Income and Corporation Taxes Act 1988

Charge to tax in certain cases

595Charge to tax in respect of certain sums paid by employer etc

(1)Subject to the provisions of this Chapter, where, pursuant to a retirement benefits scheme, the employer in any year of assessment pays a sum with a view to the provision of any relevant benefits for any employee of that employer, then (whether or not the accrual of the benefits is dependent on any contingency)—

(a)the sum paid, if not otherwise chargeable to income tax as income of the employee, shall be deemed for all purposes of the Income Tax Acts to be income of that employee for that year of assessment and assessable to tax under Schedule E; and

(b)where the payment is made under such an insurance or contract as is mentioned in section 266, relief, if not otherwise allowable, shall be given to that employee under that section in respect of the payment to the extent, if any, to which such relief would have been allowable to him if the payment had been made by him and the insurance or contract under which the payment is made had been made with him.

(2)Subject to the provisions of this Chapter, where—

(a)the circumstances in which any relevant benefits under a retirement benefits scheme are to accrue are not such as will render the benefits assessable to income tax under Schedule E as emoluments of the employee in respect of whom the benefits are paid, and

(b)the provision of those benefits is not, or is not fully, secured by the payment of sums by the employer with a view to the provision of those benefits,

then (whether or not the accrual of the benefits is dependent on any contingency) an amount equal to the cost, estimated in accordance with subsection (3) below, of securing the provision by a third person of the benefits or, as the case may be, of the benefits so far as not already secured by the payment of such sums as are mentioned in subsection (1) above, shall be deemed for all purposes of the Income Tax Acts to be income of the employee for the year or years of assessment specified in subsection (3) below and assessable to income tax under Schedule E.

(3)The cost referred to in subsection (2) above shall be estimated either—

(a)as an annual sum payable in each year of assessment in which the scheme in question is in force or the employee is serving, up to and including the year of assessment in which the benefits accrue or there ceases to be any possibility of the accrual thereof, or

(b)as a single sum payable in the year of assessment in which falls the date when the employee acquired the right to the relevant benefits, or the date when he acquired the right to any increase in the relevant benefits;

as may be more appropriate in the circumstances of the case.

(4)Where the employer pays any sum as mentioned in subsection (1) above in relation to more than one employee, the sum so paid shall, for the purpose of that subsection, be apportioned among those employees by reference to the separate sums which would have had to be paid to secure the separate benefits to be provided for them respectively, and the part of the sum apportioned to each of them shall be deemed for that purpose to have been paid separately in relation to that one of them.

(5)Any reference in this section to the provision for an employee of relevant benefits includes a reference to the provision of benefits payable to that employee’s wife or widow, children, dependants or personal representatives.

596Exceptions from section 595

(1)Neither subsection (1) nor subsection (2) of section 595 shall apply where the retirement benefits scheme in question is—

(a)an approved scheme, or

(b)a statutory scheme, or

(c)a scheme set up by a government outside the United Kingdom for the benefit, or primarily for the benefit of, its employees.

(2)Neither subsection (1) nor subsection (2) of section 595 shall apply for any year of assessment—

(a)where the employee performs the duties of his employment in such circumstances that no tax is chargeable under Case I or II of Schedule E in respect of the emoluments of his employment (or would be so chargeable were there such emoluments), or

(b)where the emoluments from the employment are foreign emoluments within the meaning of section 192 and the Board are satisfied, on a claim made by the employee, that the retirement benefits scheme in question corresponds to such a scheme as is mentioned in paragraph (a), (b) or (c) of subsection (1) above.

(3)Where, in respect of the provision for an employee of any relevant benefits—

(a)a sum has been deemed to be income of his by virtue either of subsection (1) or subsection (2) of section 595, and

(b)subsequently, the employee proves to the satisfaction of the Board that—

(i)no payment in respect of, or in substitution for, the benefits has been made, and

(ii)some event has occurred by reason of which no such payment will be made,

and makes application for relief under this subsection within six years from the time when that event occurred,

the Board shall give relief in respect of tax on that sum by repayment or otherwise as may be appropriate; and if the employee satisfies the Board as mentioned above in relation to some particular part, but not the whole, of the benefits, the Board may give such relief as may seem to them just and reasonable.

597Charge to tax: pensions

(1)Subject to subsection (2) below, all pensions paid under any scheme which is approved or is being considered for approval under this Chapter shall be charged to tax under Schedule E, and section 203 shall apply accordingly.

(2)As respects any scheme which is approved or is being considered for approval under this Chapter, the Board may direct that, until such date as the Board may specify, pensions under the scheme shall be charged to tax as annual payments under Case III of Schedule D, and tax shall be deductible under sections 348 and 349 accordingly.

598Charge to tax: repayment of employee’s contributions

(1)Subject to the provisions of this section, tax shall be charged under this section on any repayment to an employee during his lifetime of any contributions (including interest on contributions, if any) if the payment is made under—

(a)a scheme which is or has at any time been an exempt approved scheme, or

(b)a statutory scheme established under a public general Act.

(2)Where any payment is chargeable to tax under this section, the administrator of the scheme shall be charged to income tax under Case VI of Schedule D and, subject to subsection (3) below, the rate of tax shall be 10 per cent.

(3)The Treasury may by order from time to time increase or decrease the rate of tax under subsection (2) above.

(4)The tax shall be charged on the amount paid or, if the rules permit the administrator to deduct the tax before payment, on the amount before deduction of tax, and the amount so charged to tax shall not be treated as income for any other purpose of the Tax Acts.

(5)Subsection (1)(a) above shall not apply in relation to a contribution made after the scheme ceases to be an exempt approved scheme (unless it again becomes an exempt approved scheme).

(6)This section shall not apply where the employee’s employment was carried on outside the United Kingdom.

(7)In relation to a statutory scheme, “employee” in this section includes any officer.

599Charge to tax: commutation of entire pension in special circumstances

(1)Where a scheme to which this section applies contains a rule allowing, in special circumstances, a payment in commutation of an employee’s entire pension, and any pension is commuted, whether wholly or not, under the rule, tax shall be charged on the amount by which the sum receivable exceeds—

(a)the largest sum which would have been receivable in commutation of any part of the pension if the scheme had secured that the aggregate value of the relevant benefits payable to an employee on or after retirement, excluding any pension which was not commutable, could not exceed three-eightieths of his final remuneration (disregarding any excess of that remuneration over the permitted maximum) for each year of service up to a maximim of 40; or

(b)the largest sum which would have been receivable in commutation of any part of the pension under any rule of the scheme authorising the commutation of part (but not the whole) of the pension, or which would have been so receivable but for those special circumstances;

whichever gives the lesser amount chargeable to tax.

(2)This section applies to—

(a)a scheme which is or has at any time been an approved scheme, or

(b)a statutory scheme established under a public general Act.

(3)Where any amount is chargeable to tax under this section the administrator of the scheme shall be charged to income tax under Case VI of Schedule D on that amount, and section 598(2), (3) and (4) shall apply as they apply to tax chargeable under that section.

(4)This section shall not apply where the employee’s employment was carried on outside the United Kingdom.

(5)In relation to a statutory scheme, “employee” in this section includes any officer.

(6)In applying paragraph (a) or (b) of subsection (1) above—

(a)the same considerations shall be taken into account, including the provisions of any other relevant scheme, as would have been taken into account by the Board in applying section 590; and

(b)where the scheme has ceased to be an approved scheme, account shall only be taken of the rules in force when the scheme was last an approved scheme.

(7)Where the pension has been secured by means of an annuity contract with an insurance company and the sum receivable is payable under that contract by the insurance company, the references to the administrator of the scheme in subsection (3) above and in section 598(2) and (4) as applied by that subsection are to be read as references to the insurance company.

(8)In subsection (7) above “insurance company” means—

(a)a person authorised under section 3 or 4 of the [1982 c. 50.] Insurance Companies Act 1982 to carry on long term business and acting through a branch or agency in the United Kingdom; or

(b)a society registered as a friendly society under the [1974 c. 46.] Friendly Societies Act 1974 or the [1970 c. 30. (N.I.).] Friendly Societies Act (Northern Ireland) 1970.

(9)In relation to payments made under schemes approved or established before 17th March 1987 to employees who became members before that date, subsection (1)(a) above shall have effect with the omission of the words “(disregarding any excess of that remuneration over the permitted maximum)”.

600Charge to tax: unauthorised payments to or for employees

(1)This section applies to any payment to or for the benefit of an employee, otherwise than in course of payment of a pension, being a payment made out of funds which are or have been held for the purposes of a scheme which is or has at any time been approved for the purposes of—

(a)this Chapter;

(b)Chapter II of Part II of the [1970 c. 24.] Finance Act 1970; or

(c)section 208 or Chapter II of Part IX of the 1970 Act.

(2)If the payment—

(a)is not expressly authorised by the rules of the scheme, or

(b)is made at a time when the scheme is not approved for the purposes of any of the enactments mentioned in subsection (1) above, and would not have been expressly authorised by the rules of the scheme when it was last so approved,

the employee (whether or not he is the recipient of the payment) shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made.

(3)Any payment chargeable to tax under this section shall not be chargeable to tax under section 598 or 599 or under the Regulations mentioned in paragraph 8 of Schedule 3 to the [1971 c. 68.] Finance Act 1971.

(4)References in this section to any payment include references to any transfer of assets or other transfer of money’s worth.

601Charge to tax: payments to employers

(1)Subsection (2) below applies where a payment is made to an employer out of funds which are or have been held for the purposes of a scheme which is or has at any time been an exempt approved scheme and whether or not the payment is made in pursuance of Schedule 22.

(2)An amount equal to 40 per cent. of the payment shall be recoverable by the Board from the employer.

(3)Subsection (2) above does not apply to any payment—

(a)to the extent that, if this section had not been enacted, the employer would have been exempt, or entitled to claim exemption, from income tax or corporation tax in respect of the payment; or

(b)made before the scheme became an exempt approved scheme; or

(c)of any prescribed description; or

(d)made in pursuance of the winding-up of the scheme where the winding-up commenced on or before 18th March 1986; or

(e)made in pursuance of an application which —

(i)was made to the Board on or before that date and was not withdrawn before the making of the payment, and

(ii)sought the Board’s assurance that the payment would not lead to a withdrawal of approval under section 19(3) of the [1970 c. 24.] Finance Act 1970;

(4)Subsection (2) above does not apply where the employer is a charity (within the meaning of section 506).

(5)Where any payment is made or becomes due to an employer out of funds which are or have been held for the purposes of a scheme which is or has at any time been an exempt approved scheme then—

(a)if the scheme relates to a trade, profession or vocation carried on by the employer, the payment shall be treated for the purposes of the Tax Acts as a receipt of that trade, profession or vocation receivable when the payment falls due or on the last day on which the trade, profession or vocation is carried on by the employer, whichever is the earlier;

(b)if the scheme does not relate to such a trade, profession or vocation, the employer shall be charged to tax on the amount of the payment under Case VI of Schedule D.

This subsection shall not apply to a payment which fell due before the scheme became an exempt approved scheme or to a payment to which subsection (2) above applies or would apply but for subsection (3)(a) or (4) above.

(6)In this section—

(a)references to any payment include references to any transfer of assets or other transfer of money’s worth; and

(b)“prescribed” means prescribed by regulations made by the Treasury.

602Regulations relating to pension fund surpluses

(1)In relation to an amount recoverable as mentioned in section 601(2), the Treasury may by regulations make any of the provisions mentioned in subsection (2) below; and for this purpose the amount shall be treated as if it were—

(a)an amount of income tax chargeable on the employer under Case VI of Schedule D for the year of assessment in which the payment is made; or

(b)where the employer is a company, an amount of corporation tax chargeable on the company for the accounting period in which the payment is made.

(2)The provisions are—

(a)provision requiring the administrator of the scheme or the employer (or both) to furnish to the Board, in respect of the amount recoverable and of the payment concerned, information of a prescribed kind;

(b)provision enabling the Board to serve a notice or notices requiring the administrator or employer (or both) to furnish to the Board, in respect of the amount and payment, particulars of a prescribed kind;

(c)provision requiring the administrator to deduct out of the payment the amount recoverable and to account to the Board for it;

(d)provision as to circumstances in which the employer may be assessed in respect of the amount recoverable;

(e)provision that, in a case where the employer has been assessed in respect of an amount recoverable but has not paid it (or part of it) within a prescribed period, the administrator may be assessed and charged (in the employer’s name) in respect of the amount (or part unpaid);

(f)provision that, in a case where the amount recoverable (or part of it) has been recovered from the administrator by virtue of an assessment in the employer’s name, the administrator is entitled to recover from the employer a sum equal to the amount (or part);

(g)provision enabling the employer or administrator (as the case may be) to appeal against an assessment made on him in respect of the amount recoverable;

(h)provision as to when any sum in respect of the amount recoverable is payable to the Board by the administrator or employer and provision requiring interest to be paid on any sum so payable;

(j)provision that an amount paid to the Board by the adminstrator shall be treated as paid on account of the employer’s liability under section 601(2).

(3)For the purpose of giving effect to any provision mentioned in subsection (2)(c) to (j) above, regulations under this section may include provision applying (with or without modifications) provisions of the enactments relating to income tax and corporation tax.

(4)Subject to any provision of regulations under this section—

(a)a payment to which section 601(2) applies shall not be treated as a profit or gain brought into charge to income tax or corporation tax and shall not be treated as part of the employer’s income for any purpose of this Act; and

(b)the amount recoverable shall not be subject to any exemption or reduction (by way of relief, set-off or otherwise) or be available for set-off against other tax.

(5)If the employer is a company and a payment to which section 601(1) and (2) applies is made at a time not otherwise within an accounting period of the company, an accounting period of the company shall for the purposes of subsection (1)(b) above be treated as beginning immediately before the payment is made.

603Reduction of surpluses

Schedule 22 (which provides for the reduction of certain pension fund surpluses) shall have effect.