Clause 8 - Meaning of ''applicable year of assessment'' in section 7

Finance Bill – in a Public Bill Committee am 12:30 pm ar 21 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The clause deals with the rules for deciding in which year the tax charge will occur. That year is referred to as the ''applicable year of assessment''. It may be useful to the Committee if I place on record the implications of the clause. In the majority of cases, the applicable year of assessment is the tax year in which the person becomes entitled to their social security pension, and it is based on the first day that a state pension is payable, as established by the Department for Work and Pensions.

The clause also provides rules for establishing the applicable year of assessment in specified circumstances. Crucially—the hon. Member for   Cities of London and Westminster will approve of this—it provides flexibility by allowing people to take the lump sum in the year following what would be the normal year of assessment. That will help people who choose this option for the year following their retirement. That will become possible once the Secretary of State for Work and Pensions lays the necessary regulations enabling that choice; I understand that that will happen later this year. The provision may mean that a lower rate of tax is paid than would have been the case if a person had been assessed in the year of retirement. In this way, the tax rules are not a disincentive to taking the lump sum.

The clause also establishes the applicable year of assessment in cases where a person dies before taking a lump sum. There are rules that provide for cases in which the surviving spouse inherits the right to the lump sum, and also cases in which it is paid to the person's estate. This flexible approach to taking the lump sum underpins a real choice on taking retirement benefits, and I commend the clause to the Committee.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I welcome the Economic Secretary's remarks, and I welcome the flexibility given to the taxpayer to defer assessment by a year; that is a sensible measure. We all know what we are trying to do under this clause. The problem, as is so often the case with tax, is that it is easy to announce in one sentence what the Government want to achieve—namely that no one should pay a higher rate of tax than they otherwise would have paid simply because they got a lump sum payment. However, it is much more difficult to translate that into reams of written words that give effect to the measure.

I do not wish to rehearse an argument that we have already had, but as the Economic Secretary said, the applicable year of assessment is the year of assessment in which the first benefit payment day falls. Without necessarily making the case for keeping open the options for partial deferment—although that would be a beneficial outcome of what I am about to suggest—one is compelled to ask why the year of assessment is not the year in which the lump sum is paid. That year, or indeed the following year by election, would seem to be the more obvious year of assessment. Why do we have this rather tortuous mechanism under which the year of assessment is the year in which the pension is paid, not the one in which the lump sum is paid, or when the first benefit payment date for the pension falls, rather than the day on which the lump sum is paid? That gives rise to a concern about clause 8(8), which says:

''For the purposes of determining the applicable year of assessment, it does not matter when the lump sum is actually paid'', and also a concern about clause 7(1). I should be pleased if the Economic Secretary would rule out the possibility that someone could be assessed to tax in a period of assessment on a lump sum that they had not received, and that a pensioner could find that they were presented with an assessment to tax in respect of what could be four or five years' deferred pension—quite a lot of money—that they had not received: a tax bill which they therefore had no way of paying. Such a situation could arise, for example, if somebody opted to defer their pension for four years and at the end of   the four-year period the ''first benefit payment day'' fell in that period. That person would, on that day, become liable to pay the tax on the lump sum, but what if the Department for Work and Pensions could not find them? What if they had moved home or disappeared?

We know that the Treasury has difficulty tracing people and paying them the right amounts of money. It is not inconceivable, as any hon. Member will recognise—and even a brand new Member will have had enough post so far to recognise—that people do not always get the payments that they are meant to get from the Government when they are meant to get them. Is it not possible that elderly and vulnerable people may suddenly be presented with a bill for a tax liability that they cannot pay, because they have not had the lump sum in question, which is presumably accruing interest due to HMRC? That is a problem.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I draw the hon. Gentleman's attention to explanatory note 11 on clause 7, which says that there will be a PAYE deduction by the DWP on these lump sums, so it would not be the case that an elderly person—to use his suggestion—will be presented with a tax bill that they could not pay; it will be done by PAYE.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am not an expert on the PAYE system, although the hon. Gentleman may be, but the fact that tax is subject to PAYE deduction does not exempt the taxpayer from liability to pay an amount if, in error, it is not deducted or if something goes wrong with the PAYE system. I should have thought that the liability attaches primarily to the taxpayer and there is an obligation on the employer to deduct the PAYE amount.

I was going to ask some questions about this provision for PAYE pension deduction under clause 10, because I suspect that the Minister will tell us that this is a narrow class of all lump sum payments. However, we will find out about that in due course.

I also have a question about subsection (4), which the Minister has explained. Anyone who penetrated the identity of P and S on reading the Bill will have concluded correctly that they are married people, or those treated as married for the purposes of the pensions legislation, and P stands to inherit the lump sum following S's death. Can the Minister explain why the logic of allowing the year of assessment by election to be postponed by a year to avoid a spike is not extended to the widow or widower of S following S's death? Why is there not the same provision under subsection (4), allowing an election for postponement by one year?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The hon. Gentleman raises some important issues, to which I shall try to respond one by one. He made comments about the delay; that follows the basis on which the state pension is taxed. For example, the delay could be necessary to determine the amount of the final entitlement.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The Economic Secretary makes my point for me. I am suggesting that it would be more logical, and fairer, if the lump sum were taxable when it was paid. If there were a delay—because the DWP computer had broken down, or   something like that—the tax charge would arise when the payment was made. The Government propose that the charge should arise on the ''first benefit payment day''. Why?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The reason is that we are anxious that this approach should be consistent with how we currently tax state pensions; any departure from that would lead to undesirable consequences.

The hon. Gentleman also wanted clarification on whether a demand for payment of tax under self-assessment could be made before a lump sum was even paid. The answer is no. The DWP's position is that there would be reason for such a delay only if there were a doubt about the pensioner's contribution records. The DWP might have to make inquiries about entitlement to fairly small elements of the lump sum. In such a situation, apparently, the DWP often makes an initial payment, comprising the amount that is not in dispute. I hope that that helps the hon. Gentleman.

PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by the pensioner of the appropriate rate. The tax will be deducted at the same time as the lump sum is paid.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Will the Economic Secretary address the specific situation of the lump sum payment being delayed for any reason? Following on from the point made by the hon. Member for Wolverhampton, South-West, would it be the case that because a PAYE regime was in existence, the taxpayer would not become liable for the tax on entitlement to the lump sum on the ''first benefit payment day'' as the Bill suggests? Are we saying that there would be no liability on the taxpayer and that the matter would be entirely taken care of by the PAYE system that the DWP will operate?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The hon. Gentleman went on to ask about a delay in payment, and raised another point about whether a pensioner would become liable for tax before being able to pay. The response is that the only reason for such a delay would be when there was a doubt about the pensioner's contribution record. The tax would be deducted at the same time as the lump sum was paid. The DWP processes already take account of situations in which such things happen, and the changes proposed in the Bill do not have a material impact on that.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I agree with the Economic Secretary: the tax will be deducted at the moment when the lump sum is paid. We all agree on that; the problem is that the liability will not arise at the moment when the lump sum is paid. For some reason best known to themselves, the draftsmen decided that the liability should arise in

''the year of assessment in which the first benefit payment day falls''.

Therefore, if a person received their first benefit payment—their first pension instalment—on, let us say, 4 April, but received their lump sum payment some two, three or four months later, perhaps for all the good reasons that have been set out, although the PAYE tax may be deducted by the DWP when the payment is made, the liability has arisen in the year of   assessment in which the first pension payment day falls. Is that not correct?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall try again to articulate the way the system works, and if the hon. Gentleman is not satisfied with what I have to say, I will have to write to him to provide further clarification.

The hon. Gentleman keeps on referring to a delay. As I have said, the only reason for such a delay is where there is a doubt as to the pensioner's contribution record. In those circumstances, the DWP might have to make inquiries around entitlement for fairly small elements of the lump sum. It is my understanding that in those circumstances the DWP makes an initial payment comprising the amount that is not in dispute. PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by a pensioner as to the appropriate rate at which to deduct tax. The tax will be deducted at the same time that the lump sum is paid. I think that that is a pretty clear response to the hon. Gentleman's point.

Photo of Mark Field Mark Field Shadow Financial Secretary

My hon. Friend has set out an obvious practical example, and it would be helpful if the Economic Secretary were to explain what is likely to happen. What will be the procedure? Is it likely that a cheque will be sent out for a lump sum? Will the Department investigate in advance to ensure that the cheque is sent to the right place, particularly if there is a delay of three or four months, as put forward in my hon. Friend's intelligent example? Our concern is that a potentially significant interest payment will be due to a beneficiary if there is a delay between their cheque being sent out, and therefore being out of the Department's hands, and their receiving it and paying it into their bank account.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall try to provide a clearer definition of what is meant by a PAYE payment date. That is triggered by the actual payment itself, rather than by when the entitlement occurs. That has been part of the confusion; the actual payment triggers the PAYE payment date, not when the entitlement occurs.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Let us try to resolve this once and for all. I think the problem would be solved, and we would not be having this discussion, if the Bill were to state that the liability arises when the payment is made. That would be consistent with the PAYE legislation. I think that that is contained in section 683 of the Income Tax (Earnings and Pensions) Act 2003, which the Minister is now quoting and which says that the PAYE deduction falls to be made when the payment is made.

I am simply asking the Minister to confirm that there is no circumstance in which a person who has not received their lump sum payment could have a liability for payment of tax which is therefore accruing interest. For example, if a person who is due a lump sum payment has moved and cannot be traced and the Department cannot pay them the cheque because it cannot find them, in the interim period does a liability for tax arise, and is interest therefore accruing on that liability?  

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall try again. In terms of the situation that the hon. Gentleman has described, in no circumstances would that happen. I have tried to say that throughout the debate; there are no circumstances in which that would happen. I hope that reassures him.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Perhaps I can, through my hon. Friend the Economic Secretary, reassure the Committee. We are, in a sense, on clause 7, Sir Nicholas.

The hon. Member for Runnymede and Weybridge raised an interesting point. By way of an analogy, I suggest that he is mistaking a position where you have VAT at the nil rate, versus VAT exemption. There is a difference. Per clause 7(1), a charge—indefinite article—arises, but in clause 7(5)(a), for example, it quite recognises that that charge could be nil. Therefore, the concerns that the hon. Gentleman is raising would not hold water.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

Perhaps we should draw this to a conclusion. The hon. Member for Runnymede and Weybridge asked me earlier what happens if we cannot find the person concerned. If we cannot find them, there is no tax due. I should have thought that was pretty self-explanatory. If we cannot find the person concerned, how can we actually pay them to then tax them? I give way one last time.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

That is precisely the question that we are asking.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

He has told you that six times.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

He has not. If the liability to tax arose on payment of the lump sum, I would totally agree with the Economic Secretary. My concern is that it appears, from the face of the Bill, that the applicable year of assessment is the year in which the first benefit payment day falls. So if a benefit payment day occurs in a year of assessment, liability to tax on the lump sum arises at that moment. That is my interpretation.

If the Economic Secretary is able to tell me clearly that that is wrong, and that in no circumstances could a person have a liability to tax on a lump sum until they have received it, we shall be perfectly satisfied. My only remaining question for him would be, why on earth is that not the definition in the Bill—that receipt of the lump sum is the trigger for payment of the tax?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

In no circumstances.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clauses 9 to 10 ordered to stand part of the Bill.