Has HMRC's clampdown on QROPS gone too far?

Before pensions simplification in 2006 anyone wishing to transfer pension funds overseas needed advance permission from HMRC. Anecdotal evidence suggests that getting this approval could take so long that if you were not certain of staying overseas for five years it was not worth applying.

Pensions simplification came up with a genuinely simple solution to this problem. A cynic might say that European legislation meant that the UK had to open up its stance on overseas transfers, but for whatever reason the end result was some fairly simple rules. Instead of each transfer getting approval, each receiving scheme had to be ‘recognised’ by HMRC, and once this recognition had been given any transfer could take place without prior reference to HMRC.

Gradual expansion

Getting recognition was fairly easy. The scheme had to undertake to keep HMRC informed of payments made by the QROPS within five tax years of the member leaving the UK, and in most cases at least 70 per cent of the transferred funds had to be paid out as income rather than as tax-free cash. In keeping with the idea that QROPS was intended for people emigrating to the country where the QROPS was based, the scheme had to be available to residents of the receiving jurisdiction.

Over the six years from April 2006 to April 2012 the number of QROPS transfers taking place gradually expanded. A New Zealand QROPS could be used to allow the full pension fund to be paid out as cash, and New Zealand became a popular jurisdiction for QROPS. New Zealand schemes were not doing anything that breached either their own law or the UK QROPS rules.

New Zealand pension schemes do not benefit from tax relief going in, or from tax exempt status on investing and hence they do not tax emerging funds. For many people not living in New Zealand the proceeds would be taxable in their country of residence – if they remembered to declare them!

In addition to legitimate transfers to New Zealand a number of QROPS were set up in various less reputable jurisdictions. Singapore QROPS were an early faller and they were followed by those in Hong Kong. In each case the QROPS could not comply with its undertakings. The use of ‘unusual’ contracts of employment to allow people to transfer to an occupational scheme was just one example of a failed attempt to circumvent the rules.

By contrast, jurisdictions like Guernsey did their best to operate within both the spirit and the letter of the law.

Moving target

In December 2011 HMRC issued draft regulations aimed at restricting QROPS. They claimed that QROPS were primarily intended for those emigrating who wished to transfer their pension funds to their country of residence and not to allow transfers to ‘third country QROPS’. This totally ignored people living somewhere that did not have a sound economy or sound financial services regulation.

The regulations, which came into effect on 6 April 2012, specifically removed New Zealand QROPS from the list of qualifying schemes. They also introduced a new ‘condition 4’ which required schemes to ensure that residents and non-residents received the same tax treatment on their QROPS.

At this point it was not clear whether Guernsey, which taxed the income of resident pensioners, but paid gross income to QROPS members, was an accidental or deliberate target of HMRC. It became clear in April that Guernsey was indeed a deliberate target, when all but three of Guernsey’s QROPS were removed from the ‘recognised’ list, and revised regulations have emerged to prevent Guernsey’s new 157E schemes – designed to be compliant with HMRC requirements as set out in December – being recognised.

QROPS legislation was always going to be a target for exploitation/abuse, so getting revised regulations after six years is no surprise. What is surprising is the way that those regulations have blocked transfers to a reliable jurisdiction such as Guernsey, but done nothing to prevent the widespread mis-selling of QROPS in certain parts of Europe and Asia.

I suspect that deep down HMRC wishes that the QROPS genie had never been let out of the bottle. Guernsey seems to be paying the price of others going against the spirit of the law, resulting in changes to the letter of the law. But do these changes resolve the problem? ?I think not.

David Trenner is technical director at Intelligent Pensions