‘(1) In Part 2 of TIOPA 2010 (double taxation relief), in Chapter 3 (miscellaneous provisions), after section 130 insert—
“130A Interpreting provision about UK taxation of pensions etc
(1) Subsection (3) applies if double taxation arrangements make the provision, however expressed, mentioned in subsection (2).
(2) The provision is that pensions and other similar remuneration which—
(a) arise outside the United Kingdom, and
(b) are paid to persons who are resident in the United Kingdom,
are not to be subject to United Kingdom tax.
(3) That provision does not prevent a pension or other similar remuneration of a person resident in the United Kingdom being chargeable to income tax if—
(a) the pension or other similar remuneration is paid out of sums or assets that were the subject of a relevant transfer or related sums or assets, and
(b) the relevant transfer or any transaction forming part of that transfer was, or formed part of, a tax avoidance scheme.
(4) But nothing in subsection (3) prevents credit being allowed under Chapter 2 of this Part (double taxation relief by way of credit) against any tax so charged.
(5) In determining whether a pension or other similar remuneration is paid out of sums or assets within subsection (3)(a), it is to be assumed that it is paid out of such sums or assets in priority to any other sums or assets.
(6) A “relevant transfer”, in respect of any sums or assets, is a transaction or series of transactions as a result of which—
(a) the sums or assets are transferred out of a pension scheme, and
(b) the sums or assets or related sums or assets (or both) are transferred into the pension scheme under which the pension or other similar remuneration is paid.
(7) A scheme is a “tax avoidance scheme” if the main purpose, or one of the main purposes, of any party to the scheme in entering into the scheme is to secure an income tax advantage for any person under this Part by virtue of provision mentioned in subsection (2) made by double taxation arrangements.
(8) For the purposes of subsection (7)—
(a) “scheme” includes any scheme, arrangements or understanding of any kind whatever, whether or not legally enforceable, involving a single transaction or two or more transactions,
(b) it does not matter whether or not the double taxation arrangements were in existence at the time the tax avoidance scheme was entered into or given effect to, and
(c) “income tax advantage” is to be construed in accordance with section 572A(3) to (5) of ITA 2007.
(9) In this section—
“pension” and “other similar remuneration” have the same meaning as in the Model Tax Convention on Income and on Capital published (from time to time) by the Organisation for Economic Cooperation and Development;
“pension scheme” has the same meaning as in Part 4 of FA 2004 (see section 150 of that Act);
“related sums or assets”, in relation to other sums or assets (“the original sums or assets”), means sums or assets which arise, or (directly or indirectly) derive, from the original sums or assets or from sums or assets which so arise or derive.”
(2) The amendment made by this section has effect in relation to the tax year 2011-12 and subsequent tax years (and it does not matter whether the tax avoidance scheme was entered into or effected before, or on or after, 6 April 2011).’.—(Mr Gauke.)
I beg to move, That the clause be read a Second time.
New clause 4 prevents UK residents with foreign pensions from taking unfair advantage of the UK’s tax treaties, and follows an announcement I made on 6 April to take effect from that date. The new clause was published in draft on 24 May. Responses confirmed our view that the new clause achieved the desired outcome in preventing avoidance. The clause ensures that a UK resident cannot take advantage of the provisions of one of the UK’s tax treaties to avoid UK tax on a foreign pension or lump sum payment. It applies where pension savings are transferred to a pension scheme established in another country and that country has a tax treaty with the UK that provides for a pension or lump sum to be taxed exclusively where it arises.
Where a particular country would not tax a pension or lump sum paid to a UK resident, any UK resident with pension savings would have been able to make arrangements to receive their pension or lump sum entirely tax free from that country. The new clause prevents that sort of tax avoidance. However, we do not intend to tax the pensions of those who are not trying to avoid UK tax, so the clause is carefully targeted. It will apply only where pension savings have been transferred and one of the main purposes of making these arrangements is to secure an income tax advantage. If any tax is payable in the other country on the foreign pension or lump sum, the clause makes explicit provision for tax credit relief to be allowed in the UK in respect of any tax paid.
This is a straightforward anti-avoidance measure that will protect tens of millions of pounds. On the day that the statement was made, Paul Garwood of Smith & Williamson said that the measure was “unusual but clearly justified,” while Louise Somerset of RBC Wealth Management said it was “reasonable.” We are taking action to protect the Exchequer and the vast majority of taxpayers from those who undertake deliberate and artificial efforts to avoid tax.
I shall make a couple of small points about the new clause. In general, I support its objectives. The language is widely drawn and it will catch a lot of arrangements. It will catch what it is intended to catch—the international pension plans—and therefore it serves its purpose.
My only point to the Minister is that we spend a lot of time in Committee Rooms adjacent to this one dealing with double taxation agreements across various countries. I want to get an understanding from him about the relationship between individual double taxation agreements and this clause, which deals with international pension plans. In effect, we could be seen to be overriding treaties with this domestic legislation because the language in a treaty creates what is seen as a tax avoidance opportunity. If that is the case, how does the measure sit with our other responsibilities on double taxation agreements, because the UK is and should be a trusted party in tax agreements? I am unclear about where the measure fits in, given the detailed discussions we have had and will have next week on many other items, including on further double taxation agreements.
The right hon. Gentleman asks a perfectly fair question about whether we are seeking to override tax treaties that have been agreed with other parties. It is generally accepted by treaty partners that domestic legislation may be used to counter abuse of the provisions of a tax treaty. The new clause clearly addresses an abuse. I do not think we will be fairly criticised for undermining in any way the treaty obligations that we have entered into. He was right to raise the question, but as I say, because the measure tackles an abuse, it will be widely accepted, just as we would accept it if one of our treaty counterparties had to deal with a similar issue to prevent tax avoidance in their jurisdiction. The measure will not undermine the UK’s reputation as a country with which many jurisdictions want to enter into double taxation treaties.