Has HMRC's clampdown on QROPS gone too far?

The confusion that followed HMRC’s announcement, that focused primarily on Guernsey, is clear evidence that the clampdown has not gone too far.

HMRC provided both draft legislation and frequently asked questions to make the transition to the new rules as straightforward as possible. There was sufficient detail for some QROPS jurisdictions to identify that they would need to revise their existing local legislation in order to continue to provide QROPS post 6 April 2012.

Guernsey acted swiftly and enacted legislation in line with the new legislation to maintain its status as one of the main providers of QROPS. Therefore, while HMRC removed the QROPS list from midnight on 5 April 2012, the expectation should have been that most Guernsey schemes would maintain their place on the list.

Product list

To be clear, the QROPS list is purely a list of schemes that have notified HMRC that they meet the conditions to be a QROPS and have requested to be publicly listed. HMRC makes it clear that the list is not to be taken as a recommendation for a particular scheme or product and that inclusion on the list should not be taken as approval by HMRC.

Conversely, the absence of a scheme should also not be seen as a statement of the scheme status. HMRC may also temporarily remove a scheme from a list in certain circumstances while it carries out a review.

It is under this guise that we have seen the ‘removal’ of a number of schemes from the QROPS list and it has been reported that this is due to HMRC believing certain schemes are not “in the spirit” of the legislation.

HMRC indicated that it would amend legislation to reflect this.

On the 9 May 2012 HMRC issued Statutory Instrument 2012 No 1221 the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendment) 2012). This specifically excludes section 157E Guernsey schemes from being treated as QROPS if they relate to non-Guernsey residents.

Therefore, a section 157E which is open to non-Guernsey residents can never be a QROPS as a result of not being a QROPS.

While we now have some clarity in relation to these specific Guernsey schemes, the motivation for HMRC’s action is not publicly clear, but many believe it may be that HMRC wishes to see some form of taxation on pension benefits paid from a QROPS due to the fact that the pension transfer is likely to have benefited from UK tax relief on the payments in.

Lacking transparency

This is where the confusion begins and clearly points to the fact that HMRC has, as a result of its subsequent action, not gone far enough in ensuring it is clear to all what its concerns are. It should be legislation and regulation that fully underpins the QROPS regime. Whether a scheme or jurisdiction meets the new rules would then be transparent and clear.

Clarity is of paramount importance; quality providers have built up expertise in both UK and local jurisdictional pension knowledge. They have liaised with HMRC to ensure they are offering a scheme which fully meets their requirements and are able to provide guidance and support to members ?on the tax treatment of their QROPS ?and how this interacts with ?their residency.

Associations and seminars have developed to educate and promote best practice. Ensuring members are fully versed in the benefits of transferring to a QROPS but, equally, fully understand the risks and potential loss of benefits of transferring their UK-based tax-relieved pension benefits.

However, the QROPS industry is now in a state of flux and even though HMRC have now issued legislation specifically removing Guernsey’s new S157E schemes from qualifying as QROPS it is not publicly clear what the rationale is behind this move.

So, I encourage HMRC to go that little bit further and provide definitive guidance for all concerned.

Rachael Griffin is head of product law at Skandia International