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Income Tax (Earnings and Pensions) Act 2003

Overview

1694.This Chapter applies to benefits provided by non-approved retirement benefits schemes.

Section 393: Application of this Chapter

1695.This section defines the scope of the Chapter. The Chapter applies to any benefit provided by a non-approved retirement benefits scheme other than pensions and annuities within the pension income Part. Subsection (1) derives from section 596A(1) of ICTA. Subsection (2) derives from section 596A(6) of ICTA.

1696.Section 596A(7) of ICTA has not been rewritten in this Act. See Note 40 in Annex 2.

Section 394: Charge on benefit to which this Chapter applies

1697.This section establishes the charge and the basis of assessment. It ensures that the charge has priority over all other charges in this Act.

1698.Subsection (1) applies if an individual receives the benefit. It derives from section 596A(2) of ICTA. The benefit counts as employment income of the individual for the tax year in which the benefit is received.

1699.Subsection (2) applies if a person other than an individual receives the benefit. It derives from section 596A(3) of ICTA. There is a charge under Schedule D Case VI on the scheme administrator for the tax year in which the benefit is received. This charge is not employment income. Therefore it does not need to be excluded from the definition of “PAYE employment income” in section 683.

1700.Subsection (4) specifies the rate of tax for the Schedule D Case VI charge. It derives from section 596A(5) of ICTA.

1701.Subsection (5) establishes the order of priority. The charge under this Chapter takes priority over all other charges in this Act. In its application to lump sums the section derives from section 596A(8) of ICTA. It also legislates the interpretation that the specific charge in section 596A takes priority over a general charge under Schedule E.

Section 395: Application of sections 396 and 397: general rules

1702.This section applies if the benefit received is a lump sum. It derives from section 596A(8), (9) and (15) of ICTA.

1703.The section has two functions.

1704.First, it introduces sections 396 and 397. Section 396 exempts the charge under section 394 if certain conditions are met. Section 397 modifies the charge under section 394 if certain conditions are met.

1705.Second, it sets out the condition that is common to both sections 396 and 397 and which must be met if either section is to apply.

1706.The common condition is given in subsection (4). It derives from sections 596A(8) and (9) of ICTA. The employer has to have paid a contribution or contributions with a view to providing the benefit and the employee has to have been assessed to tax in respect of that contribution or contributions. The assessment may be under section 595 of ICTA or section 386(1) of this Act depending on when the contribution was made.

1707.Subsection (5) puts the onus on the taxpayer to show that the conditions in subsection (4) are satisfied. It derives from the assumptions in section 596A(15) of ICTA.

Section 396: Certain lump sums not taxed by virtue of section 394

1708.This section exempts lump sum benefits if:

  • all the profits on the scheme investments are brought into charge to tax, and;

  • the lump sum has been provided to one of the persons listed in subsection (1)(b).

1709.The section derives from sections 596A(8) and (15) of ICTA.

1710.A further requirement for the exemption to apply is that the condition in section 395(4) is met; see section 395(2).

1711.In subsection (1)(a) the phrase “brought into charge to tax” means brought into charge to United Kingdom tax.

1712.Subsection (2) puts the onus on the taxpayer to show that the income and gains of the scheme are brought into charge to tax. It derives from the assumptions in section 596A(15) of ICTA.

Section 397: Certain lump sums: calculation of amount taxed by virtue of section 394

1713.This section allows a deduction from the amount of the lump sum that is charged to tax if:

  • any of the profits on the scheme investments are not brought into charge to tax, and;

  • the condition in section 395(3) is satisfied.

1714.The section derives from sections 591D(6) and 596A(9) to (17) of ICTA. It rewrites section 596A(9) as a free-standing provision. See Change 106 in Annex 1.

1715.Subsection (3) gives the amount of the deduction. It is the total of:

  • any contribution the employee has paid, and;

  • any contribution the employer has paid that has been taxed on the employee.

1716.Subsection (3) derives from section 596A(10) and is subject to subsection (4). Subsection (4) applies the formula in subsection (6) if any of the persons listed in subsection (5) has the right to receive, or expectation of receiving, a further lump sum or sums. Subsections (4), (5) and (6) derive from sections 596A(11) to (13) of ICTA.

1717.Subsection (7) prevents double deductions. It derives from section 596A(14) of ICTA.

1718.Subsection (8) derives from the assumptions in section 596A(15) of ICTA.

1719.Subsection (9) derives from section 591D of ICTA. It prevents a claim that the scheme funds have been brought into charge to tax because they have suffered a charge under section 591C of ICTA (cessation of approval: tax on certain schemes).

1720.Subsection (10) gives the meaning of “market value”. It derives from section 596A(17) of ICTA and cross-refers to sections 272 and 273 of TCGA 1992. The reference to section 273 of TCGA 1992 is new. See Note 41 in Annex 2.

Section 398: Valuation of benefits

1721.This section provides the rules for calculating the value of the benefit.

1722.It derives from section 596A(4) and section 596B of ICTA.

1723.The language in section 596A(4) and section 596B of ICTA is almost identical to that in two other provisions:

  • paragraph 12 of Schedule 11 to ICTA, which deals with the valuation of benefits paid on the termination of employment; and

  • paragraph 10(3) of Schedule 12 to FA 2000, which deals with the provision of services through an intermediary.

1724.Paragraph 12 of Schedule 11 to ICTA has been rewritten as section 415 of this Act. Paragraph 10(3) of Schedule 12 to FA 2000 has been rewritten as section 55 of this Act. The rewrite of the three sections reflects the similarities.

1725.Subsection (1) gives the rule if the benefit is paid in cash. It derives from section 596A(4)(a) of ICTA.

1726.Subsection (2) gives the rule if the benefit is not paid in cash. It derives from section 596A(4)(b) of ICTA.

1727.Subsection (5) provides that references to the employer in the benefits code include the former employer. This subsection is needed because most employees will have retired before the benefit is paid and their employer will be a former employer.

1728.Subsection (6) adapts the benefits code if the benefit provided is accommodation costing over £75,000 and the person receiving the benefit makes good an amount that exceeds the rental value. It overrides the rule in section 106(3) that the taxpayer is allowed to deduct only the excess amount of rent paid. The taxpayer is allowed a deduction for the full amount of the excess.

1729.In the source legislation dealing with benefits the rules for calculating the value of living accommodation costing over £75,000 do not apply if the accommodation was first occupied before 31 March 1983. This rule has been rewritten as a saving; see paragraph 21 of Schedule 7 to this Act. The rule does not apply to section 596B of ICTA. So paragraph 21 of Schedule 7 does not apply for the purposes of this Chapter.

Section 399: Employment-related loans: interest treated as paid

1730.This section applies if the benefit provided is a loan at a rate of interest lower than the official rate.

1731.It derives from section 596C of ICTA.

1732.Tax is charged on the cash equivalent of the loan. This is calculated using the official interest rate. But the cash equivalent is not in fact interest. The section treats the taxpayer as having paid interest. The taxpayer can then claim tax relief on the deemed payment if real interest would have qualified for relief. The language in section 596C of ICTA is almost identical to that in paragraph 13 of Schedule 11 to ICTA, which deals with benefits paid on the termination of employment. That provision has been rewritten as section 416 of this Act.

1733.Subsection (4) prevents the notional interest being treated as income of the lender or as mortgage interest payable under deduction of tax in the hands of the payer.

Section 400: Interpretation

1734.This section gives the meaning of various terms used in the Chapter.

1735.It derives from definitions in Chapter 1 of Part 14 of ICTA.

1736.Subsection (1) includes a clarification of the meaning of “employee” and the definitions of “ administrator”, “relevant benefits” and “ex-spouse”.

1737.Section 611AA of ICTA defines “administrator” as follows:

(1)

In this Chapter references to the administrator, in relation to a retirement benefits scheme, are to the person who is, or the persons who are, for the time being the administrator of the scheme by virtue of the following provisions of this section.

(2)

Subject to subsection (7) below, where—

(a)

the scheme is a trust scheme, and

(b)

at any time the trustee, or any of the trustees, is or are resident in the United Kingdom,

the administrator of the scheme at that time shall be the trustee or trustees of the scheme.

(3)

Subject to subsection (7) below, where—

(a)

the scheme is a non-trust scheme, and

(b)

at any time the scheme sponsor, or any of the scheme sponsors, is or are resident in the United Kingdom,

the administrator of the scheme at that time shall be the scheme sponsor or scheme sponsors.

(4)

At any time when the trustee of a trust scheme is not resident in the United Kingdom or (if there is more than one trustee) none of the trustees is so resident, the trustee or trustees shall ensure that there is a person, or there are persons—

(a)

resident in the United Kingdom, and

(b)

appointed by the trustee or trustees to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(5)

At any time when the scheme sponsor of a non-trust scheme is not resident in the United Kingdom or (if there is more than one scheme sponsor) none of the scheme sponsors is so resident, the scheme sponsor or scheme sponsors shall ensure that there is a person, or there are persons—

(a)

resident in the United Kingdom, and

(b)

appointed by the scheme sponsor or scheme sponsors to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(6)

Without prejudice to subsections (4) and (5) above—

(a)

the trustee or trustees of a trust scheme, or

(b)

the scheme sponsor or scheme sponsors of a non-trust scheme,

may at any time appoint a person who is, or persons who are, resident in the United Kingdom to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(7)

Where at any time there is or are a person or persons—

(a)

for the time being appointed under subsection (4), (5) or (6) above as regards a scheme, and

(b)

resident in the United Kingdom,

the administrator of the scheme at that time shall be that person or those persons (and no other person).

(8)

Any appointment under subsection (4), (5) or (6) above—

(a)

must be in writing, and

(b)

if made after the time when the scheme is established, shall constitute an alteration of the scheme for the purposes of section 591B(2).

(9)

In this section—

(a)

references to a trust scheme are to a retirement benefits scheme established under a trust or trusts;

(b)

references to the trustee or trustees, in relation to a trust scheme and to a particular time, are to the person who is the trustee, or the persons who are the trustees, of the scheme at that time;

(c)

references to a non-trust scheme are to a retirement benefits scheme not established under a trust or trusts, and

(d)

references to the scheme sponsor or scheme sponsors, in relation to a retirement benefits scheme and to a particular time, are references to any person who established the scheme and is in existence at that time or, if more than one, all such persons.

1738.Section 612(1) of ICTA provides that “employee”

(a)

in relation to a company, includes any officer of the company, any director of the company and any other person taking part in the management of the affairs of the company, and

(b)

in relation to any employer, includes a person who is to be or has been an employee.

1739.The definition of “ex-spouse” derives from section 659D of ICTA as inserted by section 79 and paragraph 17 of Schedule 10 to Finance Act 2000.

1740.Section 612(1) of ICTA defines “relevant benefits” as follows:

‘relevant benefits’ means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or by virtue of a pension sharing order or provision, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given on or in anticipation of or in connection with any change in the nature of the service of the employee in question, except that it does not include any benefit which is to be afforded solely by reason of the disablement by accident of a person occurring during his service or of his death by accident so occurring and for no other reason.

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