SIPP and SSAS Update
Court rules printing press machinery was "tangible moveable property" for purposes of taxable property definition
In the case of Morgan Lloyd Trustees Limited v HMRC, the First-Tier Tribunal has ruled that printing press equipment was "tangible moveable property" within the meaning of the "taxable property" provisions of the Finance Act 2004, meaning that the acquisition of that property by a SSAS gave rise to an unauthorised payment.
The printing press equipment consisted of a number of machines weighing several tonnes each. They had been affixed to railway sleepers which had in turn been attached to the floor of the premises where the machines were situated. The Tribunal found that the main purpose in doing so had been to ensure the machines were steady and level and that the fixing could have been undone in a matter of minutes without significant damage to the machines or the premises. Whilst some dismantling would have been needed in order to move the machines, the work involved in this would not have been significant.
The SSAS trustees argued: (a) that the intention of the legislation must have been for "tangible moveable property" to have a similar meaning to "personal chattels" under the pre-A-day regime under which it was acceptable for SSASs to hold plant and machinery, and the type of moveable property to which HMRC objected was property with obvious scope for personal use (eg jewellery, fine wines and antiques); and (b) that the machinery fell within the legal definition of "fixtures". (HMRC accepted that if the machinery comprised a fixture, it would not be "moveable" property.)
The Tribunal rejected both of the trustees' arguments. The key test for whether an article had become a fixture was whether it had been attached to the property for the purpose of effecting a permanent improvement to the property, as opposed being attached "for the better enjoyment of" the article itself. Applying this test, the printing press machinery was not a fixture. The Tribunal also noted that if the machinery had been a fixture, that meant that as a matter of law it would have formed part of the land where it was situated. This was not consistent with a sale and leaseback arrangement which the scheme had entered into solely in relation to the machinery. The Tribunal held that the meaning of the term "tangible moveable property" was unambiguous. There was therefore no reason to construe it as meaning the same thing as "personal chattels" under the pre-A-day regime.
This judgment puts beyond doubt that "tangible moveable property" is a much broader concept than that of "personal chattels" under the pre-A-day regime, and makes clear that property can still fall within the definition of "moveable" even if machinery is required to move it.
The Finance Act 2004 allows for a scheme administrator to be discharged from a scheme sanction charge if it reasonably believe a payment was not unauthorised. Initial HMRC guidance published in relation to the introduction of the concept of "tangible moveable property" had given the impression that the concept was a continuation of the pre-A-day concept of "personal chattels". However, guidance published on 25 July 2006 made reference to machinery being included within the definition. The Tribunal held that this should have put the professional scheme administrator on enquiry within two weeks of that date that the position might have changed. As the acquisition of the machinery had taken place after that date, it declined to relieve the scheme administrator from the scheme sanction charge. However, it did relieve a scheme member from liability for an unauthorised payments surcharge, holding that it would not be just and reasonable to impose it, as pensions legislation was "immensely complicated" and the member had been entitled to rely on advice from "an apparently competent professional adviser".
Tax appeal court holds third party loan conditional on specific scheme investments gave rise to unauthorised payment
In its judgment in Danvers v HMRC the Upper Tribunal of the tax courts has held that the making of a loan by a third party to a member gave rise to an unauthorised payment where the terms of the loan provided that the member must invest his SIPP funds in shares in a specified company and that if this condition was breached, the loan would become immediately repayable and a penal rate of interest would apply. The Upper Tribunal upheld the finding of the tax court that the investment of the member's SIPP fund in the shares was "inextricably linked" to the loan made to the member. The loan made to the member was therefore to be treated as a payment from the scheme to the member under section 161 of the Finance Act 2004 which provides that a payment includes a payment provided "in connection with" a scheme investment.
The Upper Tribunal rejected the argument that its finding would have far reaching and unintended consequences by effectively holding that commonly accepted pension mortgages (where the mortgage is entered into on the basis that the member will use tax free cash from his pension fund to repay the capital) give rise to unauthorised payments. The Upper Tribunal held that the key difference is that a standard pension mortgage will not stipulate that the pension fund has to be invested in a particular investment. It also expressed the view that a pension mortgage would not give rise to an unauthorised payment simply because it stipulated that the member must hold his pension fund with a particular provider or that the borrower must undertake to draw down his pension fund on a specified date and use it to repay the loan.
This case appears to have effectively been a test case, as the judgment refers to 80 other appeals being stayed pending the outcome of the case. There is a suggestion in the judgment that the company which made the loan to the member was itself heavily dependent on loans from the company in which the member was required to invest his SIPP fund. However, the Upper Tribunal ultimately reached its conclusion without a finding of fact on this point. The key message from this case is that a loan to a member that is conditional on a member investing his SIPP funds in a particular investment will generally result in an unauthorised payment, even where the company making the loan has no connection with the SIPP provider.
Prior to the Upper Tribunal's judgment in the Danvers case, the First Tier Tax Tribunal had to consider the case of White v HMRC, which involved very similar facts, save that the express terms of the loan made no reference to the member being obliged to invest his SIPP fund in the shares in which he had in fact invested. Despite the absence of such an express requirement, the evidence pointed strongly to such a connection. The member's choice of SIPP appeared to have been driven by his desire to find one which would allow him to invest in the shares of the company concerned, and the loan had been advanced on the same day that he made his investment. The Tribunal found on the facts that the loan had been made "in connection with" a scheme investment and had therefore resulted in an unauthorised payment.
Tax Tribunal upholds imposition of unauthorised payments surcharge re pensions liberation scheme
In the case of O'Mara v HMRC, the First Tier Tax Tribunal has upheld HMRC's decision to impose an unauthorised payments surcharge in relation to unauthorised payments made as a result of the whole of the members' pension scheme funds being used to fund a loan to the members' company as part of what ultimately transpired to be a "pension liberation" scheme. It was not disputed that the payments were unauthorised, but the members argued that it was not "just and reasonable" for HMRC to impose the surcharge. One notable feature of the case was that the members' own business involved the making of loans to customers in circumstances where finance from mainstream banks was not readily available. The Tribunal dismissed the members' appeal. It held:
- It would be wrong to regard the surcharge as penal. The surcharge was a tax charge designed to recoup tax relief on contributions and tax free growth.
- The Tribunal was not required to enter into a detailed attempt to calculate whether a 55% tax charge actually represented the value of tax relief and tax free growth in relation to the members concerned.
- The Tribunal was prepared to accept that the members believed that the payments were honest and authorised, but that belief had not been based on reasonable grounds. They had simply relied on an adviser who had a financial interest in selling them a product. The members' conduct had to be viewed in the light of the fact that they had not only used the scheme (which turned out to be a pensions liberation scheme) themselves, but had also sought to introduce the scheme to customers of their own business.
- The members' own business meant that the members were financially astute. There were "warning bells" which should have put the members on notice that there was a potential issue with what they were doing, in particular, the absence of commercial repayment terms, and the fact that the members were not provided with loan or trust documentation.
The Tribunal's decision in this case seems unsurprising. Where a member is seeking to challenge an unauthorised payments surcharge imposed by HMRC, the burden of proof to establish that the surcharge would not be "just and reasonable" lies with the member. Even where the member has acted honestly, the courts will be likely to uphold a surcharge if they consider that a member has ignored "warning bells" that should have alerted the member to the fact that the arrangement was not legitimate.
Court holds terminally ill member's omission to take benefits did not give rise to IHT liability
The Upper Tribunal of the tax courts has held (Revenue and Customs Commissioners v Parry (as personal representatives of Staveley, deceased)) that a terminally ill member's omission to draw benefits from her pension scheme, motivated by her wish that her sons should receive greater benefits from the scheme, did not give rise to an inheritance tax (IHT) liability where the lump sum death benefit was held on discretionary trusts.
HMRC had sought to invoke section 3 of the Inheritance Act 1984 which (broadly) provides that if the value of Person A's estate is diminished and the value of another person's estate is increased as a result of Person A's deliberate omission to exercise a right, Person A is treated as having made a "disposition" of property which is subject to IHT. In the case in question, the member's omission to draw benefits (despite knowing that she was terminally ill) meant that the amount available to pay as a lump sum death benefit under discretionary trusts was greater than it otherwise would have been. The scheme administrator paid the lump sum death benefit to the member's sons in accordance with her expression of wish form. As the lump sum benefit was paid under discretionary trusts, the sons had no right to the death benefit prior to the scheme administrator exercising its discretion. The Upper Tribunal held it was the exercise of the scheme administrator's discretion, not the member's omission to draw benefits, which had increased the value of the sons' estates. It therefore held that there had been no disposition for IHT purposes.
Senior Managers and Certification Regime
The Senior Managers and Certification Regime (SMCR) came into force on 7 March 2016 and applies to banks, building societies and credit unions and PRA-regulated broker dealers. A separate regime for senior insurance managers (SIMR) also came into force on 7 March 2016. These two changes impacted around 950 of the forty to fifty thousand authorised firms.
HM Treasury announced in October 2015 that from 2018 the regime would be extended to the remaining regulated entities including SIPP providers. On the 22nd of February the FCA (via a website update) communicated that a consultation paper explaining the approach for the next tranche of firms would be published in Q2 2017. There is an expectation that the regulator will adopt a proportionate approach but there will be work to be undertaken for all authorised firms and so firms need to understand the potential changes in order to manage the impact on their day to day operations. For more information, click here.
Pension scheme operators are at risk from smarter scams
On 24 January 2017, the FCA issued an alert warning that scammers are becoming increasingly sophisticated in developing products designed to defeat firms’ due diligence efforts.
The alert states that:
- First-generation scams offered unregulated physical assets – such as commercial property – for direct investment.
- Second-generation scams obscured those underlying unregulated physical assets by creating a special purpose vehicle (SPV) to acquire them using funding raised by the issue of corporate bonds.
- Third-generation scams now use the services of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor; this portfolio then invests in SPV bonds.
The FCA states the reason for this evolutionary process appears to be to obscure the nature of the ultimate underlying investment. It warns firms of the need to ensure that their initial and ongoing due diligence processes are robust.
FCA proposes changes to COBS rules on pension projections
In its Quarterly Consultation published on 2 December 2016, the FCA proposed changes to its Conduct of Business sourcebook (COBS) rules on pension projections. The purpose of the changes is to remove certain conflicts that may arise when providing risk warnings under the Department for Work and Pensions (DWP) proposals in its September 2016 consultation on valuing pensions for the advice requirement and introducing new consumer protections.
FCA consultation on changes to Financial Services Compensation Scheme
The FCA has issued a consultation on how the Financial Services Compensation Scheme (FSCS) is funded and the FSCS rules regarding payment of compensation. Under the heading "Updating FSCS compensation limits and activities in light of the pension freedoms", the consultation seeks views on different options, including whether to increase the limits on claims relating to investment provision and the intermediation of life, pension and investment products. It states that the FCA is also considering extending or increasing the level of coverage of the FSCS in relation to some activities, including products and services used to manage pension savings. The consultation closes on 31 March 2017.
FCA Guidance on Fair treatment of long-standing customers in the life insurance sector
On 9 December 2016, the FCA published its Finalised Guidance setting out its expectations on the actions life insurance firms should take to treat their closed-book customers fairly. The FCA wants to ensure that ensure that ‘closed book’ customers who have life insurance products that are closed to new business, are treated fairly and do not receive less attention than customers who have recently taken out a new product.
FCA proposes two new regulatory returns to collect data from retirement income providers
In its consultation paper "Regulatory reporting: retirement income data" published in November 2016, the FCA set out its proposals to require providers of pensions, annuities and income drawdown to complete two new regulatory returns to enable the FCA to gather more data about the form in which individuals are taking their benefits. The consultation closed on 24 February 2017.
There were no fundamental changes to the pensions tax regime in the Budget, but significant changes were announced in relation to QROPS (Qualifying Recognised Overseas Pension Schemes). The Government also announced that it will amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime, and confirmed that it will go ahead with its proposals to reduce the money purchase annual allowance to £4000 with effect from 6 April 2017.
New 25% tax charge on transfers to or from a QROPS
If a transfer to or from a QROPS is requested on or after 9 March 2017, the transfer may be liable to a 25% tax charge called the "overseas transfer charge". For transfers from a UK registered scheme, the member and the scheme administrator will normally be jointly liable for the charge. The charge does not apply to all QROPS. Key exceptions are:
- the member is resident in the same country in which the QROPS receiving the transfer is established;
- the member is resident in an EEA country and the QROPS is established in an EEA country;
- QROPS established by certain international organisations to provide benefits for their employees;
- the QROPS is an overseas public service scheme and the member is employed by a scheme employer; or
- the QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme.
A transfer that is exempt at the point when it is made can in some circumstances become retrospectively subject to the charge if there is a change in circumstances within 5 tax years of the change.
Action Required by existing QROPS
Scheme managers of existing QROPS must decide whether they wish to continue to be a QROPS and, if so, submit a revised undertaking to HMRC by 13 April 2017. Failure to do this will mean that the scheme ceases to be a QROPS from 14 April 2017.
Trustees and administrators of UK schemes asked to make a transfer to an overseas scheme should familiarise themselves with the new QROPS rules. A transfer to an overseas scheme that is not a QROPS will be an unauthorised payment and attract penal tax charges. For any transfers that have not completed by 13 April 2017 (regardless of when the transfer request was made), it will be necessary to check whether the receiving scheme still qualifies as a QROPS after that date. Where the receiving scheme is a QROPS, it will be necessary to consider whether the transfer was requested on or after 9 March 2017 and, if so, whether it will be subject to the overseas transfer charge.
Ombudsman rules on liability of transferring and receiving scheme re transfer value delay
The DPO's determination in the case of Mr Y (PO-8890) gives an indication of the Ombudsman's likely approach to liability for delay in processing a transfer value where the transferring and receiving scheme share responsibility for the delay.
In Mr Y's case, a transfer value which he requested was unnecessarily delayed by 36 days, which resulted in his transfer value being approximately £14,000 lower than it would have been had it been processed without delay. Of the 36 days total delay, 23 days was due to the transferring scheme marking the transfer as "in progress" on the ORIGO pension transfer system when the transfer was actually out of scope of ORIGO. This was only picked up when the receiving scheme chased for a response. The remaining 13 days of delay was due to a delay on the part of the receiving scheme in forwarding a discharge form to the member. The DPO split liability between the providers of the transferring and receiving scheme 64%/36% respectively, reflecting the proportion of the delay for which each was responsible. She rejected an argument that the receiving scheme bore part responsibility for the first delay for having failed to chase earlier.
New drawdown tables published
On 18 January 2017, HMRC published new drawdown tables for use from 1 July 2017.
Deadline for applying for Individual Protection 2014 is 5 April 2017
In its Pension schemes newsletter 84 HMRC published a reminder that the deadline for applying for Individual Protection 2014 is 5 April 2017.
Proposed restrictions on pension transfers and new SSASs
On 5 December 2016 the Government published a consultation on pension scams. Proposed restrictions on the statutory right to transfer pension benefits and on the ability to establish a scheme with a dormant company as scheme employer could have major implications for SSASs. For more information, see our e-bulletin. Immediately after the consultation had closed, the Pensions Regulator published a blog calling on statutory transfer rights to be restricted in such a way that there would be no statutory right to transfer benefits to a SSAS. The Regulator's blog calls for serious consideration to be given to banning the establishment of new SSASs altogether. For more information, see our e-bulletin.
Government consultation response and draft regulations on pensions advice allowance
On 3 February the Government published its response to its consultation on introducing a Pensions Advice Allowance, ie the ability for members to withdraw funds from their pension pot to pay for pensions or retirement advice. The new allowance will be introduced from April 2017. A member will be able to withdraw up to £500 tax free from a money purchase pension pot to pay for pensions or retirement advice that qualifies as "regulated financial advice". The member will be able to do this up to three times during his/her lifetime (though only once in any one tax year). There will be no obligation on schemes to offer this facility, and schemes wishing to do so will need to check whether their existing rules allow it, or whether a rule amendment is necessary.
A key point is that the advice allowance can only be used to pay for regulated financial advice. Advice in relation to an occupational pension scheme will not necessarily be regulated financial advice. It will often be necessary to look at the underlying scheme investments to determine whether or not the advice is regulated, and advice unrelated to a specific investment is unlikely to be regulated. (Advice in relation to a personal pension scheme is more likely to fall within the definition of regulated financial advice.)
Information Commissioner's Office consults on guidance re consent for data processing under new General Data Protection Regulation
The Information Commissioner's Office (ICO) is consulting on draft guidance on obtaining consent to processing data under the new EU General Data Protection Regulation (GDPR) which will come into force on 25 May 2018. The GDPR imposes stricter and more prescriptive requirements regarding obtaining consent to the processing of data, in particular banning the use of pre-ticked boxes to obtain consent. The ICO's consultation closes on 31 March 2017.