We cover a significant court case concerning ‘in specie’ contributions receiving tax relief, a landmark ruling involving the Local Government Pension Scheme, changes to the RPI methodology, the FOS award limit increase and the Regulator’s proposed new data gathering powers.
The Upper Tribunal has upheld an appeal by HM Revenue & Customs in this significant case concerning ‘in specie’ contributions receiving tax relief.
The overwhelming majority of contributions to pension schemes are in the form of money paid into the scheme and receive the benefit of tax relief.
However, it was understood that a ‘contribution’ could be in the form of a direct handover of an asset to the scheme – in this case the transfer of the ownership of shares and that tax relief could be claimed for such a contribution.
Traditionally these contributions were structured so as to involve the member making a legally binding and irrevocable obligation to make the contribution (so that it becomes a debt to the scheme) and then the member would ‘settle the debt’ by transferring the relevant asset and topping up the scheme with money if the asset was not sufficient to satisfy the debt (in this case £0.03 extra was paid).
Tax relief would then be claimed on the amount of debt. The legitimacy of this basis was supported, in the eyes of some commentators, by the text of HMRC’s Pensions Tax Manual at PTM042100.
However, HMRC refused to grant Sippchoice the requested tax relief and, after the firm had won at the First Tier Tribunal stage, appealed to the Upper Tribunal.
The Upper Tribunal found that:
As a consequence of this judgment (and assuming that no further appeal overturns it) then in specie contributions by members will not attract any tax relief and should not have received relief in the past.
Our comment
This is a significant case and provides HMRC with a useful precedent to withhold tax relief in relation to all in specie contributions as the language for tax relief of employer contributions is basically the same. Rather problematically it interprets the law going back to April 2006 and therefore has unpleasant implications for any member (and potentially any employer) who has made such payments since then. Given the value of tax relief this could mean that many face large retrospective tax bills.
This case is of such significance that certain industry bodies have been in contact with HMRC to ask to avoid a mass clawback of tax relief on contributions paid using a method that had been previously agreed and was is in line with published HMRC guidance.
If you are a member or an employer who has made any in specie contributions in the past, then you should consider obtaining legal advice. Unless and until the law is clarified to the contrary, it may be appropriate to avoid the use of in specie contributions if tax relief is desired. Providers of personal pension schemes that have advertised the acceptance of such contributions will need to carefully consider where this leaves them.
(We wish to make it clear this is completely different from a recognised transfer between schemes where the assets were historically funded by money contributions but have now been transferred. The issue arises in relation to tax relief on payments into pension schemes and not payments between schemes.)
Please speak to your usual Capita contact if you are concerned about this matter.
In November 2016 the Ministry for Housing, Communities & Local Government (MHCLG) issued statutory guidance entitled “Local Government Pension Scheme: Guidance on Preparing and Maintaining an investment strategy statement” to administering authorities.
The guidance allowed administering authorities to take social and ethical objections into account when making decisions about which investment(s) they would use. However, it expressly stated that administering authorities should not use pension policies “to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries…other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”, and that Local Government Pension Scheme (LGPS) funds “should not pursue policies that are contrary to UK foreign policy or UK defence policy”.
This guidance was subject to a judicial review, brought by Palestine Solidarity Campaign Ltd, and in July 2017 the guidance was reissued with the relevant passages removed. In June 2018 the Secretary of State appealed the decision arguing that LGPS funds are “public money” and that administering authorities were part of the machinery of state and therefore the government has the power to direct how those funds should be used via guidance. The Court of Appeal disagreed with the High Court and the case progressed to the Supreme Court.
In April 2020 the Supreme Court ruled, by a slim majority, that legislation does not permit the Secretary of State to impose the government's view on foreign and defence policy, on administering authorities. The judgment also confirms that when acting in its role as an administering authority of an LGPS fund, a local authority should not be viewed as part of the machinery of the state, acting on behalf of the UK central government.
This judgment does not change the role or duties of administering authorities in relation to their investment or other powers and confirms that the administering authority remains responsible for investment decisions.
Additionally, administering authorities may take non-financial considerations into account where this would not involve a risk of significant financial detriment and where the administering authority has good reason to think that scheme members would share the concern.
The Pensions Policy Institute (PPI) has published a Briefing Note of its own setting out how the proposed changes to the calculation methodology behind the Retail Prices Index (RPI) could affect defined benefit (DB) schemes.
This reform, discussed on page 28 of the Spring 2020 edition of Compass, aims to alter RPI so that its future rates of change map exactly to CPIH (a variation of the existing Consumer Prices Index (CPI) that also includes housing costs).
Amongst the key finding of the PPI are the following observations:
The consultation on the reforms to the RPI Methodology has had its deadline for response extended to 21 August 2020.
The Financial Conduct Authority (FCA) has confirmed the annual increase to the Financial Ombudsman Services (FOS) award limits.
From the 1 April 2020 the FOS’s award limit increased to £355,000 (from £350,000). This applies to complaints referred to the service on or after 1 April 2020 about acts or omissions by firms on or after 1 April 2019.
The limit remains at £160,000 for complaints about acts or omissions that occurred before 1 April 2019.
The award limit is the maximum amount FOS can require a financial service to pay when a complaint is upheld. The limit is adjusted each year in line with inflation, as measured by the CPI.
In addition to its existing powers, the Regulator is to be given new data gathering powers under the Investigatory Powers Act 2016 (IPA 2016).
The new powers under IPA 2016 are designed to improve the Regulator’s ability to intervene to protect pension savers. The proposals will support its ongoing drive to be clearer, quicker and tougher in the way it regulates.
The new powers are expected to apply where the Regulator believes it is necessary to obtain data for the purpose of preventing or detecting serious crime or in any other case, for the purpose of preventing or detecting crime.
In non-urgent cases, authority will have to be obtained from the Investigatory Powers Commissioner but in urgent cases the Regulator can authorise its staff to obtain the data.
Any individual or business required to provide data must take all reasonably practicable steps to comply with a notice and the Regulator may apply to court for an injunction, specific performance or other order to require compliance.
The legislation is currently in draft and we wait for this to be enacted through Parliament in the coming months.
This document is for information purposes only and is based on our understanding of current law and taxation at the date shown above. Tax policy, practice and legislation may change in the future. For more information on how your particular circumstances may be affected, please contact us.
Capita Employee Solutions is a trading name of Capita Employee Benefits Limited; Capita Employee Benefits (Consulting) Limited and Capita Business Services Limited. Part of Capita plc.
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