Annex 1: Minor changes in the law made by the Act: Change 139: Pensions charged on the arising basis (sections 575, 613 and 635 of ITEPA): relief for arrears of foreign pensions: section 840 and paragraph 152 of Schedule 2
This change gives statutory effect to ESC A55 (arrears of foreign pensions). In doing this the Act makes a number of changes to the approach in the concession.
Sections 575, 613 and 635 of ITEPA determine the amount of taxable pension income for foreign pensions, foreign annuities and foreign voluntary annual payments respectively. The amount is found by applying the rules of Schedule D Case V. Section 65(1) of ICTA computes income under Schedule D Case V on the full amount of the income arising in the year of assessment (unless the remittance basis applies – see section 65(4) of ICTA). Section 68 of ICTA has provisions equivalent to section 65(1) of ICTA (but not to section 65(4) of ICTA), in respect of such income from the Republic of Ireland.
When a pension, annuity or voluntary annual payment (or an increase in such a pension etc) is granted retrospectively, arrears paid in respect of an earlier year or years arise for the purposes of sections 65(1) and 68 of ICTA in the year they become due rather than in an earlier year or years. The person receiving the arrears may be liable at a higher rate of tax in the year the income arises than the rate that would have applied had the arrears arisen in the earlier year.
Under ESC A55 the Inland Revenue recalculates the tax for the year in which the arrears arise for the purposes of section 65(1) of ICTA as if the arrears had arisen in the earlier year or years. If the recalculation is advantageous to the taxpayer, the tax charged is abated. The recalculation takes into account the 10% deduction under sections 65(2) or 68(5) of ICTA where appropriate. The abatement is applied without a claim.
Section 840 gives effect to the concession, but with some adaptations, taking the parallel relief for income charged under the remittance basis in section 836 (relief for delayed remittances: back dated pensions) as its model. So, rather than the tax for the year in which the arrears arise being abated, the arrears are treated as income of each relevant earlier year. The tax charge for each earlier year will increase, but the reduction of the charge in the year in which the arrears otherwise arise will compensate (and normally exceed the aggregate of the increases). Section 840(2) also requires a claim by the person liable for tax on the arrears, instead of action being initiated by the Inland Revenue. The administrative provisions of section 837 (claims for relief on delayed remittances) are applied so as to cater for these factors in the change of approach. It provides a time limit for claims, machinery for adjusting tax for earlier years and administration of the relief when a claimant dies.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is broadly in line with current practice.