The Hindu Business Line : Pension torpedo hits Royal Navy

THE UK Government has revealed that the mistaken taxation of army invaliding and attributable pensions also extends to Royal Navy pensions awarded between 1973 and 1999.

It also admitted that thousands of letters sent out about refunds were inaccurate and would be rewritten. The number of disabled servicemen and women affected by the error will run into many thousands, and tax refunds may be as much as £100 million.

The Government has been reviewing the issue in the Navy and the RAF and making refunds as appropriate.

Government research has not so far revealed any cases where RAF pensions were wrongly taxed, as the RAF did have checks in place which would have uncovered cases where attributable pensions should have been exempt from tax. Not so, it would appear, the Royal Navy.

Research has shown that the tax problem is more extensive than originally understood, particularly in the Royal Navy where errors have been uncovered. An independent review will now be set up to examine the tax problems in more detail. The review will look across all three services.

It recently emerged that the Ministry of Defence (MoD) only went back to 1995 in their search for those who were in the army who might be affected by the pensions tax error, and that relatives of anyone who died before then would not be given a refund unless they contacted the ministry.

The Perry error

EARLIER this year, Major John Perry won a five-year campaign to prove that former soldiers and their widows in the UK were wrongly taxed by millions of pounds on their pensions. Up to £30 million may have to be repaid.

The Ministry of Defence finally admitted its blunder and the official spokesman for Mr Tony Blair apologised for the error.

Mr Lewis Moonie, the junior Defence Minister, apologised for the error in a statement to the House of Commons and said that it was a terrible mistake.

Soldiers who had been injured and pensioned out of the army in most of the major conflicts since World War II wrongly had tax deducted from their pensions. Those in the Navy and Royal Air Force did not suffer the same problem.

The error arose in the Army Pensions Office in the 1950s when army pensioners had their "attributable invaliding pension" mistakenly taxed. The Government has so far identified 1,003 cases, and the mistake may cost it up to £30 million.

A ministry spokeswoman said the total cost was not yet known and that figures of £50 million were "pure speculation."

The Inland Revenue has already reimbursed 927 veterans and 26 widows.

Legislation in the Income and Corporation Taxes Act, 1952 allowed payments to disabled army veterans to be tax-free. The Navy and the RAF adhered to the Act.

Major Perry has received a cheque for £58,000 in back tax. He said: "There is only one word to describe my campaign all this time, and that's tenacity. If I'm told I'm on the wrong line when I know I'm on the right line, I don't get off the line until I get what I want."

A long fight

Major Richard Perkins, who retired from the Army in 1959 after suffering a mental breakdown whilst serving as a Brigade Major in Malaya may take the Ministry of Defence to Court over its refusal to refund him tax incorrectly deducted from his pension for the last 42 years. Major Perkins receives a disability pension which was subject to tax until August 2001, when he successfully fought for tax-free pension rights through the independent Pensions Appeal Tribunal.

However, the MoD is refusing to repay the tax incorrectly deducted and has offered to return only two years' tax.

Meanwhile, the MoD and the Inland Revenue are fighting over which department is responsible for repaying the tax.

Naval gazing

IN THE annals of taxation history, one would generally expect successes to be generated by lawyers and accountants. Regrettably, in the case of Army Pensions, it is retired Royal Artillery Major John Perry who has spotted errors that go back no less than 50 years. This is a major source of embarrassment to the MoD which fully accepts that it has been in the wrong. For the last 50 years, their employees working in the Navy and the Air Force have correctly applied what is now Section 315 Income and Corporation Taxes Act 1988.

This states in language that is very easily intelligible that "income from Wounds and Disability Pensions to which this sub-section applies shall be exempt from Income Tax and shall not be reckoned in computing income for any purposes of the Income Tax Act".

It goes on to refer in the next sub-section to "wounds pensions granted to members of the Naval, Military or Air Forces of the Crown". It also goes on to describe various other pensions to which it will apply. Apparently, the legislation was originally introduced in the 1952 version of the Act and thus the sick and wounded of dozens of wars have been deprived of their tax relief.

While this must be an embarrassment to the MoD it hardly shows up the Inland Revenue in a better light.

There is also a danger that accountants acting for some of the losers in this bizarre case might feel as if they have egg on their faces.

It took a man who describes himself as "completely dotty" to win a battle that he may well have found as frustrating as some of the more serious ones he has fought in. What is even stranger is that he apparently spent 10 years trying to persuade his former employers that they had made a mistake. Surely even the most junior Army paymaster would be able to understand the remarkably simple English in Section 315.

It is anticipated that some individuals may be able to claim six figure sums as a result of the errors and the MoD has been quoted as confirming that claims can be made not only by ex-servicemen but also by widows or heirs. There have been various different estimates of the total cost to the exchequer in connection with repayments that might have to be made. The Times has estimated that it could be as much as £30 million.

Whenever a problem of this type arises everyone assumes that it must be unique. It is nice to feel that some other equally dotty type might discover a similar problem that has been going on even longer.

In that case, one hopes that at least it is a dotty accountant.

(Source: TaxZone Digest)

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