Her Majesty's Revenue and Customs (HMRC) is under pressure from the insurance industry to make anti-avoidance rules on the recycling of tax-free cash less complicated and more workable.
Both individual providers and the Association of British Insurers (ABI) have approached HMRC to point out the current guidance is overly complicated and unworkable.
However insurers admit the rules cannot be removed altogether, as it is a ministerial decision from the Treasury which was announced in the pre-Budget report. The best they can hope for is a relaxation of the rules to make them less pervasive.
Scottish Equitable and Norwich Union, along with the ABI, have expressed concerns over the complexity of the guidance, and have put forward their own suggestions to make the process simpler.
Iain Oliver, head of pensions at Norwich Union, says there needs to be some clarification around the recycling issue as the current approach of HMRC is inconsistent with the aims of simplification.
Norwich Union claims the proposals as they stand will introduce complexity rather than simplify the retirement process, and adds the potential impact will be disproportionate to the amount of recycling likely to occur.
Oliver says: “For scheme administrators the guidance adds extra burden; implicitly requiring communication with members about their new responsibility and warning against recycling activity, or risk a scheme sanction charge.”
He adds Norwich Union suggest the issue could be addressed by tackling recycling through the self assessment tax form and by effectively ruling out the promotion of such activity by including it in the Financial Services Authority (FSA) Code of Business Rules.
Scottish Equitable has also been in contact with HMRC to suggest three ways to help simplify the process and take it forward. It first of all recommends HMRC should waive the scheme sanction charge if administrators meet certain conditions, which may include asking the member to declare they have no intention of recycling, and informing the member of the legislation.
It claims this will avoid case by case investigations and save time and resources for both scheme administrators and the HMRC. The company also suggests administrators should not apply and collect any unauthorised payment charges, even if the member self declares the intention to recycle.
Scottish Equitable believes the charge should instead be applied by HMRC and collected through the self-assessment system, similar to Norwich Union’s suggestion, to save scheme administrators time and resources and avoid the difficulties of trying to reclaim a charge that may have already been spent.
Finally it is asking HMRC to simplify the legislation in general, including increasing the trigger amount of pension commencement lump sum (tax free cash) taken in the last year from £15,000 to around 10% of the lifetime allowance.
It also asks for there to be a clear time limit for measuring whether contributions have increased “significantly”, with Scottish Equitable recommending a year, and in addition it asks for the unauthorised payment tax charge to only be applied to the part of the money that is recycled, rather than the whole lump sum.
Rachel Vahey, head of pensions development at Scottish Equitable, says the guidance needs to be simplified greatly as it is currently overly complicated and would create unnecessary work for providers, advisers, consumers and the Revenue.
She adds: “We would rather just have the basic principles set out, as most people already know what they are going to do with their tax free cash, and it is not to reinvest it into a pension.”
John Gleadall, senior technical manager at Legal & General, says the industry consensus is the proposals are unworkable, as it is very hard for a scheme to control what people want to do with money which they are legally entitled to.
He admits: “We have no choice in this as it’s a ministerial decision, but it seems the HMRC are going to go away and think about how to maybe relax it, and try to find ways to make it less pervasive and not apply to so many people.”
The ABI have also been making the feelings of the industry clear to the Revenue in a meeting last week.
Jonathan French, spokesman for the ABI says the first thing to note is the Treasury has imposed this decision, leaving the HMRC to implement it, and they have come up with proposals which are unworkable.
He says: “At the meeting we aired our concerns on how complicated the proposals are and the workability issues. We suggested the possibility of introducing a limit under which the recycling rules would not apply, which would make it a lot better.”
But he says it is now essentially up to the Revenue to look at the suggestions and see if this represents a good way forward.
Patrick O’Brien, spokesman for the HMRC, says: “The response to the consultation has been good. We are currently reviewing the comments and it is possible that in light of the comments some parts of the guidance will be changed.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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