TNAG-2685-FCO40-3886-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1993 — Page 148

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19 AN

Mr Ricketts.

HMOCS COMPENSATION SCHEME

1.

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with I don't Hürke partial funding of all Welc

reasons

We have been in correspondence with the Inland Revenue to

persions

establish whether payments made by HMG to HMOCS officers under charges

the proposed compensation scheme would be subject to UK Income Tax. In previous cases, HMOCS officers have not been subject to tax in the UK (but there is a difference: in previous cases it was the former DT which paid the compensation, although the funds for this were often provided by HMG).

2. The Inland Revenue have now advised that the situation for Hong Kong HMOCS officers under current law is likely to be as follows:

Officers who continue to work for the SARG after 1997

As these officers will not be UK residents and will not be employed in the UK they will not be subject to UK Income Tax provided the compensation arrangement applicable to them is administered separately from that which will apply to those retiring voluntarily in 1997.

Officers who take voluntary retirement in 1997

The scheme to pay HMOCS officers who retire in 1997 would apparently constitute a retirement benefit scheme and would not be of a type which could be exempted from UK tax (unlike the scheme for those who continue to serve). Officers would thus be liable to UK Income Tax.

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The ODA are checking the legal provisions quoted by the Inland Revenue- the Revenue's letter, which is difficult to decipher without having the law to hand, is attached. But the implications are serious: an officer who retires in 1997 stands to lose around 30% of his compensation payment in tax. This will make HMG's arrangements even less attractive compared to HKG's Limited Compensation Scheme for officers passed over for promotion, and it would mean that the value of HMG's scheme would be about one third of the value of HKG's scheme of officers directed to retire.

4.

This is an issue which will come up at the next round of consultations; if it is not resolved it could prejudice the saleability of HMG's package. If the ODA agree with the Revenue's interpretation of the law, we will need to ask the Treasury whether they would agree to the full compensation payment being paid in one lump sum before 1997. This should overcome the problem, but I would need to confirm with the Revenue.

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CONFIDENTIAL