A long-standing impasse arising from FA 2004 ss. 240 and 208 may have been largely resolved. Pension Schemes Newsletter 40, published on 19 March, sets out new proposals from HMRC to handle the application of the Scheme Sanction Charge (SSC) from 6 April 2010 and for the years up to and including the tax year ended 5 April 2010.

Background

The SSC is due in any tax year that a registered pension scheme makes one or more "scheme chargeable payments" (RPSM 041.04.830). In a tax year, the amount of the SSC is 40% of the total scheme chargeable payments made. Where a scheme chargeable payment is an unauthorised payment and the unauthorised payments charge has been paid, the amount of tax due is reduced. The amount of the reduction is the lower of:

• the amount of the unauthorised payments charge that has been paid, or
• 25% of the scheme chargeable payments that are 'tax paid'

ie leaving the scheme administrator to pay a maximum of 15% of the unauthorised payment.

A scheme chargeable payment is 'tax paid' if all or part of the unauthorised payments charge due has been paid. The problem arises because the person liable in the first instance to pay the unauthorised payment charge is the recipient of the payment, via self-assessment. (In addition if the unauthorised payment is 25% or more of the value of their fund they have to pay a 15% surcharge. Again they should return this on their Self Assessment tax return.) To obtain the reduction, the scheme administrator is reliant on the member providing evidence they have paid the 40% tax due on the unauthorised payment. As HMRC has acknowledged, however, there is no incentive for them to do so and the scheme administrator cannot insist on it. The problem has been causing considerable anxiety in the industry, as we have previously reported on many occasions (most recently in January this year).

The most obvious solution is to change the legislation to allow the scheme administrator to deduct the whole of the unauthorised payments charge before making the payment, ie to withhold the tax and account for it on the Accounting for Tax return. HMRC say "this is unlikely for the foreseeable future". ("Why not?" is unfortunately not among the FAQs set out and answered in PSN 40.)

A further problem is that if a scheme sanction charge is not paid when due, interest is charged from 31 January following the tax year in which the charge arose. The legislation (SI 2005/3454 Reg 4) also states that HMRC must issue an assessment to tax whenever a SSC to tax arises - but HMRC has not done so. This interest charge applies, however, whether or not HMRC have raised an assessment (RPSM 043.01.060).

In July 2008 HMRC announced in PSN 34 a review of the problem, with the hope that it would be completed by the end of that summer. The industry has been waiting until now for the decision.

The new process

From 6 April 2010, if as scheme administrator you have to make an unauthorised payment and you want to obtain certainty about the amount of SSC you have to pay, as well as minimising the work the member has to do in reporting their tax charge, you can ask the member to complete a mandate giving you authority to withhold from the unauthorised payment an amount equivalent to the tax (and, if applicable, any surcharge) they will have to pay via their Self Assessment tax return.

Where the member completes the mandate, you will then be able to deduct the amount from the unauthorised payment and send it to HMRC PSS at Nottingham. The advantage to the member of completing the mandate is they will not have to provide details of the tax charge on a Self Assessment tax return and will, therefore, have nothing further to do. After the Event Report for that year is received HMRC will compare the unauthorised payment entries on the Event Report against their database of tax that has been withheld from unauthorised payments,and then raise the SSC assessment.

Process for raising the SSC for the tax years 2006/07 to 2009/10 inclusive

In all cases where HMRC already holds the Event Report, they we will allow a 25% deduction against the SSCs due for those years. HMRC will raise the SSCs for these years between 1 July and 30 September 2010.

In the meantime, scheme administrators are required to amend Event Reports which included payments that at the time of doing the report were unauthorised but because of the retrospective amendments to legislation (eg SI 2009/1171) do not now need to be reported. Without these amendments, HMRC says, the reports are now incorrect.

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