Back dated Pension

Back dated Pension

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Has anyone had experience with HMRC on this?

My client (86 years old) has received a backdated lump sum payment from the Irish government in 13/14, 90% taxable in UK. As lump sum would mean tax at 40% if all in 13/14 we have applied accruals basis and carried back to relevant years to 2000/01. Initially HMRC were only going to raise assessments back to 2010 however they changed their minds and have now issued all assessments. While we are unhappy that they have changed their position we can kind of accept it as the tax bill is lower than all in one year but HMRC are now charging over £3k interest on late payment. We have objected but its been turned down as the tax was late but my client could not have paid tax on income that she did not know she was going to get.

Any advice on where we can go now? Could we appeal to FTT and if so on what grounds, Unconscionable?

Any advice would be appreciated. Thanks

Replies (19)

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By Cathy R
29th Oct 2015 18:24

They should not have raised assessments.  The tax should be calculated as due in the year of receipt, but on the basis of how much would have been due had it been paid when it was due.  I do not have time to look up the legislation now but I will tomorrow.

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By Cathy R
30th Oct 2015 08:34
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By David Treitel
30th Oct 2015 19:08

But HMRC Manuals say that foreign pensions are taxable on the arising basis; not the accruals basis. The income (less the 10% deduction) is entirely taxable in 2013-14.

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Replying to Jason Croke:
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By thehaggis
30th Oct 2015 19:36

Arising/accrual - same thing

David Treitel wrote:

But HMRC Manuals say that foreign pensions are taxable on the arising basis; not the accruals basis. The income (less the 10% deduction) is entirely taxable in 2013-14.

Yes - the arising basis.  The pension arises in one year and accrues until it is paid.  Pensions are taxed in the year they arise, not the year they are paid.

Cathy is correct

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By petersaxton
31st Oct 2015 08:40

OP wants cake and eat it

It shouldn't be taxed in 2013-2014 because it would be taxed at 40%.

It shouldn't be tax earlier because she didn't know about it.

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By RCroucher
02nd Nov 2015 09:26

Done this

Thanks for the responses. So far we have requested that the lump sum is treated on the accruals basis and applied to the relevant tax years. HMRC have done this and we do not really have any issues since tax is charged at 20% and not 40%. BUT HMRC are charged late payment interest on all this years which just seems unfair since the tax payer could not have declared the income earlier as she did not know it was coming!

We have objected to the interest but HMRC are insisting it is payable - has anyone overturned interest on a similar situation and if so how?

Thanks

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By petersaxton
02nd Nov 2015 12:46

Either

You accept taxable in 2013-2014 and pay tax at 40%

OR

You accept tax at 20% over several years and also accept that some tax is paid late

Can't you see the logic? Why is it unfair? Because she didn't know about the tax? So then get charged in in 2013-2014.

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By RCroucher
02nd Nov 2015 13:27

Its the interest charges

I fully understand the tax charge its the interest HMRC want to charge on the tax now being late - seems unfair don't you think!

Could not have declared correct taxable income in earlier years at each deadline as no idea additioanl income was going to arrive let alone be chargeable and client has had no benefit of interest on the money in earlier years!

 

 

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By petersaxton
02nd Nov 2015 13:59

Tax due

If the income is chargeable in a particular year and the tax is due that year then the fact that you are paying it late means that interest should be added.

Was she due this pension in earlier years? Couldn't she have made payment of an estimated amount of tax?

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By Cathy R
02nd Nov 2015 14:07

Interest should not be charged on this.  The point of having it calculated this way is so that the taxpayer is not put at a disadvantage, if they charge interest then clearly there is a disadvantage.  You do need to calculate what the tax liabilities for each year would have been, and present your figures to HMRC. 

Personally I would be firm with HMRC that they are incorrect, I have dealt with cases like this and there have never been interest charges.

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By Cathy R
02nd Nov 2015 14:09

Just to clarify, the tax is chargeable in the year of receipt, (so no interest due) but calculated on the basis of the amounts that would have been payable had the arrears been paid when they were due.

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Replying to JHC:
Stepurhan
By stepurhan
02nd Nov 2015 14:21

Statutory basis?

Cathy R wrote:

Just to clarify, the tax is chargeable in the year of receipt, (so no interest due) but calculated on the basis of the amounts that would have been payable had the arrears been paid when they were due.

As you say you've successfully agreed matters on this basis, can you let us know what statutory basis you quoted to get this treatment? Peter's either/or treatment seems logical, so knowing on what basis you can get best of both worlds would be useful. I can't help thinking just saying HMRC are wrong without stating the legal basis for that assertion won't get the OP anywhere.
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By petersaxton
02nd Nov 2015 14:19

Cathy

Do you have any links to HMRC manuals or any other sources?

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By Cathy R
02nd Nov 2015 14:24

The earlier link I posted is the only one I can find at the moment, I'm sure that a couple of years ago I found something that went into more detail but I cannot locate it now.  It may actually have been connected to the Pension Providers guidance.  I dealt with a case like this a couple of years ago involving quite substantial sums, I provided HMRC with my spreadsheet of what the year by year liabilities would have been and the client was given a tax refund.

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By petersaxton
02nd Nov 2015 14:54

Cathy's link

Cathy, your link doesn't provide evidence that the pension is chargeable in the year of receipt or over several years with no interest charge. It supports exactly what HMRC are wanting to do.

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By Cathy R
02nd Nov 2015 15:14

http://www.hmrc.gov.uk/manuals/sammanual/SAM20050.htm

 

This gives a bit more detail, in particular note 4.

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By petersaxton
02nd Nov 2015 15:48

HMRC seems to be reasonable

Note 4: "Any available credit from the PAYE tax deducted in the year when the pension was received should be transferred to OAS to be allocated back to the SA record with an effective date of payment (EDP) equal to the relevant dates".

So the income and the PAYE is allocated to the relevant years of assessment and any tax still outstanding for those years incurs interest.

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By Cathy R
02nd Nov 2015 16:01

With an effective date of payment equal to the relevant dates.  The relevant dates being the dates the tax would have been due.  This would mean no interest charges.

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Replying to AynsleyD:
By petersaxton
02nd Nov 2015 16:37

Tax all paid each year?

Cathy R wrote:

With an effective date of payment equal to the relevant dates.  The relevant dates being the dates the tax would have been due.  This would mean no interest charges.

Only if the tax deducted in Ireland was sufficient to be the same as UK tax. The OP doesn't make this clear. I wonder how the OP dealt with the fact that Ireland's tax year is the same as the calendar year. Ireland's personal allowance is greater than the UK but the 20% band is smaller. There's also a Universal Social Charge of between 1.5% and 8%.

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