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Expat Briefing Editorial Team
19 December, 2013
Earlier this year, HM Revenue and Customs (HMRC) was ordered by a court to clarify its position regarding certain QROPS pensions transfers. Finally, the long-awaited guidance arrived in late November, but the situation for expat pensioners and their advisers seem just as uncertain.
This has all come about as a result of HMRC's fruitless pursuit through the courts of a number of individuals who had transferred their UK pensions into a QROPS listed in Singapore, which was thought by the UK tax man to be flouting the QROPS rules. A High Court action was abandoned by HMRC in June 2013 and the presiding judge then ordered that HMRC should explain its position for the benefit of thousands of QROPS holders wondering whether they might be the next to be clobbered by the tax man.
QROPS (which stands for Qualifying Recognised Overseas Pension Schemes) were introduced in April 2006, and they allow a UK taxpayer's pension entitlements to be transferred tax-free to another jurisdiction where he or she is seeking permanent residence. However, a scheme has to meet certain conditions in order to achieve QROPS status. For the first five years of non-residence, the fund will remain subject to HMRC's rules, but after that the rules that apply will be those of the destination country of the fund.
There are limits to the list of countries which are suitable destinations for QROPS. HMRC has to approve destination pension fund administrators, and once it has done so, that administrator is 'Recognized'. There is quite a large number of countries which have approved pension fund administrators, and HMRC publishes a list of them every two weeks.
The list of approved (recognized) QROPS operators is, however, a moving target, because HMRC tries to police the behaviour of administrators on the list, and has removed some countries where administrators went outside its rules, for instance by allowing full cash withdrawal before the expiry of five years of non-residence.
The case in question arose when 122 former members of a Singapore-based investment fund launched a group litigation challenging HMRC's decision to withdraw its QROPS status in 2008. The investment fund, promoted by Panthera Recognized Overseas Self-Invested International Pension (ROSIIP), notified HMRC in 2006 of its QROPS status, and was included in HMRC's QROPS list shortly thereafter. However, HMRC challenged this in 2008 when it erased Singapore from its allowable overseas destinations for UK pension schemes amid suspicions of abuses after the five-year reporting period to HMRC elapsed.
Furthermore, HMRC found in 2008 that ROSIIP was not eligible for transfers of UK pensions under the QROPS scheme on the grounds that the fund was not available for Singapore residents and that it was not registered with the local pensions regulator. As a result, the UK High Court ruled against Panthera in 2011, holding that ROSIIP had never been a QROPS and that all tax-free transfers of UK pensions to ROSIIP were consequently unauthorized and subject to tax charges of up to 55% on total transfers in addition to administrative surcharges levied on ROSIIP itself and initial UK pension funds. This ruling was confirmed in 2012 in the Court of Appeal.
That wasn't the end though, and ex-ROSIIP members sought a judicial review of HMRC's decision, arguing that, as ROSIIP was part of HMRC's QROPS public listing at the time of transferring their pensions between 2006 and 2008, they had legitimate expectations that ROSIIP was a regular QROPS.
In July 2012, HMRC said that it would "actively resist" the claims of the ROSIIP investors, but in May 2013, the High Court gave permission for a group litigation order challenging the way that the tax department had handled the case to proceed. After four days of court proceedings which concluded on June 21, 2013, HMRC submitted an application to withdraw the assessments. And in a highly unusual step, it also agreed to pay all legal costs incurred on an indemnity basis.
HMRC was forced to eat a substantial portion of humble pie following its embarrassing climb-down as a clearly vexed judge, Mr Justice Charles, lambasted the department for its obstructive and inconsistent behaviour in the case by withholding evidence and failing to explain why tax was not assessed against another de-listed QROPS scheme with very similar characteristics to the ROSIIP case. He labelled HMRC's behaviour "shameful" and "aggressive", and criticised the department's expectations for what a reasonably sophisticated taxpayer would garner from the wording of its QROPS list, calling the notion "bunkum". As a condition of the withdrawal application, Justice Charles ordered HMRC to produce a public policy statement clearly setting out its position in relation to QROPS within 21 days, or he would issue a judgment. This HMRC duly did, although rather begrudgingly it seems, fearful that the statement would act as guidance for tax avoiders. But, after filing the necessary document in the High Court, HMRC waited until November 27 to publish its clarification on its website.
The issue in the judicial review was not that the ROSIIP scheme breached the QROPS rules – that was apparently decided by the High Court in May 2011 and upheld by the Court of Appeal in March 2012 – but the manner in which HMRC had administered the QROPS regime. Central to this was an amendment to the wording of preamble to the QROPS lists in 2008, which warned investors that HMRC assumes schemes meet the criteria to be a QROPS when added to the list, but that it can retroactively change the status of any scheme on the list thereby making them subject to the 55 percent tax charge. Taxpayers therefore have very little comeback if HMRC later decides to de-list the scheme into which they have transferred their pension.
The new "guidance" would appear to change things very little, however. This states that HMRC will not use its powers to raise or pursue any assessments resulting from a transfer from a registered pension scheme to a scheme purporting to be a QROPS if the the transfer to the scheme took place before 24 September 2008. However, HMRC reserves the right to investigate such transfers, and may pursue assessments where "there is evidence relating to the transfer of dishonesty, abuse, artificiality or any similar circumstances and the imposition of relevant tax charges in relation to the transfer appears not to be unfair".
With regards to transfers made from 24 September 2008 onwards, where a transfer is made to a scheme included on the QROPS list, and HMRC later discovers that the scheme is not a QROPS, HMRC says that it "will consider whether to exercise its collection and management powers on the particular facts of the case in the light of the principle of conspicuous unfairness mentioned above".
So the onus remains firmly on taxpayers themselves and advisors to determine whether a QROPS they intend to use is legitimate or not – a decision clearly fraught with risk given the heavy penalty for non-compliance and HMRC's ability to de-list schemes without warning. Indeed, there is evidence that the tax department is now policing the QROPS regime with an even stronger hand: in the QROPS list published in early August 2013, all but two of 25 Hong Kong-based QROPS that were previously listed in mid-July had been removed, and HMRC refused to provide an explanation for its action.
Nigel Green, CEO of the financial advisory firm deVere, was quoted as saying that the move signals a "more proactive" approach to deciding which jurisdictions should be included on the list. He added: "Inevitably, there will be a smaller list of potential jurisdictions into which UK pensions can be transferred, but the list, and therefore the pension transfer industry itself, will become even more robust".
When they were introduced, QROPS were welcomed by financial advisers and investors alike, enabling expats to transfer their pensions abroad without facing crippling tax costs, and data suggests that QROPS remain popular pensions vehicles, with more than 3,000 QROPS schemes currently available.
That said, choosing the right QROPS solution is still a tricky businesses, with the due diligence requirements much more complex than with ordinary investments. So expats and their advisers could do without the added uncertainty that HMRC brings to the process. It remains to be seen therefore how the ROSIIP case and the actions of HMRC affects the industry in the future.
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