Are HMRC Over-reaching Themselves?
On 24 October 2024, HMRC published Pension Schemes Newsletter 163.
Tucked away at the end of this Newsletter was a short statement concerning the calculation of the authorised surplus payment charge. HMRC said that:
Authorised surplus payment charge
The rules for authorised surplus payment charges are set out in section 207 of The Finance Act 2004. This charge arises on the value of the gross amount of the authorised surplus payment and not the amount received by the sponsoring employer on the refund of surplus.
HMRC will update the guidance included in the Pensions Tax Manual at PTM145200 with examples to reflect this.
After careful consideration, in my view, HMRC’s position here is flawed and does not reflect the provisions of the legislation. I will, of course, explain why I take this view.
The primary legislation permitting registered pension schemes to make authorised surplus payments is Section 177 of the Finance Act 2004:
177 Authorised surplus payment
For the purposes of this Part a payment is an authorised surplus payment if it is of a description prescribed by regulations made by the Board of Inland Revenue.
The Regulations referred to here are The Registered Pension Schemes (Authorised Surplus Payments) Regulations 2006 [SI 2006 / 574]. These Regulations refer to an authorised surplus payment as being a payment made by a registered pension scheme to a sponsoring employer.
This position is also reflected in the PTM in the text:
An authorised surplus payment is a type of authorised employer payment that can be made under the tax rules for registered pension schemes. It is a payment:
made to a sponsoring employer of a registered pension scheme that is an occupational pension scheme,
…
Importantly, then, the authorised surplus payment is only the payment that is actually made to the sponsoring employer. Any tax charge that arises on making such a payment is not itself part of the authorised surplus payment.
It is helpful here to compare the taxation provisions relating to an authorised surplus payment (Section 207 of the Finance Act 2004) with those arising on the making of an unauthorised employer payment (Section 208 of the Finance Act 2004).
Comment: In both cases, this is very much ‘setting scene’ – a tax charge will arise when either of these payments are made.
Comment: For an authorised surplus payment it is the scheme administrator that is liable for the tax charge, whilst for an unauthorised employer payment, it is the employer who is liable.
As outlined above, an ‘authorised surplus payment’ refers only to the payment actually made to the employer.
Similarly, an unauthorised employer payment (Section 160 (4) of the Finance Act 2004) is:
a payment by a registered pension scheme that is an occupational pension scheme, to or in respect of a person who is or has been a sponsoring employer, which is not authorised by section 175
In both cases, then, the tax charge only arises on the payment actually made to the employer.
Now, if a scheme makes an unauthorised employer payment, not only does an unauthorised payment charge fall on the employer, a scheme sanction charge also falls on the scheme administrator (Section 239 of the Finance Act 2004):
(1) A charge to income tax, to be known as the scheme sanction charge, arises where in any tax year one or more scheme chargeable payments are made by a registered pension scheme.
(2) The person liable to the scheme sanction charge is the scheme administrator.
Special provision is, however, made in Section 160 (4A) of the Finance Act 2004, covering cases where a scheme sanction charge arises (remembering that the liability for this charge falls on the scheme administrator) but the scheme administrator withholds part of the unauthorised payment to cover this charge:
If an unauthorised member payment or unauthorised employer payment made to or in respect of a person would have been greater but for a reduction made in respect of the whole, or any proportion, of the amount which the scheme administrator considers may be the amount of the liability to the scheme sanction charge in respect of it, it is to be regarded for the purposes of this Part as increased by the amount of the reduction.
This is commonly referred to as ‘grossing up’ the unauthorised payment and is explained further in the PTM.
What HMRC are suggesting in Pension Schemes Newsletter 163 is that an authorised surplus payment should similarly be ‘grossed up’, such that the tax charge due actually forms part of the authorised surplus payment. I consider this to be incorrect on two counts:
Aries will, of course, continue to monitor this situation however we would hope that HMRC will maintain the position as currently reflected in the PTM.
Aries Insight?provides comprehensive and detailed guidance on the application of authorised and unauthorised payments and the associated tax charges, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.
Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.