Expenses and Benefits – Moving Extra-Statutory Concessions into legislationFriday, December 18th, 2009
During 2009, HMRC has used statutory powers to legislate the provisions of various Extra-Statutory Concessions (ESCs) where it is believed that they exceed HMRC’s discretion to make concessions that depart for the strict application of tax law.
Most of the ESCs relate to areas other than income tax law. However, one ESC, currently awaiting Parliamentary approval, is the enactment of ESC A61 Clergymen’s heating and lighting etc expenses with effect from 6 April 2010. The new sections 290A and 290B that are inserted into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) continue to exempt from tax the payment or reimbursement of heating, lighting, cleaning and gardening costs incurred by ministers of religion, but only if they are in “lower-paid employment”, i.e. they have an annual earnings rate of less than £8,500.
A new consultation document was published at the time of the 2009 Pre-Budget Report which proposes the enactment of seven further ESCs, some of which have income tax implications. Of particular interest are the following two ESCs which are expected to become law at a date to be confirmed in 2010:
ESC A10 Lump sums paid under overseas pension schemes
This ESC is to be legislated by means of two new sections added to ITEPA, section 395B, which is part of the taxation rules for employer-financed retirement benefits schemes (EFRBS), and section 646B, which is a chapter of the Act that provides a variety of tax exemptions.
The concession provides tax relief for lump sums received from certain retirement benefits schemes established outside the UK, but only to the extent that the lump sum rights were accrued in respect of periods of “foreign service” during which the employee was not ordinarily resident in the UK.
Without the ESC, tax charges might arise under the ITEPA provisions relating to
- relevant benefits under an employer-financed retirement benefits scheme,
- benefits provided on termination of employment, and
- pension income.
The new statutory provisions continue to provide the same tax relief as the ESC, i.e. full income tax exemption for lump sums provided under non-UK retirement benefit schemes that are not registered schemes. However, where the level of foreign service falls below specified limits, the tax liability in respect of the lump sum is reduced proportionately but is not removed altogether.
ESC A81 Termination payments and legal costs
This concession provides tax exemption for any legal costs that an employee may recover from the previous employer following a court judgement or a pre-trial settlement. Although the legal costs are effectively payments from the employer as a result of the termination of employment and are therefore exempt under the £30,000 provisions of sections 403 and 404 of ITEPA, any amount of legal costs that exceed the threshold would be taxable. The concession has the effect of exempting payment of legal costs entirely if the conditions are met so that no liability can arise at all under section 403.
The objective of the concession is maintained in legislation by means of a new section 413A to ITEPA that removes tax liability in full where
- the payment is made under an order of a court or tribunal, or
- the termination results in a compromise agreement between the employer and the employee that makes provision for the payment, and the payment is made directly to the employee’s lawyer.
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