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In which year is this taxable

In which year is this taxable

Somone claimed ESA.  It was paid for a short period then stopped by DWP.  They appealed against the decision and took it to tribunal.

Person won and it was paid in 2011/12.  Arrears from September 2011 were paid this year also.

When are the arrears taxable?  Is it in 2010/11 or 2011/12.  Logic suggests it should be taxable last year as that was when the entitlement arose?

Can anyone help?

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13th Jul 2011 12:22

When paid

I would have said it's taxable when it's paid.  That's normally the case for bank interest, dividends, etc... the only time you use an accruals basis for unpaid income is when you have a business (including a rental business).  Otherwise you'd end up paying tax on income you haven't received.  But I'm not sure I could tell you the statutory reference for that!

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By Nadine
13th Jul 2011 12:55

Receipts basis

EIM76005 which covers Social security benefits paid in arrears states:

"Arrears of benefit may be paid in a lump sum. The arrears are chargeable for the year or years of assessment to which they relate."

Don't forget that Income based ESA is non taxable so you will need to check this with your client.

Revenue guidance about ESA is at EIM76185.

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13th Jul 2011 15:42

Sorry but doesnt that mean accruals basis

"Arrears of benefit may be paid in a lump sum. The arrears are chargeable for the year or years of assessment to which they relate"

I read that as if the benefits relate to a claim for the previous year or years you go back and include the amounts due for each of those years.

My arguement would be otherwise a lump sum would put someone over the personal allowance or higher rate bands.

This is certainly the case for State Pension where you are taxed on 52 x your weekly rate not on the amount you may have received. Particularly relevant in the first year of payment when you can receive a payment after 5 April for last years pension.

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13th Jul 2011 16:37

Yes

I agree I interpet that as an accruals basis.  EIM76004 reinforces that view - it says that soecial security benefits are taxable on an arising basis.  So i take back my above comments!

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