Chapter EIM15326
| Published date | 22 May 2014 |
| Record Number | EIM15326 |
| Court | HM Revenue & Customs |
The examples on this page are simplified to demonstrate the application of different pieces of legislation according to situation and time. They are not intended to demonstrate how every last detail of the conditions required for the various exemptions to operate is satisfied in these fictional cases.
Example 1 – Lump sum paid before 6 April 2011For guidance on ESC A10 see EIM15082 and subsequent guidance.
Extra-Statutory Concession A10 – full exemption exampleIn 2010 an employee retired from employment with a foreign company after 20 years’ service.
Suppose the service in the first 15 years counted as foreign service (see the definition at EIM13690) whereas that of the last 5 did not.
On retirement in 2010, the scheme paid the employee a lump sum of £100,000.
ESC A10 applied. Not less than 75% of service in the employment was foreign service (15/20 = 75%) so test (a) in EIM15083 was met. Consequently the lump sum was fully exempt from Income Tax.
Extra-Statutory Concession A10 – partial exemption exampleIn 2010 an employee retired from employment with a foreign company after 15 years’ service.
Suppose the service of the first 6 years counted as foreign service (see the definition at EIM13690) whereas that of the last 9 did not.
On retirement in 2010, the scheme paid the employee a lump sum of £90,000.
ESC A10 applied. The foreign service did not meet any of the three tests in EIM15083 but partial exemption was available. Following EIM15083, the amount of the £90,000 lump sum that was to be charged was reduced by the same proportion as the foreign service bore to the employee’s total service in that employment, that is 6 years out of 15 years.
(6/15) × £90,000 = £36,000 reduction
£90,000 − £36,000 = £54,000 left chargeable under section 394 ITEPA 2003.
Example 2 – Lump sum paid on or after 6 April 2011 by employer directly Payment before 5 February 2014An employee retired from employment with a foreign company in 2012 after 15 years’ service. On retirement in 2012, the employer paid a lump sum of £90,000 under the scheme.
Part 7A ITEPA 2003 took effect from 6 April 2011 but does not apply to the direct provision of benefits by an employer. A lump sum paid on retirement by the employer is a relevant benefit subject to section 394 ITEPA 2003.
However, suppose the service of the first 6 years counted as foreign service (see the definition at EIM13690) whereas that of the last 9 did not. This means that there can be a foreign service exemption.
At the time of the payment ESC A10 still applied. The ‘foreign service’ did not meet any of the three tests in EIM15083 but partial exemption was available. Following EIM15083, the amount of the £90,000 lump sum that was to be charged was reduced by the same proportion as the foreign service bore to the employee’s total service in that employment, that is 6 years out of 15 years.
(6/15) × £90,000 = £36,000 reduction
£90,000 – £36,000 = £54,000 left chargeable under section 394 ITEPA 2003.
Payment after on or after 5 February 2014An employee retires from employment with a foreign company in 2015 after 15 years’ service. On retirement in 2015, the employer pays a lump sum of £90,000 under the scheme.
Part 7A does not apply to direct provision of benefits by an employer. A lump sum paid on retirement by the employer is a relevant benefit subject to section 394.
However, suppose the service of the first 6 years counted as foreign service (see the definition at EIM13690) whereas that of the last 9 did not. This means that there can be a foreign service exemption. By the time of the payment ESC A10 no longer operates and has been replaced by section 395B ITEPA 2003.
The foreign service did not meet any of the three tests for full exemption in EIM15325 but partial exemption is available. The amount of the £90,000 lump sum, which without any exemption would be fully charged under section 394, is reduced by the same proportion as the foreign service bears to the employee’s total service in that employment, that is 6 years...
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