Robin Ellison says we need a change in HMRC's approach to dealing with pension tax issues
The recent U-turn on National Insurance contributions (NICs) by the government shows that changes in taxation is a tricky area for the Treasury.
It is understandable that with the national deficit getting ever bigger, HMRC is doing all it can to garner funds to pay for health, defence and roads. So few would argue that we need (1) a Treasury to determine taxation policy and (2) an HMRC, which needs appropriate powers to carry out its work.
The Treasury's unstated but self-evident long-term strategy is to phase out tax relief for second tier pensions, even though (or perhaps because) the population is aging. But the way its operating arm, HMRC, is behaving is giving serious cause for concern.
The recent spring Budget announced some technical changes to the operation of QROPS, a minor subset of a subset of pensions taxonomy. It issued around 100 pages of discussion documents and draft legislation to tackle this relatively trivial issue, and one that affects only a few such pension arrangements - and ones that are probably not policeable anyway, being in foreign climes. It was an absurdity.
But not much more of an absurdity compared with its recent excursions into pensions litigation. Some of it has proved justified; there have been scheme members who have been abusing the system by organising investments against the letter and spirit of the law. But there are also examples of abuse of the litigation system by HMRC, not least by seeking to charge tax on administrators who have done their best, and on individuals who have had their money stolen.
Change of direction
In tax disputes, the public policy used to be that any ambiguity in the taxing legislation was to be interpreted against the taxman; the argument was that if the taxman did not like the law, he could change it.
More recently that policy has changed - it now operates a system of GAAR, a general anti-avoidance rule. The thinking behind this rule is that regardless of the wording of the Finance Act, HMRC should be able to impose tax if the intention, if not the wording, of the legislation and of parliament was to charge tax on a particular transaction.
There is a GAAR committee that applies this new principle. The idea is to stop lawyers and accountants playing games with the system, and helping their clients to avoid tax when by nitpicking the wording of a statute, when they really ought to pay tax.
But that principle should work both ways, so that where the tax law says by mistake that tax should be paid, but that was clearly not the intention of parliament, HMRC should use its common sense not to chase for money.
There have been a couple of instances recently where HMRC has attempted to charge tax where to do so is clearly unfair. One is a tragic case where a woman dying of cancer transferred her s32 policy to a personal pension fund, and HMRC attempted to impose inheritance tax once she had died.
A second case, where the dispute is about the imposition of very technical rules about paying pension contributions in specie, has been pursued by it in a manner contrary to the principles by which HMRC in its own charter is supposed to behave.
Part of the problem is an understaffed and inexperienced HMRC workforce.
But the main reason for such behaviour by HMRC is the difficulty of applying an unworkable pensions tax system invented by MPs and the Treasury. A simpler pensions tax system would of course help.
In the meantime, a change of tone by HMRC would be a quick win - as would the application of a policy of reverse-GAAR.
Robin Ellison is head of strategic development for pensions at Pinsent Masons
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