Industry officials say a contributory factor to the Treasury's withdrawal of tax relief on residential property in sipps could be because launch of the computer system to monitor such investments was at least six months behind schedule.
According to the Association of Member-Directed Pension Schemes, three weeks before the pre-Budget report delivered the U-turn on Sipps, HM Revenue and Customs told the body the HMRC was at least six months behind on its computerisation programme to monitor the investment of residential property and more esoteric assets into pensions.
AMPS says when simplification was first suggested four years ago, the organisation pointed out to the government the problems for both providers and HMRC of allowing pensions to invest in residential property and more exotic assets such as art, antiques and fine wine.
The organisation says they were reassured by representatives of the Revenue a robust system of self-assessment would be able to cope with these more esoteric investments, a system that is the basis on which the rest of HMRC taxation systems work.
But just over three weeks ago, AMPS claims, the Revenue told them they were at least six months behind in their computerisation programme to monitor these assets.
John Bradley, chairman of AMPS, says they believe the lack of preparedness on behalf of the Revenue contributed to the government’s decision to remove the tax advantages from residential property and esoteric assets.
He says: “When we first started talking to the Revenue about this type of investment, we were telling them the problems they would have monitoring it, but they said there wouldn’t be any problems because of their computerised system of self-assessment. Then three weeks ago we were told they were at least six months behind in their computerisation programme. Is it connected that three weeks later they pull the plug on residential property? Because they don’t have the systems in place, is it just a coincidence?”
Rachel Vahey, pensions development manager at Scottish Equitable, says the Revenue released a statement around three weeks ago to say they were running into general problems with their new system to collect information and to apply tax charges.
She says: “They were originally going for a big bang approach to have everything up and running for A-Day but they announced they were going to change to a phased-in approach over six months, as they had not fully road-tested programmes and were running into problems generally.”
An announcement on November 11 by Ivan Lewis, economic secretary to the Treasury, stated there would be delays to the implementation of online reporting requirements, which added the “Pension Scheme Online service will not initially be as comprehensive as originally intended”.
Although this relates to just one part of the system, Rachel Vahey says it is all interlinked as those running a sipp and its members would have to report their investments and any unauthorised payments, such as living in a residential property without paying rent into your pension.
She says it may not have been the deciding factor in the Government’s announcement, but that it could have been one of a combination of factors which led to the decision to withdraw the tax relief on these investments inside a sipp.
Vahey suggests the delay in the system may have produced long-term doubts about whether the system would be robust enough to properly monitor and collect the information, particularly as if HMRC wanted to control the investments through tax they would need to have a very good system.
John Moret, sales and marketing director at Suffolk Life, says he would be surprised if this was the main reason for thesipp U-turn.
He says: “Clearly what they have done is put back the introduction of electronic filing of returns, so some things are obviously running behind, but whether that embraces other areas, I have no idea, although I wouldn’t be surprised. But I would be surprised if this was the main reason for the U-turn, it might be a contributing factor, but I think the main cause is the cost to the Exchequer, which has been estimated at several billions of pounds if people took advantage of the full tax relief.”
But Adrian Boulding, pensions strategy director at Legal and General, suggests where people were taking advantage of or using their assets, such as driving classic cars, or drinking the fine wine, would show up on statements at the end of the year which was looking to be introduced from April 2007 onwards.
He adds: “The U-turn was not something to do with them not being ready. The cause of it I think is down to a mixture of two things. Criticism in Parliament, particularly from the Liberal Democrats over sipps and the tax relief on the investments you could put in them, and a government desire to have more of the housing market as owner/occupier rather than rental, and if the sipp market took off then that would stimulate the rental sector. I think a mixture of these two reasons was the deciding factor.”
Patrick O’Brien, a spokesman for HMRC, said although they announced a delay with the online reporting requirements that particular announcement would have had no effect on A-day per se at all, as it was a purely administrative issue, and would have had no effect on the sipp announcement.
He adds the government keeps all aspects of tax policy under review and takes action where it becomes clear a particular aspect of legislation may be open to abuse.
He says: “There is no linkage between the two issues. There is no basis for such a claim and its nonsense for anyone to suggest a link. That was a PBR decision for Treasury ministers and it would have absolutely no bearing on that matter whatsoever. It was a purely political decision, and before the pre-Budget report came out we always offered a caveat saying Treasury ministers would be keeping tax issues constantly under review. The comment about the IT sounds fanciful and is not in any way correct.”
Whether this did actually contribute to the decision or not, the AMPS is now calling on the government to make amends by reinstating the current rules of borrowing from a pension fund which allow the purchase of commercial property.
They say fears about the impact pension fund investment could have on the housing market - through the ability to invest in residential property - led to HMRC to reinterpret the borrowing rules under the Financial Act 2004, and halve the borrowing limit to 50% of the value of the fund.
AMPS says this has limited a valuable facility for businesses seeking commercial premises, and now residential property is classified as a “prohibited asset”, it is urging the government to reinstate the current borrowing rules of 75% of the fund plus VAT, or to abolish borrowing limits for commercial property altogether and let the market determine the borrowing limits and restrictions.
John Bradley, says: “It is unfortunate that the concept of simplification as a single overall regime is now to be lost through the almost hysterical actions of an unregulated few. However, I still believe that sipps and ssass are for the public the optimum pensions product. AMPS will continue to negotiate with Government to ensure that these schemes receive fair treatment.”
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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