Clause 640: Exemption under section 639 where income withheld

2537.     This clause extends the exemption identified in clause 639 if the pension or allowance is reduced because another pension or allowance is also payable. It derives from section 318(3) of ICTA.

Clause 641: Wounds and disability pensions

2538.     This clause applies to wounds and disability pensions paid to members of the armed forces and civilians. It exempts the pensions from any charge to income tax. It derives from section 315 of ICTA.

2539.     Paragraphs (a) to (d) of subsection (1) identify pensions paid to members of the armed forces. They are derived from section 315(2)(a) to (d) of ICTA. Section 315(2)(a) to (d) identifies the pensions in general terms. This avoids the need to identify each of the various schemes under which the pensions are paid. The clause follows the pragmatic approach of section 315(2).

2540.     The clause uses the term "the armed forces of the Crown" rather than "the naval, military or air forces of the Crown". The two terms have the same meaning. They cover all United Kingdom service personnel, including members of the regular forces, the reserve forces and the women's services. The term has also been used in the rewrite of sections 197 and 316 of ICTA (clauses 296 and 297).

2541.     Paragraphs (e) and (f) of subsection (1) apply to pensions paid to civilians and members of the merchant navy who have been disabled as a result of war service. They are derived from section 315(2)(e) of ICTA. The Bill does not rewrite the reference to the Injuries in War (Compensation) Act 1915 as there are no surviving beneficiaries of these schemes.

2542.     Paragraph (g) of subsection (1) also applies to pensions paid to civilians and members of the merchant navy. This is new. It gives statutory effect to the practice of extending the exemption to pensions granted by schemes established under sections 3 to 5 of the Pensions (Navy, Army, Air Force and Mercantile Marine) Act 1939. See Change 141 in Annex 1.

2543.     Subsection (2) prevents the exemption applying to any amount not attributable to disablement or disability. It derives from section 315(3) of ICTA.

Clause 642: Compensation for National-Socialist persecution

2544.     This clause exempts annuities and pensions paid by the German and Austrian Governments to victims of National-Socialist persecution. It derives from section 330 of ICTA.

2545.     Paragraph 46 of Schedule 6 to this Bill repeals the reference to section 330 of ICTA in section 65(2) of ICTA. The exemption means the reference is unnecessary.

Clause 643: Malawi, Trinidad and Tobago and Zambia government pensions

2546.     This clause exempts certain pensions paid since 6 April 1973 in respect of government service in Malawi, Trinidad and Tobago and Zambia. It derives from sections 616(1) and (2) of ICTA.

2547.     Sections 616(1) and (2) of ICTA were introduced in 1973 to deal with a consequence of the Overseas Pensions Act 1973. Under the Overseas Pensions Act 1973 the United Kingdom government took over responsibility for paying certain pensions previously paid by Commonwealth governments. In 1973 the United Kingdom had double taxation agreements in force with three countries under which government service pensions paid by those countries were exempt from United Kingdom tax.

2548.     The effect of the Overseas Pensions Act 1973 was to make these pensions United Kingdom pensions. The benefit of the exemptions given by the double taxation agreements would have been lost if they had not been preserved in some way. Section 616(1) and (2) of ICTA preserved the exemptions by treating the pensions as if they were still paid by the original government. The practical effect is that the pensions are exempt as long as the relevant provisions of the double taxation agreement are unchanged. The clause legislates the practical effect.

2549.     Subsection (5) prevents the exemption applying to any part of the pension that is paid under the Pension (Increase) Act 1971. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Clause 644: Pensions payable where employment ceased due to disablement

2550.     This clause exempts disablement pensions paid solely as a consequence of work-related illness or accident or war injuries. It gives statutory effect to ESC A62. See Change 142 in Annex 1.

2551.     Subsection (1) applies the clause to qualifying disablement pensions.

2552.     Subsection (2) defines "disablement pension". It is a pension paid to a person who has left an employment because of disablement. The clause does not apply to pensions paid by tax-approved pension schemes. These are approved retirement benefits schemes and former approved superannuation funds.

2553.     Subsection (4) gives the meaning of "office". It applies clause 5 in Part 2 (Employment income: charge to tax).

Clause 645: Social security pensions: increases in respect of children

2554.     This clause applies to a social security benefit, taxed as pension income, if the benefit is increased because the recipient is responsible for a child. It derives from section 617(1)(b) of ICTA and ESC A24.

2555.     Subsection (2) defines "social security pension". Paragraph (a) derives from section 617(1)(b) of ICTA. Paragraph (b) derives from ESC A24.

Clause 646: Former miners etc.: coal and allowances in lieu of coal

2556.     This clause applies to free coal and payments in lieu of free coal given to retired miners and their widow or widower. It gives statutory effect to an extension to ESC A6 published in paragraph SE 66695 of the Inland Revenue's Schedule E manual. See Change 69 in Annex 1.

2557.     Subsection (2) limits the scope of the exemption to the provision of free coal, or the payment of cash in lieu, of an amount that represents a reasonable level of personal consumption. But subsection (3) assumes that this condition is met unless the Inland Revenue can show that it is not. The purpose of these two subsections is to reproduce the restriction that applies to all ESCs - a concession will not be given where an attempt is made to use it to avoid tax.

2558.     Subsection (4) gives the definition of "former colliery worker". The definition is the same as that in clause 306.

Chapter 18: Exemptions: Non-UK resident taxpayers

Overview

2559.     This Chapter exempts certain pensions paid to non-residents in respect of government service overseas.

Clause 647: Introduction and meaning of "foreign residence condition" etc.

2560.     This clause describes the foreign residence condition that must be satisfied if the exemptions identified later in the Chapter are to apply. It also expands the meaning of pension. It derives from section 615 of ICTA.

2561.     Subsections (2) and (3) deal with the foreign residence condition. The taxpayer must make a claim to the Board to be non-resident.

2562.     Subsection (4) identifies various payments that are also treated as pension income for the purposes of this Chapter. It derives from the definition of pension in section 615(7) of ICTA.

Clause 648: The Central African Pension Fund

2563.     This clause exempts pensions paid from the Central African Pension Fund. It derives from section 615(2)(f) of ICTA.

Clause 649: Commonwealth government pensions

2564.     This clause exempts pensions paid by various Commonwealth governments from funds established in the United Kingdom. It derives from section 615(2)(b) of ICTA.

2565.     Subsection (2) defines "Commonwealth government". The exemption does not apply to all the countries that are current members of the Commonwealth. But the term is not inaccurate because the clause applies only to countries that have a former colonial connection to the United Kingdom.

2566.     Subsections (3), (4) and (5) set out a number of other definitions used to establish the meaning of "Commonwealth government". The reference to "colony" in section 615(2)(b) of ICTA has been rewritten as "British overseas territory". This incorporates the change introduced into Schedule 1 to the Interpretation Act 1978 by section 1(3) of the British Overseas Territories Act 2002. Any reference to "colony" is now interchangeable with "British overseas territory".

Clause 650: Oversea Superannuation Scheme

2567.     This clause exempts pensions paid under the Oversea Superannuation Scheme. It derives from section 615(2)(c) of ICTA, and corrects a small error in ICTA, which refers to this scheme as the "Overseas Superannuation Scheme".

2568.     Subsection (2) cross-refers to the legislation under which the pensions must be paid. The schemes are now operated under the Overseas Pensions Act 1973.

Clause 651: Overseas Pensions Act 1973

2569.     This clause exempts pensions paid under section 1 of the Overseas Pension Act 1973. It derives from section 615(2)(d) of ICTA.

2570.     Subsection (2) prevents the exemption applying to any part of the pension paid under the Pensions (Increase) Acts. It derives from section 615(4) of ICTA. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Clause 652: Overseas Service Act 1958

2571.     This clause exempts pensions paid under the Overseas Service Act 1958. It derives from sections 615(2)(e) of ICTA.

2572.     Subsection (4) cross-refers to the legislation under which the pensions must be paid. These schemes are now to be operated under the Overseas Pensions Act 1973.

2573.     Subsection (5) requires the pensions to be paid in accordance with schemes made under the Overseas Pensions Act 1973. These are schemes that the Secretary of State certifies as corresponding to the 1958 Act. This subsection derives from section 615(8)(c) of ICTA.

2574.     Subsections (6) and (7) give the conditions that must be satisfied for a person to be treated as employed in the service of an overseas territory. They are derived from section 615(8)(b) of ICTA as amended by paragraph 9 of Schedule 3 to the International Development Act 2002.

Clause 653: Overseas Service Pensions Fund

2575.     This clause exempts pensions paid out of the Overseas Service Pensions Fund. It derives from section 615(2)(g) of ICTA.

2576.     Subsection (3) extends the meaning of "pension" to include any gratuity or other sum payable in respect of ill health. It derives from the definition of "pension" in section 615(7) of ICTA.

Clause 654: The Pensions (India, Pakistan and Burma) Act 1955

2577.     This clause exempts pensions paid under the Pensions (India, Pakistan and Burma) Act 1955. It derives from section 615(2)(a) of ICTA.

2578.     In subsection (2)(b)(ii) "correspond to the provision made under the 1955 Act" is a reference to the provision for pensions to be paid.

2579.     Subsection (3) prevents the exemption applying to any part of the pension that is paid under the Pension (Increase) Act 1971. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Part 10: Social security income

Overview

2580.     This Part identifies the income that is taxed as social security income. It derives mainly from section 617 of ICTA. It also derives from other provisions of the Income Tax Acts that deal with the taxation of social security income.

2581.     Section 617 of ICTA contains the main rules and charges United Kingdom social security benefits to tax under Schedule E. It sets out in narrative form the various social security benefits that are charged to tax. It also identifies the benefits that are not charged to tax. And it provides that some of those benefits are not to be treated as income for any income tax purpose.

2582.     Subsections (3) and (4) of section 617 of ICTA deal with whether social security contributions may be deducted for tax purposes. The clauses in this Part deal only with the charging of benefits. So the rules about deductions are not rewritten here.

2583.     The aim of the social security income Part is to set out all the rules charging or exempting benefits payable under the social security Acts. The approach is to list the benefits in two tables. One table lists the taxable benefits and the other lists the non-taxable benefits.

2584.     The Part also sets out the charging and exemption rules that apply to foreign benefits.

Chapter 1: Introduction

Overview

2585.     This Chapter sets out the structure of the social security income Part.

Clause 655: Structure of the social security income Part

2586.     This is the only clause in the Chapter. It is new.

2587.     Subsection (1) lists the other Chapters in the Part. It identifies the different Chapters that deal with United Kingdom and foreign social security benefits. In each case, different Chapters deal with the benefits that are charged to tax and those that are exempt.

2588.     Subsection (2) is a signpost to three rules that apply to government payments but which are not dealt with in this Part. The rules are not rewritten in this Part because they may apply more widely than to social security income alone. For instance, a Treasury order under section 151 of FA 1996 may require that a benefit is taxed as a business receipt.

Chapter 2: Tax on social security income

Overview

2589.     This Chapter imposes the charge on "net taxable social security income" and explains how to calculate "net taxable social security income". There are four steps in the process:

• Step one - identify the income as social security income;

• Step two - exclude any exempt income;

• Step three - calculate the amount of "taxable social security income"; and

• Step four - calculate "net taxable social security income" by allowing any payroll giving deductions from "taxable social security income".

2590.     These steps are carried out separately for each United Kingdom and foreign social security benefit.

2591.     The Chapter includes a signpost to the provisions that identify the person liable to pay any tax charged on United Kingdom and foreign social security benefits.

Clause 656: Nature of charge to tax on social security income

2592.     This clause explains that the charge on social security income does not extend to income that is exempt from tax. It is new.

2593.     Exempt income is included in the definition of social security income but is not taxed. The definition of "exempt income" applies for the purposes of the social security income Part. In particular, the expression is used in clause 681(1) (taxable and other foreign benefits: exemptions).

Clause 657: Meaning of "social security income", "taxable benefits" etc.

2594.     This clause introduces the terms which are used to identify the benefits that are taxable and to arrive at the amount of income that is charged to tax. It is new.

2595.     Subsection (2) makes it clear that the expression "social security income" (used in clause 656) includes both taxable benefits and those that are exempt.

2596.     Subsection (4) ensures that the four statutory payments listed in clause 660(2) are not included in social security income if they are charged to tax as employment income.

Clause 658: Amount charged to tax

2597.     This clause imposes the charge to tax. It is new.

2598.     The clause explains how relief for payroll giving is allowed against social security income. The rules for the relief are in Part 12. Those rules depend on a definition of "taxable social security income" from which the payroll giving deduction ("PGD") is subtracted to arrive at the "net taxable social security income". That lower amount is the amount on which tax is charged.

2599.     Each taxable benefit is treated separately in the calculation of net taxable social security income.

Clause 659: Person liable for tax

2600.     This clause is a signpost to the clauses later in the Part where the person liable for the tax is identified for United Kingdom and foreign benefits. It is new.

Chapter 3: Taxable UK social security benefits

Overview

2601.     This Chapter sets out the rules for taxing United Kingdom social security benefits.

2602.     The charge on United Kingdom social security benefits in ICTA is under Schedule E. The charge is under paragraph 5 of Schedule E (section 19(1) of ICTA):

.. any other provision of the Tax Acts directing tax to be charged under this Schedule ..

2603.     Section 150(a) of ICTA charges allowances under Job Release schemes. The last Order under the Job Release Act 1977 extended the effect of the Act to 28 September 1988. So the Bill does not rewrite paragraph (a) of the section (or section 191 of ICTA). The other paragraphs, which charge statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay, are rewritten in this Bill - see paragraph 2605.

2604.     The Chapter sets out the income chargeable. It also identifies the basis of assessment and the person chargeable.

Clause 660: Taxable benefits: UK benefits - Table A

2605.     This clause sets out the United Kingdom benefits that are taxable. It derives from section 617(1) of ICTA. That subsection deals with most United Kingdom benefits (some of which are taxed in Part 9 as pensions). The table in this clause also lists other benefits that are not within section 617:

• statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay, from section 150 of ICTA;

• income support, from section 151 of ICTA;

• jobseeker's allowance, from section 151A of ICTA; and

• incapacity benefit, from section 139 of FA 1994.

2606.     Subsection (1) is the first of the tables ("Table A"). This table lists the taxable UK benefits. The second table ("Table B") is in clause 677 - see paragraph 2680.

2607.     The table identifies each benefit by the section of the social security Act under which it is paid. The table also identifies the corresponding Northern Ireland provision if it has been enacted. The suspension of the Northern Ireland Assembly has prevented the enactment of some proposed Northern Ireland provisions. Those provisions are described rather than identified in the table.

2608.     The table arranges the benefits in alphabetical order. This means that a particular benefit should be easy to find. And it should be easy to maintain the clarity of the table because it will be easy to insert any new benefit into the table in the right place.

2609.     Incapacity benefit is included in the table of taxable benefits. See Change 143 in Annex 1.

2610.     Subsection (2) is a special rule for statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay. It derives from the opening words "if they would not otherwise be (chargeable)" in section 150 of ICTA.

2611.     In most cases these payments are earnings from an employment and charged to tax under the employment income Parts of the Bill. This subsection ensures that a charge under the employment income Parts takes precedence over a charge under the social security income Part.

2612.     In other cases the payments are made by the government. Then there is no charge to tax on them as earnings and they are charged as social security income.

Clause 661: Taxable social security income

2613.     This clause sets out the basis of assessment for some United Kingdom social security benefits. It derives from section 41(2) of FA 1989, which applies only to the benefits (and pensions) mentioned in section 41(1) of FA 1989.

2614.     Incapacity benefit is explicitly brought within the rule in section 41 of FA 1989 by section 139(3) of FA 1994.

2615.     Five benefits in Table A are not covered by the rule in section 41 of FA 1989. They are statutory adoption pay, statutory maternity pay, statutory paternity pay statutory sick pay (all charged to tax by section 150 of ICTA) and jobseeker's allowance (charged to tax by section 151A of ICTA). There is no statutory basis of assessment for these benefits in ICTA.

2616.     So the clause applies only to the first three benefits listed in Table A.

Clause 662: Person liable for tax

2617.     This clause identifies the person chargeable. It is new.

2618.     The rule in this clause applies only to United Kingdom social security income. But an identical rule applies to foreign social security income - see clause 680.

2619.     The social security income Part includes income that ICTA taxes under Schedule E and income that ICTA taxes under Schedule D. For income taxed under Schedule D section 59(1) of ICTA identifies the person chargeable as the person "receiving or entitled" to the income.

2620.     There is no equivalent of section 59(1) of ICTA for social security benefits that ICTA taxes under Schedule E. It would be inconsistent to identify a person chargeable for some but not all social security income. The social security income Part avoids this inconsistency. It makes the person liable for tax on social security income the person receiving or entitled to the income in all cases where ICTA does not specify the person chargeable. See Change 135 in Annex 1.

Chapter 4 Taxable UK social security benefits: exemptions

Overview

2621.     This Chapter sets out the partial exemptions that apply to the taxable benefits listed in Table A. It derives from sections 151, 151A and 617 of ICTA and section 139 of FA 1994.

2622.     One exemption applies generally. That is the exemption for any part of a benefit that is in respect of a child. The other exemptions relate to part of the following benefits:

• incapacity benefit;

• income support; and

• jobseeker's allowance.

2623.     This Chapter deals with the benefits that are sometimes taxable. Chapter 5 deals with the benefits that are never taxable.

2624.     Section 617(2) of ICTA provides that payments within the subsection "shall not be treated as income for any purpose of the Income Tax Acts". In order to make the exemptions simple and consistent the phrase "no liability to income tax arises" is used throughout the Bill to express exemption from tax. See Note 28 in Annex 2.

Clause 663: Long-term incapacity benefit: previous entitlement to invalidity benefit

2625.     Long-term incapacity benefit is usually taxable. But this clause exempts long-term incapacity benefit from tax in some circumstances. The clause derives from section 139(2) and (5) of FA 1994.

2626.     Subsection (1) exempts long-term incapacity benefit from tax if it relates to a period of incapacity for work that started before 13 April 1995. On 13 April 1995 incapacity benefit replaced sickness benefit and invalidity benefit.

2627.     This provision has a limited life because no new claimants will be entitled to the exemption. But a significant number of claimants remain entitled to the exemption.

2628.     Subsection (2) contains the definition of invalidity benefit. This was the expression used to describe invalidity pension and invalidity allowance. Neither sickness benefit nor invalidity benefit was taxable.

Clause 664: Short-term incapacity benefit not payable at the higher rate

2629.     This clause limits the charge to tax on short-term incapacity benefit. It relies on definitions in the social security legislation. It derives from section 139(1)(a) of FA 1994.

2630.     The charge on incapacity benefit in section 139 of FA 1994 excludes "benefit payable for an initial period of incapacity". That period is defined as a period for which short-term benefit is payable other than at the "higher rate".

2631.     Subsection (1) restricts the charge to tax on short-term incapacity benefit so that it is taxable only if it is payable at the "higher rate".

2632.     Subsection (2) cross-refers to the definition of "higher rate" in the social security legislation. The phrase is construed in accordance with section 30B(5) of the Social Security Contributions and Benefits Act 1992. That section refers to the rates of benefit set out in Schedule 4 to the Act. The benefit is payable at the "higher rate" after the first 196 days of a period of incapacity for work.

2633.     As noted in paragraph 2605, incapacity benefit is charged to tax by section 139 of FA 1994. So it is logical for the benefit to be excluded from the charge in section 617 of ICTA. A free-standing charge was set up by section 139 of FA 1994 in case section 617(1) was not effective in taxing a new benefit - an explicit charge was thought to be safer.

2634.     When incapacity benefit replaced sickness benefit and invalidity benefit in 1995, the references to the older benefits were not removed from section 617(1) of ICTA (some publishers have updated the text to help the reader). Instead, section 13(2) of the Social Security (Incapacity for Work) Act 1994 treats the references to sickness benefit and invalidity benefit in section 617(1)(a) as references to incapacity benefit. So incapacity benefit appears to be excluded from the charge in section 617 by subsection (1)(a).

2635.     A consequence of exclusion from the section 617(1) charge would be that the benefit is not regarded as income for income tax purposes because of section 617(2)(c). This was overlooked when section 139 of FA 1994 set up the free-standing charge. So the benefit is apparently disregarded by section 617 of ICTA but clearly taxed by section 139 of FA 1994.

2636.     The Bill clarifies the law, to bring it into line with the clear, undisputed, policy objective (to tax incapacity benefit) and generally accepted practice. See Change 143 in Annex 1.