Will new HMRC de-registration powers have unintended consequences for SSASs?

Published by James Jones-Tinsley on

In August 2017, HM Treasury and the Department for Work & Pensions finally released their response to the ‘Pension Scams’ consultation.

The response outlined three potential interventions, aimed at tackling different aspects of pension scams; one of which was entitled, “Making it harder to open fraudulent schemes”, in which it stated, “…the government intends to introduce legislation in a Finance Bill later in 2017 aimed at ensuring that only active companies can register a pension scheme”.

Although this intervention focused on the registration of a new pension scheme, the response expanded the remit to also include the possible de-registration of existing pension schemes, “…if they are registered with a dormant sponsoring employer”.

Then – in September 2017 - the government published a series of policy papers for the post-Autumn Budget Finance Bill, of which one was entitled, “Pensions tax registration”; accompanied with draft legislation and an explanatory note.

The policy paper includes the following statements;

  • “This measure extends HMRC powers…to de-register…those pension schemes with a dormant company as a sponsoring employer”;
  • “The measure will have effect from 6 April 2018”; and
  • “Legislation will be introduced in Winter Finance Bill 2017 amending Finance Act 2004 to widen the circumstances in which HMRC may refuse to register a pension scheme…Changes will also be made to the circumstances when HMRC can de-register a pension scheme”.

The fact that the draft legislation implies that existing occupational pension schemes - which includes Small Self-Administered Schemes (SSASs) - with dormant sponsoring employers may be subject to de-registration by HMRC, fulfils the premise included in the consultation response.

In the past five years or so, a common pension scam was to set up a new company for the victim with the sole purpose of facilitating the registration of a new occupational pension scheme for that victim.  However, the new company would never trade. 

Although we broadly supported the restriction of new registrations to non-dormant companies in our response to the Pension Scams consultation, this proposed extension to include existing schemes goes beyond the initial remit of the consultation, and is not something that we support. 

This extension represents a ‘blunt instrument’ to attack those schemes set up over the past five years or so, using dormant companies as a sponsoring employer, but in reality has the unnecessary side-effect of putting bona fide pension arrangements at risk of de-registration.

In addition, the draft clauses raise more questions than answers.  In terms of what constitutes a “sponsoring employer” in the context of a money purchase SSAS, any employer that has contributed to the scheme at any point, including prior to A-Day, will remain a sponsoring employer for as long as the employer remains in existence, and funds remain in the SSAS relating to those contributions.

Secondly, the draft legislation defines a “dormant company” as a body corporate that has been dormant during a continuous period of one month in the last year.

This means that, in theory, trustees have a maximum of one month to transfer out benefits for all members and beneficiaries, to avoid any risk of exposure to a de-registration charge.  This is clearly impractical.

And although a dissolved company is no longer a body corporate, and would no longer be treated as a sponsoring employer, a company that is in administration, receivership, or liquidation remains a body corporate and may still meet the dormant test.

Thirdly, one would hope that HMRC would not use their new powers to de-register a SSAS where there exists a continuing non-dormant sponsoring employer, as well as a dormant one, which is not an uncommon situation.  This remains a risk area for many SSAS clients.  There is little to protect against this, other than by transferring benefits out, and winding up the scheme.

And fourthly, where a sponsoring employer is sold, so that the SSAS members no longer control that company, and it is then subsequently made dormant, could the scheme still be de-registered?

The draft clauses imply that when a sponsoring employer satisfies the dormant test, HMRC would have the power to de-register the SSAS.  Whilst this would be a discretionary power, it still puts the scheme at risk.  As above, there is little to protect against this, other than by transferring benefits out, and winding up the scheme.

If the draft clauses receive Royal Assent unaltered, the scenarios outlined above could precipitate a mass-migration of SSAS funds to, for example, SIPPs, where the sponsoring employer already is, or becomes, dormant – in order to avoid the imposition of costly de-registration tax charges by HMRC.

And what of the scammers, at whom the draft legislation is supposedly aimed?  If it is accepted that dissolved companies are no longer sponsoring employers, (as they no longer exist, and so are not body corporates), then existing scams set up by dormant companies could simply bypass the de-registration risk by dissolving those dormant companies. 

It therefore appears that the de-registration risk to existing schemes is likely to impact bona fide arrangements, (who may have historic dormant companies for perfectly legitimate reasons), more than scam arrangements, and the de-registration tax charges could then impact scam victims more than the scammers themselves.

The draft clauses were first released for “technical consultation” until 25 October 2017 and, given that the stated reason for doing this is, “…to ensure that the legislation works as intended”, we forwarded our representations, and alternative clause wording, directly to HMRC ahead of the deadline, concerning the unintentional consequences of implementing the draft legislation on bona fide occupational pension schemes that have a dormant sponsoring employer.

"the de-registration risk to existing schemes is likely to impact bona fide arrangements"

Post-Budget Update

An HMRC & HM Treasury document, entitled “Overview of Tax Legislation and Rates” (or “OOTLAR”) was published on 22 November 2017, following the Chancellor’s Autumn Budget speech.

OOTLAR stated that the ‘Finance Bill 2017-18’, (the third Finance Bill of 2017), would be published on 1 December 2017.

Section 1 of OOTLAR provides details on all tax measures to be legislated in Finance Bill 2017-18, stating, “This…explains where changes, if any, have been made following consultation on the draft legislation”.

Part 1.18 of OOTLAR (“Master trust tax registration”) goes on to say (our emphasis in bold);

“…the government will legislate in Finance Bill 2017-18 to introduce HMRC powers to register and de-register master trust pension schemes and [occupational pension] schemes for dormant companies. Draft legislation and a tax information and impact note were published on 13 September 2017. The legislation is unchanged following consultation. The changes will have effect on and after 6 April 2018.”

Clearly, it is disappointing that our concerns for bona fide schemes were not addressed, although there will be another opportunity to submit representations to politicians, once the Bill reaches the Committee Stage in the House of Commons.

If you are concerned about leaving the risk of deregistration open, you might like to lend your support to our efforts to ensure the legislation targets only scammers, and thus “works as intended”. To assist you with this, you can find proposed wording for a communication to your local Member of Parliament here and the below briefing note to enclose with your letter. We have also provided a link to a website that provides you with MPs’ contact details here.

We will continue to monitor the passage of the Bill through Parliament, and will keep our SSAS clients appraised of any changes to the current clause wording.