Explanatory Notes

Income Tax (Earnings and Pensions) Act 2003

2003 CHAPTER 1

6th March 2003

Commentary on Sections

Example 3

Ne = £5,000; Da = 183; De = 183; Smg = 0
Part 8: Former employees: deductions for liabilities
Overview

2237.This Part contains provisions that give relief for payments made against liabilities arising from a former office or employment. To qualify for relief those payments must be made in the run-off period defined in the provisions. This Part derives from the provisions in section 92 of FA 1995 but subsections (6) to (8) are dealt as consequential amendments in paragraphs 217 and 219(2) of Schedule 6 to this Act. Subsection (10) is dealt with in sections 409 and 410 of this Act.

2238.In most instances there will not be any income from the relevant employment against which to set the payment incurred because that employment must have ceased. Relief for the payment is therefore given against total income. That contrasts with the corresponding provisions for similar payments incurred in an ongoing office or employment, found in sections 346 to 350 in Chapter 2 of Part 5 of this Act, which derive from section 201AA of ICTA. Under those provisions the payment can only be set against earnings from the employment that gives rise to the liabilities that led to the payment being incurred.

2239.Section 92 of FA 1995 operated by importing concepts from section 201AA of ICTA. This Part does not follow that approach and instead is as self-contained as possible.

Section 555: Former employee entitled to deduction from total income

2240.This section sets out the circumstances under which entitlement to a deduction arises. It derives from parts of section 92(1) and (5) of FA 1995.

Section 556: Deductible payments made outside the time limits allowed

2241.This section gives the start and finish dates of the run-off period referred to in the overview above. It derives from section 92(2)(a) of FA 1995.

2242.Subsection (1) is more precise than the source legislation about when the payment must be made. See Change 134 in Annex 1.

Section 557: Deductible payments wholly or partly borne by the former employer etc.

2243.This section gives a method for determining the amount of any deduction due to a former employee in one of two circumstances where that employee has not paid or borne the whole of the cost of the payment personally. It derives from parts of section 92(4) and (5) of FA 1995.

2244.The first circumstance is that the former employer (as defined in section 563) of this Act has borne some or all of the cost involved. The second circumstance is that the cost has been met from the proceeds of a contract of insurance against the risk(s) that gave rise to the need to make the payment. A deduction for the payment involved is available only to the extent that the former employee has been treated as having received a relevant retirement benefit or post-employment earnings.

Section 558: Meaning of “deductible payment”

2245.This section derives from section 201AA(1), (7), (8) and (9) of ICTA and from section 92(2)(b) of FA 1995. It describes the different sorts of payments that can qualify as a deduction under this Part.

Section 559: Liabilities related to the former employment

2246.This section describes the types of liability that can give rise to payments that are eligible for relief. It derives from section 201AA(2) of ICTA and from section 92(2)(b) of FA 1995.

Section 560: Meaning of “qualifying insurance contract”

2247.This section describes the conditions that have to be met if an insurance contract is to fall within the scope of this Part. It derives from section 201AA(3)(a) to (d) and (4) of ICTA and from section 92(2)(b) of FA 1995.

2248.Subsections (2) to (5) state the conditions that have to be met for an insurance contract to come within section 558(1).

Section 561: Connected contracts

2249.This section describes what determines whether insurance contracts are connected with one another. It derives from section 201AA (5) and (6) of ICTA and from section 92(2)(b) of FA 1995.

2250.Subsections (1) to (3) define when insurance contracts are connected.

2251.Subsections (4) to (7) provide for that connection to be ignored in certain specified circumstances.

Section 562: Meaning of “former employee” and “employment”

2252.This section defines what is meant by a “former employee”, giving some non-exhaustive examples of the sort of posts covered. It is based on and developed from the definition of “employment” in section 4 of this Act. It is sufficiently wide in scope to include what are commonly described as “shadow directors”, as defined in the full out words of section 67(1) of this Act. See Note 1 in Annex 2.

Section 563: Other interpretation

2253.This section contains definitions of some terms used throughout this Part. It derives from section 92(4) (part) and (9) of FA 1995.

2254.In particular this section has an extended definition of “former employer”. See Note 1 in Annex 2.

Section 564: Application of this Part to office-holders

2255.The provisions in this Part are written in terms of the “former employee”. This section extends the provisions so that they apply equally to former office-holders. It echoes the provisions in section 5 of this Act. The section derives from part of section 92(4) and (9) of FA 1995. See Note 1 in Annex 2.