Everald Dewar | Employment Tax Credit - the receipt and loss of a blessing

Employment Tax Credit - the receipt and loss of a blessing

The good book said, "It is more blessed to give than to receive", and the evidence of this is etched deeply in The Fiscal Incentives (Miscellaneous Provisions) Act.

This act brought about the Employment Tax Credit (ETC), an incentive that reduces income tax payable, and since its advent in 2015, many business having employees have been blessed. In order to claim this blessing, all businesses need to do is as an employer, ensure to be paying payroll and statutory deductions, that is, Education Tax, National Housing Trust (NHT), National Insurance (NIS) and Heart contributions.

When these showers of blessings fell on one businesswoman and the reducing effect on her tax liability was just too good to be true, her response was: "I fear the Greeks even when they bear gifts", as was expressed by a Trojan when he saw the wooden horse used by the Greeks to trick their way into the city of Troy.

Well, soon after the "mercy drops round us are falling" the compliance and audit arm of Tax Administration Jamaica (TAJ) has been carrying out its vigil, taking back this blessing where it is suspected, or has been proven, that it was not properly received.

Afterall, the ETC claimed will not become final until the TAJ validates whether the employer is compliant and is entitled to claim the credit. That is to say, paying all the taxes on the due dates and the returns were filed on time.

How does one ensure that this blessing is not taken away? First, you must file your income tax return and make the claim. If this tax return is for a company, it must be filed electronically (e-filing) online via the TAJ portal. This e-filing requirement took effect January 2019 and must also be done for asset tax and the employers' monthly payroll deductions as well.

Just a reminder that for income tax, the penalty for late filing is $5,000 per month, plus interest. If the taxpayer is brought before the court for non-filing, the fine is $100,000 per tax return.

Second, the claimant will only receive the credit on income he/she "actively earned" - that is, by the 'sweat of his brow', such as from trading or a profession. This is opposed to income he earns doing nothing (passive income), such as from just investing or gambling.

It follows that the ETC will not be granted on income from interest, dividends, insurance proceeds, the earning of royalty, renting of properties - with the exception of renting a hotel or resort cottage that is licensed. Financial institutions that are regulated by the Financial Services Commission and the Bank of Jamaica will also not qualify for ETC. This is clearly the natural and intended effect as set out in the legislation.

You probably concluded that it's a bad thing to have investments or 'non-sweat' income. However, the practical application of the law is that a taxpayer is not able to claim ETC, but only on that portion that relates to investment.

So, for instance, if a taxpayer carried on business as a builder and part of this involves the renovation of premises for rental, as opposed to resale one, must ensure to differentiate between when a particular property was sold as a part of the trade as a builder in this case, or whether the property fell to be treated as an investment, the subject of which ETC relief is not applicable.

Therefore, one must make sure to identify whether the purpose for which a transaction was entered is for trade or investment. Put another way, when an item was purchased was the intention to trade or to be used as an investment?

There are many uncertainties, but these are not on the application of the legal provision but the interpretation of what is in fact trading income. This is sometimes a matter of interpretation based on complex legal and technical rules which, because of space and at the risk of losing readers, cannot be explained here.

- Everald Dewar is an associate tax partner at BDO Chartered Accountants in Kingston.