Jersey RegTech Super-[Tax]-Deduction

As a Jersey FINTECH creator (see iTrack or RISQED), Comsure often reminds its clients about Jersey's RegTech super-deduction initiative, designed to encourage financial services companies to invest in regulatory compliance technology (RegTech) that aligns with the standards set by the Jersey Financial Services Commission (JFSC).

Here are some key details on Jersey's RegTech super-deduction

1. Overview
1. Purpose: To help companies automate processes and controls required to meet regulatory obligations.
2. Deduction Rate: Eligible companies can deduct 150% of qualifying expenditures related to the purchase and implementation of RegTech in the year of acquisition.
2. Eligibility
1. Companies: Must be financial services companies under Article 123D of the Income Tax (Jersey) Law 1961 and regulated under Schedule 2 of the Proceeds of Crime (Jersey) Law 1999.
2. Expenditures: Must be related to regulatory compliance activities, including software and hardware costs, installation and configuration, and training expenses.
3. Benefits
1. Tax Relief: Provides significant tax relief, enhancing the financial incentive to invest in compliance technology.
2. Compliance: Helps companies stay ahead of evolving regulatory requirements, thereby reducing the risk of penalties and reputational damage.
4. Example
1. If a firm purchases a new data centre for backing up client data, under the Money Laundering (Jersey) Order 2008, it can claim 150% of this expenditure as a deduction from its taxable profits.

To learn more, here is some guidance:-

1. TECHNICAL GUIDANCE and
2. Updated REGTECH SUPER-DEDUCTION (GOV.JE) website to address several areas:
   1. 0% service entities. The government have outlined conditions under which financial services companies may be permitted to claim software subscriptions and licenses that have been recharged via a 0% cost centre company (see subsection 3.5). The conditions are that there are no markup, margin, or additional service fees associated with the recharge—that is, it must be priced as if the company had contracted directly with the manufacturer or developer to purchase the software at the 10% rate.
   2. FATCA/CRS in scope. We’ve provided greater detail on the definition of regulatory compliance activity (see subsection 3.2). Because FATCA/CRS obligations arise as a reporting requirement (Article 3AF(2)(d) of the Income Tax law) during AML/KYC Procedures (Article 3AF(2)(a)), we will consider expenditure on software that automates that process/transmission eligible for the Super-Deduction.
   3. Apportionment. We’ve also prescribed a process for apportioning the use of general enterprise resource planning and trust administration software such as Navision (See subsection 3.3).
   4. Software developed in-house. We’ve added greater detail on costs that will be accepted for RegTech solutions developed in-house (see subsection 3.4).  

To learn more, here is a Long read

 1. Jersey's regulatory requirements continue to evolve in both complexity and stringency:

1. 1. Non-compliance with the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations not only leads to significant penalties but also to potential reputational damage. On the flipside, those businesses demonstrating elevated levels of compliance may be able to gain a competitive advantage.

 2. The Jersey Financial Services Commission’s (“JFSC”) current strategy is anchored in the harnessing of technology and influencing the digitalisation of financial services:

1. 1. In the 2024 budget agreed in December 2023, Jersey’s government introduced a 150% super-deduction for certain companies within financial services on expenditure incurred on regulatory compliance technology (so-called “RegTech”).

 3. An independent report commissioned by the JFSC suggests:

1. 1. 78% of Jersey firms agree that RegTech is increasingly necessary. The report also highlighted opportunities for growth in this area, as 42.2% of these firms had yet to utilise RegTech to address regulatory compliance challenges.

 4. It is vitally essential for financial services companies in Jersey to meet the constantly evolving regulatory requirements:

1. 1. By introducing the super-deduction, we see efforts from Jersey’s government to work with the sector and the JFSC to foster productivity and drive competition.

Breaking down the jargon

5. The 'Reg' of RegTech relates to regulatory compliance activity. This encompasses:

1. 1. The prevention of financial crime, including combatting money laundering activity and the financing of terrorism, and the proliferation of weapons of mass destruction.
   2. The management of data, information and cyber risks, and the protection of identity and privacy.
   3. Other activities required by the JFSC for risk management, fraud prevention, and the good conduct of financial services.
   4. Regulatory reporting, analytics, and compliance management about the above-listed activities.

6. The 'Tech' of RegTech relates to:

1. 1. Software costs related to regulatory compliance activity.
   2. Computer hardware related to regulatory compliance activity.
   3. Direct costs related to the installation and configuration of said software/hardware.
   4. External training expenses directly related to the use of said software/hardware.

7. A ‘super-deduction’, although a common concept in other jurisdictions, is relatively novel in terms of Jersey tax.

1. 1. It is simply a deduction of more than 100% of eligible expenditure, although this specific super-deduction is set at 150%.

Who is eligible?

8. To qualify for the RegTech super-deduction, an entity must:

1. Fall under the definition of a ‘financial services business per the Proceeds of Crime (Jersey) Law 1999, and be registered with JFSC.
2. Be a ‘financial services company’ (for Jersey tax purposes) charged to tax under Article 123D of the Income Tax (Jersey) Law 1961 at the rate of 10%.

What are the practicalities?

9. The super-deduction is available on both revenue and capital expenditure:

1. 1. Revenue expenditure – this will be allowed in the year that the cost is expensed. We would expect the associated tax computations to detail the 150% deduction from profits.
   2. Capital expenditure – should this be incurred on qualifying RegTech plant and machinery (e.g. computer hardware and/or software), the super-deduction of 150% will be available as a capital allowance.

10. If the company has insufficient profits, against which it may fully utilise the capital allowance super-deduction:

1. 1. Any unused part of the allowance may be carried forward for future use.

11. All capital expenditure on RegTech will be pooled separately for capital allowance purposes:

1. 1. This allows for tracking in the years following the super-deduction, to help calculate the corresponding balancing charges that may arise upon disposal of the RegTech.

12. If a disposal from the RegTech pool is made to a connected person, the disposing company will be liable to a balancing charge on the deemed disposal value:

1. 1. This is the price the hardware and software would fetch if sold on the open market.

13. If the disposal occurs fewer than three financial periods post-acquisition, however, the balancing charge will be 150% of the deemed disposal value:

1. 1. In any case, a disposal made to a third party will give rise to a balancing charge equal to 100% of the disposal value.

What about software-specific expenditure?

14. In line with Revenue Jersey's concessions and practice B22:

1. 1. If software is accounted for as a revenue expense following Generally Accepted Accounting Principles (“GAAP”), the Comptroller will allow the expenditure as revenue expenditure and grant the tax deduction in the year in which it is expensed.

15. Alternatively, where the software expenditure is capitalised in the financial statements following GAAP:

1. 1. Capital allowances can be sought on the capital expenditure incurred on the software as 'plant'.

16. Concession B22 is highly relevant in the context of the RegTech super-deduction:

1. Care must be taken to consider the treatment of any eligible software expenditure following the GAAP under which your or your client’s accounts are produced.
2. The super-deduction will then be applied to the software either as a deductible revenue expense or as a capital allowance within the RegTech capital allowances pool.

17. There will likely be a question within the 2024 Jersey corporate tax return, through which a company can claim the super-deduction for qualifying expenditure incurred in the 2024 tax year.

1. 1. It will be essential for companies claiming the super-deduction to prepare and retain documentation related to the qualifying expenditure.
   2. This should include invoices and proof of payment for RegTech expenditures.

What’s the timeframe?

18. The RegTech super-deduction has been confirmed for the 2024 tax year. Deputy Ian Gorst, Minister for Treasury and Resources at the time of its introduction, has commented that the pilot scheme will also cover the 2025 tax year, with the possibility of extension if the scheme proves successful.

References

RegTech super-deduction - Government of Jersey https://www.gov.je/TaxesMoney/IncomeTax/Companies/Guidelines/Pages/RegTechSuperDeduction.aspx

 Everything Jersey businesses need to know about RegTech... - KPMG https://kpmg.com/dp/en/home/insights/2024/06/jersey-regtech-super-deduction.html.