Overview
1741.This Chapter contains another of the free-standing Schedule E charges covered by paragraph 5 of section 19(1) of ICTA. It derives from section 148 of, and Schedule 11 to, ICTA. The provisions apply to charge to tax payments made and benefits provided when an employment ends or the terms of it are changed. As such payments and provision of benefits may continue for a period after the event, the charge to tax continues year by year as long as they continue.
Section 401: Application of this Chapter
1742.Subsection (1) derives from section 148(1) of, and paragraph 2(1) of Schedule 11 to, ICTA. It sets out the circumstances in which payments and benefits come within the provisions of the Chapter. The reference to “relative” has been expanded to make it clear that only “blood relatives” are included.
1743.“Personal representatives” is a defined term in section 721 of this Act. It is not defined in paragraph 2(1) of Schedule 11 to ICTA. This is a minor change to the law. See Change 159 in Annex 1.
1744.Section 148(5) of ICTA has not been rewritten in this Chapter. The reason for that is explained in Note 42 in Annex 2.
1745.Subsection (2) is a signpost to the exceptions which may apply.
1746.Subsection (3) prevents a double charge to tax in cases where there may be some doubt as to whether a benefit or payment is within this Chapter or is within another charge to tax. It also ensures that anything which is not chargeable by virtue of the provisions in Part 3 of this Act will be within the provisions of this Chapter if there is a cessation of or change in the employment. It derives from part of the end-words of section 148(1) of ICTA.
1747.Subsection (4) derives from section 148(6) of, and paragraph 2(2) of Schedule 11 to, ICTA. It provides that payments to people other than the employee may be within the scope of this Chapter. It also provides that throughout the provisions which this Chapter uses to determine what and how much is chargeable, any references to employee and employer include the person whose employment has terminated and his former employer. This means that those provisions do not need to refer to former employees and former employers.
Section 402: Meaning of “benefit”
1748.This section derives from section 148(2), (2A) and (3) of ICTA and includes a minor change to the law. See Change 107 in Annex 1.
1749.Subsection (1) explains which benefits are within the scope of this Chapter. Subsection (1)(a) defines them as any benefits received by the employee or former employee which are received as set out in subsection (1) and which, if received as an employee for performing the duties of the employment, would be taxable earnings from the employment. This will include any benefit which would come within the definition of earnings in section 62 of this Act and any benefit for which an amount is treated as earnings by a provision in the benefits code. Subsection (1)(b) includes those benefits which would be within subsection (1)(a) but to which an “earnings-only exemption” applies.
1750.“Earnings-only exemption” is defined in section 227 of this Act. Part 4 of this Act contains most of those exemptions. Section 227(4) lists exemptions that are contained in Part 7 and apply in respect of general earnings. Some of these may be “earnings-only” exemptions. Section 227(1) and (2) may be used to identify which are “earnings-only” exemptions and which are “employment income” exemptions.
1751.Subsection (1)(b) means that the only benefits that do not come within the scope of this Chapter are those which are subject to an exemption other than an “earnings-only exemption”. These wider exemptions are labelled “employment income exemptions”, defined in section 227, and serve to exempt payments and benefits from any charge under this Chapter, provided any conditions for the exemption to apply are met.
1752.There are some benefits to which an earnings-only exemption applies, but which are not to be chargeable under this Chapter in the case of a termination of the employment. These are listed in subsection (2).
1753.Subsection (3) identifies a benefit which is exempt from the scope of this Chapter in the case of a change in the terms or remuneration of the employment. This prevents the exempted removal benefits falling into this Chapter.
1754.Not all the benefits listed in section 148(2A) of ICTA are included in subsections (2) and (3) of this section. That is because there is no need to include those benefits that are now subject to “employment income exemptions” (which operate to exempt them from all charges under the employment income Parts of this Act).
Section 403: Charge on payment or other benefit
1755.This section contains the charge to tax on termination payments and benefits where they exceed the £30,000 threshold.
1756.Subsections (1) and (4) set out the basis of the charge, the threshold and when amounts are to be taken as exceeding it. These provisions derive from section 148(1) and (3) of, and paragraphs 7(2) and 14(1) of Schedule 11 to, ICTA. Amounts brought into charge by virtue of this section come within “specific employment income” in section 7(4) of this Act. Section 6(3) of this Act provides that the rules in Chapters 4 and 5 of Part 2 do not apply to specific employment income. That derives from section 19(1), paragraph 5 of ICTA and the case of Nichols v Gibson CA 1996 at 68 TC 611.
1757.Subsections (2) and (3) set out the rules for the timing of the charge to tax, and the time when benefits are treated as received. The rules are similar to the receipts basis for earnings. In cases where payments are made over a period of time, or benefits are provided for some time after the employment has terminated, once the £30,000 threshold has been exceeded, there will be continuing liability as long as payments continue to be made or benefits provided. These provisions derive from section 148(3) and (4) of ICTA.
1758.Subsections (5) and (6) make clear who is liable for a tax charge arising by virtue of this Chapter, both in the ordinary course of events and if a payment or benefit is received after the death of the employee or former employee. The latter circumstances are covered by subsection (5), which derives from paragraph 14(2) of Schedule 11 to ICTA. “Personal representatives” is defined in section 721 of this Act. See Change 159 in Annex 1.
Section 404: How the £30,000 threshold applies
1759.This section deals with two aspects of the £30,000 threshold. The first concerns the payments and other benefits that are to be aggregated. The second concerns the way the £30,000 is to be allocated between payments and benefits received at different times. Subsections (1) to (3) deal with the first aspect, and derive from section 148(1) and (6) of, and paragraphs 7, 8 and 16 of Schedule 11 to, ICTA. Subsections (4) and (5) relate to the second aspect and derive from section 148(1) of, and paragraph 7 of Schedule 11 to, ICTA.
1760.Subsection (1)(c) sets out the circumstances in which the payments and benefits from more than one employer are aggregated. Only one sum of £30,000 is available in respect of an employment, different employments with the same employer and employments with employers who are associated.
1761.Subsection (2) explains when employers are “associated” for this purpose. Subsection (3)(a) treats the successors to the employer or the person looked at to determine control as if they were the original employer or person. Successors are not defined anywhere in the Tax Acts so the normal meaning applies, being someone who takes the place of another person to perform a like role and duties. Subsection (3)(b) defines the time at which one has to consider whether employers are associated to be the “termination or change date”.
1762.Subsections (4) and (5) explain how the £30,000 threshold is attributed to the payments and benefits in the order in which they are received.
Section 405: Exception for certain payments exempted when received as earnings.
1763.This section provides that certain payments which would otherwise fall within this Chapter are not to be included. It derives from section 148(2A) of ICTA.
1764.Subsection (1) sets out the exemption which is to be taken to apply for this Chapter in the case of a termination of employment.
1765.Subsection (2) sets out the exemption which is to be taken to apply for this Chapter in the case of a change in the terms or remuneration of the employment.
1766.Not all the payments listed in section 148(2A) of ICTA are included in subsections (1) and (2) of this section. That is because there is no need to include those benefits that are now subject to “employment income” exemptions which operate to exempt them from all charges under the employment income Parts of this Act or those that are excluded by section 402(2) or (3) of this Act.
Section 406: Exception for death or disability payments and benefits
1767.This section provides an exception where the payment or benefit is due to death, injury or disability. It derives from paragraph 3 of Schedule 11 to ICTA.
Section 407: Exception for payments and benefits under tax-exempt pension schemes
1768.This section provides an exception where the payment is made or benefit provided through certain pension schemes and is due to a change in or termination of employment owing to ill health. This exception derives from paragraph 4 of Schedule 11 to ICTA.
1769.The payment or benefit referred to in subsection (1)(b) will usually be a commutation payment calculated by reference to past service.
Section 408: Exception for contributions to tax-exempt pension schemes
1770.This section derives from Inland Revenue Statement of Practice 2/1981, which excepts special contributions to approved schemes and payments for the purchase of an annuity under an approved transaction.
1771.Subsection (1) sets out the type of contribution which is excepted.
1772.Subsection (2) provides signposts to the definitions of terms used.
1773.This is a minor change to the law. See Change 108 in Annex 1.
Section 409: Exception for payments and benefits in respect of employee liabilities and indemnity insurance
1774.This section covers the treatment of a payment or benefit received by an employee in connection with a liability arising after the employee’s employment has ceased and its interaction with this Chapter. The payments or benefits in subsection (1) are not within this Chapter if the conditions in subsections (3) to (5) are met. The section derives from section 92(10) of FA 1995.
Section 410: Exception for payments and benefits in respect of employee liabilities and indemnity insurance: individual deceased
1775.This section covers the treatment of a similar payment or benefit to that described in respect of section 409 where the employee has died. It does not matter whether the former employee’s death gave rise to the cessation of the former employment or simply occurred after that cessation. The payment is specifically excluded from any charge to tax on the personal representatives of the deceased former employee arising by virtue of this Chapter. The section derives from section 92(10) of FA 1995.
1776.“Personal representatives” is defined in section 721 of this Act. See Change 159 in Annex 1.
Section 411: Exception for payments and benefits for forces
1777.This section provides an exception for certain payments and benefits for members of the armed forces. It derives from paragraph 5 of Schedule 11 to ICTA.
Section 412: Exception for payments and benefits provided by foreign governments etc.
1778.This section provides an exception which is limited to those employed by foreign governments and to particular circumstances. It derives from paragraph 6 of Schedule 11 to ICTA.
Section 413: Exception in certain cases of foreign service
1779.This section provides an exception for payments made in certain cases of “foreign service”. The exception depends on the length of the foreign service up to the date of the termination of, or change in, employment, compared with the whole period of service.
1780.As the period involved exceeds 20 years it is necessary to define “foreign service” in a number of different ways because of the changes in the Schedule E charge over that period. This section derives from paragraphs 9 and 10 of Schedule 11 to ICTA.
1781.Subsection (3) deals with the period in which this Act will have effect.
1782.Subsection (4) deals with the period in which the “foreign earnings deduction” (in sections 192A or 193(1) of ICTA) was applicable.
1783.Subsection (6) deals with the period before the foreign earnings deduction became available and before the Cases of Schedule E were introduced. This ensures that all periods of overseas service are included.
Section 414: Reduction in other cases of foreign service
1784.The exception for foreign service in section 413 may not apply because the length of service is insufficient. If so, the amount charged to tax may be reduced under this section, which derives from paragraphs 9 and 11 of Schedule 11 to ICTA. The amount of the reduction depends on the length of foreign service compared with the total length of service.
1785.The reduction is applied to the amount which remains above the £30,000 threshold.
1786.There is, however, a limitation to the reduction. This is intended to ensure that where tax is deducted from a payment – for example a gift aid payment – enough tax remains in charge to satisfy the tax on the payment. Subsection (4) has the effect that any personal reliefs and the reduction added together must not bring the income tax payable below an amount equal to the tax on the gift aid payment.
1787.This is a change from the limit in ICTA that would “reduce the amount of income on which the taxable person is chargeable below the amount of income tax which the taxable person is entitled” to charge or deduct. It is a minor change to the law. See Change 109 in Annex 1.
Section 415: Valuation of benefits
1788.This section sets out how to value the benefits chargeable under this Chapter. It derives from paragraph 12 of Schedule 11 to ICTA. It applies the valuation rules of the benefits code as set out in Chapters 2 to 10 of Part 3 of this Act.
1789.Subsection (1) provides the rule for arriving at the amount of cash benefits.
1790.Subsection (2) provides the same rule as that in section 64 of this Act (relationship between earnings and benefits code). The amount of any earnings is considered first, and the cash equivalent under the benefits code “tops up” the earnings with the excess. This link to the benefits code is a minor change to the law. See Change 110 in Annex 1. The benefits are considered on the basis of what would be chargeable if section 15 of this Act applied.
1791.Subsections (3) to (7) of this section modify the valuation provisions used in the benefits code so that they can apply properly to work out the valuation of benefits brought into the charge to tax under this Chapter. These provisions derive from section 596B of ICTA.
1792.Subsection (4) allows the valuation of the cash equivalent to be made by reference to the person chargeable or the recipient of the benefit.
1793.Subsection (5) disapplies, for valuation purposes, section 401(4) which treats the employee as the recipient in certain circumstances.
1794.Subsection (7) applies where the benefit is living accommodation and an amount has been made good. It overrides the limitation in section 106 of this Act which restricts the deduction to the rent paid, and so allows a deduction of the whole of the amount made good for the purposes of this Chapter.
1795.One of the modifications to the benefit of provided living accommodation is that section 146(8) of ICTA does not apply for the purposes of this Chapter. This refers to accommodation first occupied by the employer before 31 March 1983. In view of the length of time since that date, the provision has been removed from section 107 of this Act. The disapplication of it has also been removed from this section. It is in paragraph 21(2) of Schedule 7 to this Act.
Section 416: Notional interest treated as paid if amount charged for beneficial loan
1796.This section is the equivalent of section 184 of this Act (interest treated as paid) in the benefits code and is written in the same terms.
1797.It allows relief in respect of the benefit of a loan which falls within this Chapter, but prevents it from being treated as real interest paid under deduction of tax.