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CERN Pensions: UK Tax Treatment

Part of Petition - Royal Bank of Scotland Closure in Stepps – in the House of Commons at 5:10 pm on 15th March 2018.

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Photo of Robert Jenrick Robert Jenrick The Exchequer Secretary 5:10 pm, 15th March 2018

I can always count on my hon. Friend Kwasi Kwarteng to put me in my place.

I thank my hon. Friend Sir Robert Syms for highlighting this issue. I want to say how we proud we are of the pioneering work carried out at CERN and of the work of all those who have retired and returned to the UK. Poole is a beautiful place to retire to, by the seaside.

It seems appropriate to be talking, if only tangentially, about CERN’s work in the week in which we lost that great physicist, Stephen Hawking. One of the few scientific bets that he lost in his career was that the Higgs boson would never be found, so even somebody of his genius can get things wrong every now and again.

The Government are committed to a fair and consistent tax system. This is especially important in pensions, as the Government promote saving through tax incentives and allowances. We want those incentives to work and to be fairly distributed. My hon. Friend outlined the history of the issue before us today. As he said, the Government reviewed this regime at autumn statement 2016, and announced that the UK tax treatment of foreign pensions would be changed to be closely aligned with that of UK pensions. Following that, the Finance Act 2017 legislated so that, with effect from 6 April 2017, 100% of income from foreign pensions has been liable to UK tax; it was previously 90%. This aligns the tax treatment of UK pensioners with the treatment of those who earn their pension overseas, ensuring a fair system. At the outset when contributions are made towards a pension—whether that pension is UK or foreign—they are usually free of any tax paid in the UK. With this change, the tax treatment of contributions and payments are now consistent.

My hon. Friend raised a series of points on which I hope to provide some clarity. He was kind enough to speak to me before this debate and mention a number of international organisations where British citizens work and make a valuable contribution, including the OECD, NATO, the United Nations and others. My hon. Friend noted that pensioners from these international organisations or organisations of a similar type are reimbursed, for example, 50% of their income tax payments. It important to say that this does not arise as a result of any country’s tax rules. It is not because of a particular deal made by the United Kingdom with any of these organisations, but because of the specific provisions within the pension scheme of that international organisation.

It would be CERN’s decision whether it wanted to make a similar provision in its pension scheme either for the future, or to reopen and reassess their past practice for CERN pensioners who had retired, were drawing on their pensions and are now my hon. Friend’s constituents. Any payments received by UK residents are subject to UK tax, including reimbursement. That is the case for all international organisations. I will return to the EU, which, as is so often the case, has special treatment.

The UK only supports special tax treatment for international organisations when the employees have worked for the organisation in the UK, which I hope my hon. Friend will understand is a somewhat different situation for tax purposes. Aside from the EU, the UK has no bilateral agreements in relation to the tax treatment of international organisations with other countries. We do with the EU, which is our only exception, and that is common practice across the Union.

My hon. Friend mentioned international comparisons. We understand that other major economies are typically taking a similar approach to the UK with respect to taxing pensions. Countries such as France, Germany and Switzerland all tax occupational pensions such as CERN’s and the foreign income of their residents. There may be other examples such as those that he raised and spoke to me about earlier. Of course, I am happy to look into that. It may be a topic that we could discuss were we to meet. Certainly, our major international competitors and the countries from which, one presumes, a majority of CERN’s employees are drawn take an approach similar to the one that we have taken.

In our correspondence prior to this debate, my hon. Friend suggested that the Government could introduce a 25% tax relief on CERN pensions to mirror the tax-free lump sum. I understand that that would be an attractive proposition for CERN pensioners. However, the tax-free lump sum is not an allowance. If a qualifying lump sum is not paid, this relief is not available. These lump sums can be paid free of UK tax whether built up in a foreign or a UK pension if the qualifying conditions are met. Allowing for 25% tax relief outside of these circumstances would, we believe—I hope that my hon. Friend will understand this—undermine these qualifying conditions, which apply to all pensioners.

I hope that my comments have at least explained the rationale behind the Government’s policy. I appreciate the concerns that my hon. Friend raises. I assure him that the Government have not sought to target individuals unfairly or to impact on the work undertaken by those at CERN or, indeed, by any other of our citizens who choose to live and work abroad. As he says, this is an incredibly important and increasingly prevalent aspect of the modern labour force, with increasing globalisation and a global market for the most talented individuals, certainly in the scientific and research world.

The changes we made in 2017 stopped people from transferring their pensions abroad to avoid UK tax. That was a consideration, but it was not the primary motivation. Our primary motive was to do this as part of a wider move towards consistency and fairness in pensions and taxation. The Government recognise that those in receipt of foreign pensions do face additional costs in accessing their pension. That was the original motivation behind the 90% rate that was introduced, I believe, in the 1970s. However, we have taken the view that it is not for Government to compensate these individuals for their choice to work outside the UK or to enable them to use this as a UK tax break. It is the Government’s role to encourage a fair and sustainable tax regime in the UK. The changes that we made have equalised the system, from which only overseas-based employees were previously able to benefit.

I again thank my hon. Friend for raising this issue. I also thank his constituents and others who may be paying attention to this debate for the ground-breaking work that they have done at CERN, which the Government and, I think, all Members are rightly proud of. We are proud that UK citizens have played a part in that and that they have chosen to return home to the UK for their well-earned retirement. The Government are delighted to welcome home British expatriates who have worked abroad to spend their retirement in places such as Poole. We recognise that that plays an increasingly important part in our economy.

I hope that my hon. Friend’s constituents will appreciate the Government’s rationale for making these changes over the past few years. We took a decision to treat all UK pensions consistently. Such judgments are difficult ones, and do involve winners and losers, but we appreciate the views of his constituents, and I would be happy to meet him and them in person, if it would help to further the conversation, and to listen to their specific concerns and see what, if anything, we can do.