I can summarise all the above comments by saying that if compensation funded by HMG is paid to officers staying on after 1997 under a scheme dealing only with such compensation then no United Kingdom tax liability will arise in respect of the payments unless they are made to an individual who has become UK resident before his employment formally ends.
I now turn to the second group of individuals ie those who
to retire to the United Kingdom in 1997 and receive compensation on and after that retirement. Assuming that UK residence is not established prior to formal termination of the employment then no tax charge under Section 19 could possibly arise. However I take the view that a charge under Section 596A (which became law on 27 July 1989) would be imposed. I take the view that the compensation payments would meet the definition of "relevant benefits" within Section 612 of the 1988 Act and that the compensation arrangement set up to pay them would constitute a retirement benefit scheme within Section 611 of that Act. As the scheme will not be one of the 3 types described in Section 596(1), then the benefits therefrom will be chargeable under Section 596A(2) for the years in which they are received. As Section 596A takes precedence over the provisions of Sections 148 and 188 (which apply only to items "not otherwise chargeable to tax") then the payments cannot benefit from the exemption in Section 188(1)(f). (This problem would not have existed if the retirement compensation arrangement was one to be offered and administered by the Hong Kong Government, rather than HMG, because the benefits would have derived from a scheme fitting the description found in Section 596(1)(c) of the Act).
Finally I should mention that, because the definition of a "retirement benefit scheme" in the Taxes Acts covers not only schemes which consist entirely of relevant benefits, but also schemes which include any relevant benefits, then compensation payments to individuals staying on after 1997 could be "infected" by the Section 596A charge if dealt with as part of a single arrangement which also deals with retirement payments to those leaving in 1997. It is for this reason that, earlier in this letter, I emphasised the need to have a separate scheme for the officers who are staying on.
I hope my comments above will be of assistance in your deliberations. I am also copying this letter to Alan McDonald for his information.
Yours sincerely
feter Bowen
P M BOWEN
2
HJH/C63