Quarter 1 needs to be submitted by 15 th April. It is important to point out that should a quarterly return, and payment of any tax deducted, be submitted late you may become liable to a 5% surcharge on the total value of the return, together with a penalty in respect of the failure to submit the return on time (see Parts 8 and 9).
PART 2 Payments subject to the ETI Scheme The ETI Scheme applies to various types of payments you can make, which include:- Wages Pensions Redundancy/Termination/Severance Sickness pay (but not Social Security Sickness Benefit) Commission Overtime Labour-only contractors and subcontractors Mortgage subsidy payments Benefits in Kind (see Part 12) Salaries Directors fees etc Casual earnings Part time earnings Bonuses Holiday pay Tips Payments to Domestic Staff (but see Part 1) Pensions paid to former employees ETI applies to pensions paid to former employees or their dependants in exactly the same way as it applies to wages, salaries etc., paid to present employees. Whoever pays the pension is, for the purposes of ETI, treated as the employer. This may be yourself as the former employer, the trustees of the pension scheme or a third party to whom the payment of pensions has been contracted, e.g. a life assurance company. Directors Fees etc In general, payment of directors fees etc occurs when they are either physically paid to the director or earlier, if irrevocably made available to him/her. Whilst drawings on loan account in advance of fees being voted are clearly not subject to ETI, at the time fees etc are credited to a loan or other account with the company on which the director is free to draw, ETI should be operated accordingly. Obviously, if a director draws a salary during the year, ETI should be operated as it arises. It is argued occasionally that no deductions need to be made from directors fees etc because the director will not be liable to tax once his/her personal assessment is issued. Employers should note that the requirement for the payer to operate ETI is not dependent upon the ultimate liability of the recipient; tax should be deducted in accordance with the Coding or Direction notice held, and if neither is held tax at the standard rate should be deducted. If the Director can be certain that no tax would indeed arise ultimately, he would be prepared to issue a Direction notice to cease deductions on receipt of the appropriate application from the director concerned. Redundancy/Termination/Severance Such payments are liable to tax where they exceed 30,000 in aggregate. (The 10,000 limit was increased to 30,000 with effect from 1 January 2009.) However, where a payment is made in lieu of notice to which the employee would otherwise be entitled, this is not considered to be a redundancy/termination/severance payment and will therefore be taxable in full. The taxable element of any redundancy/termination/severance payment is subject to ETI. If when making such a payment, you consider that you require clarification please contact the Income Tax Office for assistance.
Part-time and Casual Earnings Employers should be aware that the ETI Scheme should be operated in respect of all payments of wages, salaries, etc, whether these are made to full-time, part-time or casual employees. If the employer is not in possession of an original Coding or Direction Notice (photocopies of Coding or Direction Notices should not be accepted), tax should be deducted at the standard rate of 20%. In no circumstances should payment be made gross to an employee without written authorisation from this office, (usually in the form of a Coding or Direction Notice). As any tax which should have been deducted can be recovered from the employer, by the Director, it is recommended that, in any case of doubt, tax should be deducted at the time of making the payment. The comments above apply equally to payments made in respect of manual labour. Sickness Pay If you pay your employees when they are sick, you should enter the pay on the employee s Tax Deduction Form in the same way as ordinary pay. This is not to be confused with Social Security Sickness Benefit (see Part 3). Holiday Pay Holiday pay is normally paid in advance and may cover more than one pay period for ETI purposes for instance, three weeks holiday pay for a weekly paid employee should be recorded as pay for three separate weeks on the ETI schedules. Labour-only contractors and subcontractors There are separate and important instructions relating to such payments. You should refer to further notes in Part 13.
PART 3 Payments not subject to deductions under the ETI Scheme Social Security Sickness Benefit If your employees are required to refund to you any Social Security Sickness Benefit they receive, this should be deducted from your employee s gross pay before entering the amount of pay on the Tax Deduction Form this is because these benefits are not subject to Income Tax. If you are in any doubt as to whether ETI applies to any payment you make please contact the Income Tax Office ETI Section. Students Students under 15 are not required to have tax deducted, although payments made should be recorded on the quarterly returns in the usual way. Students aged 15 or over should register at this office in order to obtain a tax reference number, Coding or Direction notice, failing which tax should be deducted at the rate of 20%. Reimbursement of Expenses Should you reimburse an employee for any expenses actually incurred by them in the performance of the duties of their employment you should not include these payments as gross pay.
PART 4 Practical problems How do I deal with employees paid at irregular intervals? Where an employee is paid at irregular intervals, i.e. other than weekly or monthly, you should contact the ETI Section for advice. What happens if an employee does not have a coding notice? In the absence of a Coding Notice you must deduct tax at 20% from the earnings. If an employee feels that they should have received a Coding Notice but has not done so, they should contact the Income Tax Office How do I deal with commission, bonus and overtime payments made? These should be added to the pay of your employees in the week or month in which the payments are actually made. The ETI Scheme is then operated on the total amount.
PART 5 How do I complete and submit my ETI returns? The actual returns can be completed: manually (handwritten) on Tax Deduction Forms (by concession only) or electronically, using a file created either by software supplied by the Income Tax Office or by a payroll system. Returns Creator Package:- This package includes a free software CD, developed jointly by Social Security and Income Tax, which calculates Social Security contributions/income Tax automatically and also includes explanatory booklets enabling an employer to install the software and operate the system. A quarterly data file can then be simply and securely e-mailed to the relevant department or saved to diskette, CD or memory stick and posted. (Please note that Social Security and Income Tax do not provide CD s or memory sticks to employers). Returns Creator is compatible with Microsoft operating systems (Windows 95 onwards) and can be installed on a personal computer with a CD drive. Computerised Payroll System:- Should you wish to return your schedules electronically using a computerised payroll system, please contact either the Income Tax Office on (01481) 740440 or email (eti@tax.gov.gg) in order to confirm that the system/format you wish to use is acceptable to the Income Tax Office. Tax Deduction Forms (by concession only):- These are supplied to employers to record details of their employees gross earnings and tax deducted, and should be submitted along with: Tax Remittance Forms (by concession only):- These are supplied to employers along with the Tax Deduction Forms to summarise the total tax deducted from the employees.
PART 6 Coding Notices A Coding Notice (part 2) will be issued directly to you by the Income Tax Office for each of your employees. Coding Notices can also be issued throughout the year and should be operated with effect from the next pay day of the employee concerned. A Coding Notice is valid only for use by the employer to whom it is addressed and for the year shown. Where no coding notice is available, you must deduct tax at 20% The operation of the Coding Notice is straightforward. You simply deduct the Tax Code Number from the gross pay (after first deducting any superannuation contributions) and deduct tax from the balance at 20%. Please see below examples of Coding Notices and how to calculate the tax to be deducted. Example 1 As this Coding Notice shows allowances weekly/monthly of zero, tax must be deducted at 20%. e.g. Gross Pay 800.00 Taxable Pay 800.00 @ 20% = 160.00
Example 2 In the above example if Mr Argentina is paid weekly and has gross earnings per week of 300, the tax to be deducted is calculated as follows: Gross Pay 300.00 Less Tax Code 157.00 Taxable Pay 143.00 Tax to be deducted is:- 143.00 @ 20% = 28.60 In the above example if Mr Argentina is paid monthly and has gross earnings per month of 900, then the tax to be deducted is calculated as follows: Gross pay 900.00 Less Tax Code 679.00 Taxable Pay 221.00 Tax to be deducted is:- 221.00 @ 20% = 44.20
PART 7 Direction Notices Direction Notices may be operated either instead of, or in conjunction with, a Coding Notice. These can be issued at any time during the year and should be operated following the instructions given. The direction notice may contain tax refund instructions. A Direction Notice is intended to operate only for the year shown on it, and if you receive more than one Direction Notice during the course of a year, you must always act upon the most recent. At the end of the year or after the expiry date shown on the direction notice, if earlier, you should revert to using your employee s then current tax coding in the normal way. Example 1 In the example above, Mr Argentina has been issued with a Direction Notice instructing you, as the employer, to cease making tax deductions but to continue to record the gross pay. These details should be submitted to the Income Tax Office in the normal way at the end of each quarter. Example 2
In this example above, Mr Argentina has been issued with a Direction Notice, instructing you, as the employer, to deduct 5.00 in addition to the tax deducted under the Coding Notice until 31 December 07, then revert to the Coding shown on the Coding Notice. These details should be submitted in the normal way at the end of each quarter. For example, if Mr Argentina has monthly:- Gross earnings 800.00 Coding Notice 688.00 Taxable Pay: 112.00 @ 20% = 22.40 plus 5.00 as shown in the Direction Notice = 27.40
PART 8 Late Payment Surcharges A surcharge will be applied to all payments submitted after the relevant quarterly due date (see Part 1), unless the amount of the surcharge falls below the de minimis limit of 50 This means that payment should be with the Income Tax Office no later than the 15 th of the month following the end of the quarter in which deductions were made under the ETI Scheme. Surcharges are at the rate of 5%. In cases where a part payment is received a 5% surcharge will be applied on the balance outstanding. If a return already submitted is found to be incorrect then a surcharge (and additional surcharges if appropriate), will be applied to any additional tax, from the due date. If payments remain outstanding additional surcharges (also at 5%) will be added at 6 monthly intervals, not only on the outstanding tax but also on any previous surcharge, additional surcharge or penalty imposed (see Part 9), until such time as the debt is fully paid. There is a right to appeal against any surcharges/additional surcharges. Any appeal must be addressed to the Director of Income Tax, in writing, within 30 days, but the only grounds of appeal allowed are that the surcharge/additional surcharge is not payable in Law or it has been miscalculated. The fact that tax was paid late due to an error or oversight by the employer is not a valid right of appeal. In addition, collection of any amounts outstanding may continue through the normal legal channels, unless the debt is being paid under an agreement made with the Income Tax Office.
PART 9 Penalties Returns under the ETI Scheme should reach the Income Tax Office by 15 th of April, July, October and January respectively. If you do not employ in a quarter you should still send in a nil return, if you are still registered as an employer with the Income Tax Office. If you cease to employ permanently you should advise the Income Tax Office so that your name can be removed from the list of employers. A Penalty of 300 will be automatically imposed if an the ETI return is not submitted by the due date. A further penalty of 50 a day can be imposed until the return is submitted. (See also Part 8 regarding Late Payment Surcharges).
PART 10 Employers with 80 or More Employees Any employer with 80 or more employees is required to remit tax deducted under the ETI Scheme to the Income Tax Office on a monthly basis, rather than quarterly. The tax deducted must be paid on or before the 15 th of the following month, e.g. tax deducted during October 2007 must be paid to the Income Tax Office no later than 15 th November 2007. The quarterly Tax deduction returns, should still only be sent in to the Income Tax Office on a quarterly basis, as at present. Failure to remit the tax by the due date may result in a 5% surcharge being applied to the amount overdue (see Part 8).
PART 11 Failure to Operate the ETI Scheme Correctly Where the ETI Scheme is not operated correctly you as the employer may be required to pay the amount of tax outstanding. Section 81A(7) of the Income Tax Law states that: Where an employer fails to deduct from the emoluments of any employee the tax which he is required to deduct under the provisions of this section the amount of such tax shall be payable by the employer as if it had been so deducted and where the amount of any such tax is paid by the employer (a) (b) (c) that amount shall be deemed to be tax deducted in accordance with the provisions of subsection (2) of this section; that amount shall be recoverable by the employer from the employee as a civil debt due to the employer; that amount shall not be recoverable by the Director from the employee. (See also Part 9). Should you be in any doubt as to whether an employee is liable to deductions under the ETI Scheme please contact the Income Tax Office ETI Section for advice. Furthermore Section 201A(1) of the Income Tax Law explains the consequences of failure to remit the tax deducted from payments made to employees. A person who, having deducted tax from a payment in accordance with section 81A of this Law, fails to pay that tax to the Director within the time provided by or under regulations made under subsection (4) of that section, is guilty of an offence and liable on conviction to (a) (b) (c) imprisonment for a term not exceeding two years, or a fine not exceeding ten times level 5 on the uniform scale, or both. A person who wilfully fails to deduct the tax which he is required, by section 81A of this Law, to deduct from any payment is guilty of an offence and liable, on conviction, to - (a) (b) (c) imprisonment for a term not exceeding 12 months; or a fine not exceeding level 5 on the uniform scale; or both.
PART 12 Benefits In Kind Employers are obliged to deduct tax, under the ETI Scheme, in respect of benefits in kind provided to employees. Where benefits are provided, the amount of the benefit should be added to the employee s gross pay in the pay period in which the benefit was provided, and tax should be deducted from the total amount (i.e. as if the benefit had been paid in cash). Please be aware that share option/share award schemes should also be included where there is a taxable emolument. As you are aware, the first 450 of certain benefits provided to an employee is exempt from tax. Previously, this adjustment was carried out by the Income Tax Office but it will now be necessary for you to take the exemption into account when the benefits are included in the gross pay of your employees. If your employee receives benefits on a continuing basis (for example, individual health insurance cover of, say, 100 per month) the benefit to be included in each pay period would be calculated as follows: Value of benefit 100 Less exemption ( 450/12) 38 Monthly benefit 62 This 62 should then be added to the employee s gross monthly pay and the tax deducted accordingly on the total figure. Note: The 450 exemption does not apply to motor vehicle or accommodation benefits or emoluments arising under share option/share award schemes. As such, if your employee receives a car benefit of, say, 2,500 per annum, the relevant monthly figure of 208 (i.e. 2,500 12) should be added to your employee s gross pay each month and tax deducted accordingly. Where your employees receive one-off benefits (such as a performance incentive prize) then the full 450 may be offset against this benefit in the month in which the payment is made. For example, if your employee receives an incentive prize of 600 and no other benefits are, or will be, provided to that employee during the year, the full 450 may be deducted from the payment made and the amount of 150 should be added to the gross pay for the month and tax deducted accordingly. With the taxation of all benefits in kind through the ETI Scheme, it will no longer be necessary, from 2010, for benefit in kind returns to be submitted.
There will be an exception in cases where it is not possible for tax to be deducted from the benefits provided (for example, where there is no cash payment from which to deduct tax). This may apply where, for example, a caretaker receives free accommodation in lieu of salary. In such cases it will still be necessary for a benefit in kind return to be completed at the beginning of the following year, and such forms will be issued on request. The above also applies when calculating the gross wage for Social Security contribution purposes. If you require any further information regarding the taxation of benefits in kind through the Employees Tax Instalment Scheme, please contact the ETI Section.
PART 13 Provision of Labour Only Does the ETI Scheme always apply to payments made to labour-only contractors, subcontractors, partnerships and gangs? Yes, except in the following circumstances:- When a payment is made by a private householder (see Part 1), or When a payment (including a payment made by a business concern) is made to a limited company, or Where materials are supplied. As the ETI Scheme applies to payments for labour only, it need not be operated where the payment also covers the materials for a job supplied by the contractor, etc.. However, where only negligible amounts of materials are supplied for example, a carpenter supplying only his tools, nails and screws the Scheme must be operated. If in doubt, call the Income Tax Office ETI Section for advice. How do I operate the scheme on payments made for labour only? This depends on whether a payment is for an individual or for more than one person, i.e. a partnership, a gang, etc. Payments to individuals Those persons who provide only their own labour are treated in the same way as all other employees and the ETI Scheme must be operated in the usual way. Payments to labour only partnerships and gangs There are special requirements for these payments. As explained in part 11 failure to operate the ETI Scheme correctly can result in an employer being required to pay tax which he has failed to deduct. In addition late payment surcharges and heavy penalties can be imposed and in extreme cases an employer may even be prosecuted. (See the following paragraphs and Parts 8, 9 and 11). What are the requirements regarding payments to labour only partnerships and gangs? The rules require you, as the employer, to see and note details from a special plastic card called an ETI Exemption Certificate before you can make payments to partnerships and gangs without deduction of tax. If this certificate is not produced by a ganger, tax must be deducted at the 20% standard rate from all amounts paid to him.
In addition, there are two forms on which details of these payments must be recorded. Both forms need to be completed quarterly and submitted to the Income Tax Office. The forms distinguish between payments to: Exemption Certificate holders and payments to people who do not hold an Exemption Certificate The documents and how to use them The ETI Exemption Certificate The ETI Exemption Certificate is in the style of a plastic credit card. It is coloured metallic gold. The words and logos printed on the card are blue and personal details are printed on to the card, along with a photograph of the authorised cardholder. The strip on the reverse of the card will show the authorised cardholder s signature (hereafter called the ganger ). Each time a payment is to be made you must ask the ganger to produce his ETI Exemption Certificate, as you will need to note the details shown on it. If he does not, then tax must be deducted at the standard rate of 20% from the whole of the payment. You should check the ganger s photograph, and also the signature on the reverse of the Certificate against any receipt/wage book, to ensure that the person presenting it is, in fact, the authorised cardholder. You should also check that the expiry date shown on the Certificate has not passed. After a payment has been made the Certificate must be returned to the authorised cardholder. From time to time details of any Certificates, which for some reason have been cancelled before the expiry date, will be published in La Gazette Officielle. You should make a note of the numbers of these Certificates as they will no longer be valid and should not be accepted. If you have reason to doubt the validity of any Certificate shown to you, you should contact the Income Tax Office for instructions before making any payment. NOTE: AN ETI EXEMPTION CERTIFICATE SHOULD NEVER BE ACCEPTED IN RELATION TO A PAYMENT FOR THE LABOUR OF ONE PERSON ONLY I.E. SOMEONE WHO HAD NO OTHER PERSON ASSISTING HIM. IF IN DOUBT, CALL THE INCOME TAX OFFICE ETI SECTION FOR ADVICE BEFORE MAKING THE PAYMENT.
Exemption Certificate holders payment list On this list, which must be submitted quarterly, you are required to show the following information for gangers who hold valid ETI Exemption Certificates:- 1. Pay date 2. Ganger s ETI Exemption Certificate number 3. Gangers ETI Exemption Certificate expiry date 4. Gangers name 5. Amount of payment At the end of the quarter this schedule must be totalled and the declaration signed. Payments to Gangers Schedules On this schedule, which is submitted quarterly, you are required to show the following information for gangers who DO NOT hold valid ETI Exemption Certificates: 1. Pay date 2. Full name of Ganger 3. Full Guernsey address 4. Gross pay 5. Tax deducted at 20% At the end of each quarter this schedule must be totalled. The top copies of both the Exemption Certificate Holders Payments List and Payments to Gangers Schedule must be sent to the Income Tax Office no later than the 15 th day of the month following the end of the quarter, i.e 15 th January, April, July or October, as appropriate. The Payments to Gangers Schedule must be accompanied by your remittance for the total tax deducted. You must complete and submit both of the documents each quarter. If you have not made any such payments the documents must still be returned clearly marked no payments made. In certain circumstances the Director of Income Tax may require returns and payments to be submitted monthly.
PART 14 STATEMENTS OF PRACTICE RELATING TO EMPLOYMENT There are a number of Statements of Practice relevant to you as an employer. A booklet containing the Statements of Practice can be found at www.gov.gg under Income Tax/ Statements of Practice/Statements of Practice (Including Interpretations of Law) & Extra Statutory Concessions. In addition, Statements of Practice recently approved can be found at www.gov.gg under Income Tax/ Statements of Practice/Zero-10 and associated matters.