A meeting of HMRC Pension Scheme Services Customer Forum this week reviewed the operation of the new regime a year on from A-Day. Aries had placed the issue of maintenance of the RPSM (Registered Pension Schemes Manual) on the agenda. HMRC asserted that they do understand the value of the RPSM to the industry, stating their policy intention is to update the Manual at least quarterly. The most recent amendments appeared last week (see previous Aries article). On occasion, however, a longer spell may elapse and indeed we may not see the next update until after the Finance Bill gets Royal Assent (expected in July).
Suggestions for amendments are logged by subject on individual record sheets in a central area at Nottingham. Trivial changes, such as fixing broken hyperlinks or correcting typos are passed straightaway for updating (although HMRC acknowledged that enabling links is currently taking longer to achieve than it should). More substantive matters involving the guidance itself are passed to the relevant 'subject owner' in the technical team, who decides whether an amendment is justified and if so passes the change back to the team responsible for compiling the next quarterly list. There is a two-month lead time for ‘non-urgent’ changes: so for example if say at the end of February 2007, you advised a correction to make sense of an example in the RPSM, it’s unlikely to result in a correction before late July at the earliest. Even after it’s been logged, distributed, considered and passed, it will still be at least another two months before the change appears on the web.
The root of the problem is that HMRC's pensions section lacks direct control over its own web pages. They may specify the content, but are not responsible for actual publication; the time delay to implementation depends on how much else is in the queue. Intractable as it may seem to them, HMRC Pension Scheme Services must address this issue as it constitutes a serious roadblock to timely communication of guidance.
Aries argued strongly for maintenance of a downloadable pdf version covering at least the technical pages, as a single document. This would enable practitioners to print out, read and distribute internally all the guidance on a particular issue. It would also facilitate a search on a particular topic. None of this can be done easily, if at all, at the moment, with the Manual spread as it is over more than a thousand separate web pages.
Unfortunately, the pdf version has not been updated at all since it was made available (as a result of sustained pressure from Aries and other Customer Forum members) last August. Worse, HMRC declared that it will NOT be updated at all, allegedly because adequate resources for the task are lacking. Rather than update it, in fact, the existing pdf version may be removed altogether from the website in future.
Aries Members login here for further notes of the meeting.
"Wholly and exclusively"
A particular concern about the RPSM raised at the Customer Forum was the absence of guidance on the practical interpretation of "wholly and exclusively" (see Aries article). The fact that for guidance on deductibility of employer contributions to a registered pension scheme, one must search beyond the RPSM and look instead in the Business Income Manual (BIM) is an undesirable hurdle in itself (there isn’t even a link to the BIM from any RPSM page at present); but when vital pages there are quietly updated without publicity, the situation is simply untenable.
A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense, unless there is a non-trade purpose for the payment. Where the contribution is part of a remuneration package paid 'wholly & exclusively' for the purposes of the trade, then the contribution is an allowable expense. In respect of controlling directors, local inspectors are advised it is unlikely there will be a non-business purpose. For other directors, or employees who are close relatives or friends of the business proprietor, it may be a different story. In our earlier article on the subject, we drew particular attention to the inadequacy for SSASs of the BIM guidance, noting that
This page (BIM 47105) has now been updated*, and a new following page BIM 47106 inserted, on the application of ‘wholly and exclusively’ to remuneration payments to friends and close relatives of controlling directors.
The new guidance implicitly acknowledges it might not be feasible - especially in a small business - to find a comparator to assess the reasonableness of the remuneration in question, stating
and goes on to note that
"it may be helpful to consider variations in the level of remuneration over time; however it is important to establish the reasons for such variations, which may include an element of catch up. One element of the remuneration package where this may apply is with regard to employer contributions to the employee's pension (BIM46035)."
However it isn't all positive. If it seems to the local inspector that a remuneration package is demonstrably in excess of what is commercially reasonable, he may consider other avenues in addition to the question of whether an element of the payment is other than wholly or exclusively for the purposes of the trade. For example, he might take the view that it is in fact part of the controlling director's remuneration or the proprietor's drawings. If so, even though the payment may be wholly and exclusively for the purposes of the trade, it will be taxable as earnings of the director rather than the employee, if the spouse or close relative is simply acting as a conduit for the director (ITEPA 2003 s.62).
Salary sacrifice
The value of accurate and timely guidance from HMRC to dispel damaging rumours was amply demonstrated this week, in response to a scare story about salary sacrifice in the trade press. This asserted that employers faced fines if company salary sacrifice schemes were not registered with HMRC by 1 May. Salary sacrifice is a long-established and perfectly legitimate strategy for boosting contributions to a pension arrangement at no net additional cost to either employee or employer (briefly, by having money which would otherwise be paid as taxed salary, attracting NICs, to be paid gross instead to the pension scheme). As such, it has been widely adopted for decades. It seemed unlikely that the new legislation* on National Insurance avoidance would treat salary sacrifice in this punitive way.
The National Insurance Contributions (Application of Part 7 of the Finance Act 2004) Regulations 2007 (SI 2007/785).
Recent guidance [PDF] explains how HMRC will apply the legislation, which requires certain persons to disclose some NI contribution arrangements. The purpose of the Tax Avoidance Disclosure (TAD) regime is to give HMRC early warning of new avoidance schemes and inform anti-avoidance legislation and compliance work. TAD is designed to capture new and innovative schemes, packages marketed by commercial enterprises as a 'secret' tax dodge.
Further guidance has been issued this week in response to the press claims.
The obligation to disclose normally falls upon the promoter, often an accountant, lawyer or bank, but possibly a payroll consultant or service provider. In some circumstances where the scheme is designed "in-house" and there is no promoter, the employer may be liable to disclose - but small and medium-sized employers ('SMEs') are exempt. Even for a large employer, a scheme is notifiable only if it falls within one of several descriptions – "hallmarks".
The hallmarks most likely to trigger a NICs disclosure are:
The most recent guidance notes that while nothing specifically excludes salary sacrifice arrangements (or schemes that use salary sacrifice to provide other tangible benefits) from disclosure, in practice HMRC expects very few such schemes to be notifiable. Even if such a scheme gets as far as the hallmarks, HMRC would not expect an existing standard scheme to fall within either of the confidentiality hallmarks or the premium fee hallmark, all of which are proxies for "new and innovative".
Nor would HMRC expect an existing standard scheme to fall within the standardised NICs product hallmark because most, if not all, those schemes will have been on the market before 1 August 2006.
Thus, unless there something new, innovative or unusual about a salary sacrifice arrangement, or it is using salary sacrifice to provide tangible benefits of a type, or in a way, that schemes on the market before 1 August 2006 did not, it is most unlikely that HMRC will expect disclosure.