Section 2.69, as any QROPS industry stakeholder would tell you, is the clause that begins on page 62 of the Budget document, and states: “…where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended to be available under the QROPS rules, the Government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS”.
Here at Brooklands, we think we understand why HMRC changed the legislation, and why it felt it had no choice but to do so.
In our view, HMRC came up with a package of amendments to its existing QROPS legislation, which were unexpectedly unveiled to the industry on 6 December, 2011, in direct response to the Isle of Man’s efforts to go after the third party QROPS market, by introducing changes to its income tax regime by means of legislation (known as “50c”) in 2010.
With the benefit of hindsight, it is easy to see that the Revenue realised at once that it was looking at a potential game-changer here, with a rival jurisdiction – in this case, one of its Crown Dependencies – actually looking at establishing industries from QROPS.
Why else, for example, would HMRC have taken more than seven months to review the IoM’s proposed legislation, and then for “Section 2.69” to be so specifically worded?
Through the eyes of HMRC
If you think about it from HMRC’s perspective, you can see why the Isle of Man’s 50c legislation stood apart. Here, for the first time, HMRC was confronted with the idea that other governments would actually go to the trouble of changing their own tax or pension legislation, with the sole intention of accommodating the development of an entire local industry based on the targeting and transferring of UK pensions.
Up to this point, HMRC might have been able to dismiss QROPS as little more than a minor “leak” of taxable capital, involving just a few, relatively small pension providers in a handful of jurisdictions, and no more than about £2bn worth of pensions in total, with a natural cap in that only individuals who permanently moved abroad would be eligible to participate.
Not that £2bn is loose change, of course. But it is important to remember here that HMRC did not create the QROPS framework out of a desire to give offshore pension administrators something to do, particularly as the pension money being transferred abroad would have been assembled from tax-deferred income, and would be from UK tax-paying providers (notably Insurance companies) – a fact that the Revenue would have been keenly aware of.
Rather, it created QROPS for a number of reasons, including a desire to reduce its own workload, the need to meet the obligations of its double-tax agreements, and in preparation for the proposed European Union directive on pensions’ portability legislation (which has still yet to be ratified).
Shock and awe part 2
Shocked as HMRC must have been by 50c, the alarm bells must have really begun ringing in its Parliament Street offices when, in early 2012, Guernsey unveiled its own painstakingly crafted QROPS-friendly legislation, known as Section 157E, in direct response to HMRC’s changes to the QROPS legislation unveiled in December.
This would have been further confirmation, to HMRC, of the fervour that QROPS had created at the government level in key jurisdictions.
This, we think, probably led to the last minute addition of Section 2.69 to the Budget, and therefore probably comes closest to indicating HMRC’s overall intent – which then led to the subsequent and curiously timed "Statutory Instrument (2012 No. 1221)", introduced on 3rd May 2012.
It looks like HMRC has used the change of legislation as well to cool the overall enthusiasm that had been building within the QROPS industry, and this can be seen by the significant increase in reporting requirements, and the introduction of a member declaration. (This obliges a pension scheme member to declare that he or she fully understands that transfer could come with a significant tax penalty.)
We are also seeing HMRC seeking to pass much more responsibility to the UK transferring providers to do their own due diligence on the QROPS schemes they are transferring to, rather than relying on the HMRC list of QROPS.
We believe that alongside of these motives, HMRC was also keen to crack down on what, by the end of last year, had become an increasingly obvious phenomenon of aggressive and often misleading QROPS marketing by a handful of offshore providers.
Still other concerns…
While the targeting of UK pensions by non-UK governments appears to have been the initial reason HMRC was moved to act in December, March and May, it is no secret that HMRC has had other concerns about the QROPS market for some time. Unfortunately, it appears that some of these concerns have not been fully understood or appreciated by the industry, and we are seeing evidence of practices that will continue to bring the spotlight on QROPS going forward.
For example, despite HMRC re-stating, in its December 2011 consultation paper, that QROPS are intended only for individuals who are permanently leaving the UK, we are still seeing examples of providers promoting QROPS for UK residents (current and future).
It has also come to our attention at Brooklands that some providers have been promoting a transfer to a QROPS in the first instance, with the idea that the funds, once assembled, might then be “onward transferred” (or “washed through”) to a recently de-registered scheme, with immediate effect.
HMRC have confirmed that such onward transfers and also loans to members are reportable in their Form APSS 253, and will be subject to tax penalties.
In our opinion, taking tax-relieved monies through to a scheme which cannot fulfil the QROPS criteria would most likely be viewed by HMRC as a deliberate circumvention of its recent regulations (as well as member loans), and as such, could be breaches of the fundamental limits (regardless of whether the scheme member has completed his or her five years outside the UK).
It would therefore leave the scheme member subject to significant tax charges that would be applied on scheme deregistration of up to 55%.
Above all, QROPS industry players, including pension administrators as well as IFAs, should never forget that that HMRC have wide ranging powers, which specifically include ‘Regulation Making Powers’.
Therefore, although the QROPS legislation in effect is not principles based, it is extremely important to be mindful of HMRC’s intent.
Paul Evans is managing director of Dubai-based Brooklands Pensions , a multi-jurisdictional QROPS and UK SIPP administrator
