PSI19.1.16 - Withdrawal of Approval: General -
Taxation Consequences
(This archived guidance relates to HMRC discretionary
practice before the 6th April 2006. For current guidance on
Registered Pension Schemes see the Registered Pension Schemes
Manual)
Where a scheme’s approval is withdrawn or approval
automatically ceases to apply, the scheme no longer qualifies for
the special tax treatment given to approved schemes (see Part 17
Section 1
PSI17.1.1). Following loss of
approval it therefore becomes subject to the normal provisions
applying to non-approved pension schemes (see the booklet
“Tax Treatment of Top-Up Schemes” available in the
Office Library at reference F87). These are:
[PN19.3(c)]
- the automatic relief on contributions paid
to the scheme by the employer is not available under section 592(4)
ICTA 1988. Claims to relief on such contributions will be
considered by reference to section 79 Finance Act 1989. This means
that a deduction will not be available until a benefit becomes
chargeable on the employee(s).
[PN19.3(b)]
- Any contributions made by the employer to
the scheme will be deemed to be income of the scheme member(s) by
virtue of section 595(1) ICTA 1988.
[PN19.3(c)]
- Any contributions paid by the scheme
members will not be admissible for expenses relief under section
592 (7) ICTA 1988.
[PN19.3(C)]
- The scheme’s income from investments,
deposits or any underwriting commissions will not qualify for
exemption from tax under section 592(2) and (3) ICTA 1988.
[PN19.3(d)]
- Any capital gains realised by the scheme
will not be exempt from tax under section 271(1)(g) Taxation of
Chargeable Gains Act 1992.
[PN19.3(a)]
- Tax will be chargeable under section 596
ICTA 1988 in respect of all benefits payable from the scheme, on or
after 27 July 1989 except to the extent that they are chargeable
under section 19(1) or section 58. (Technically speaking, tax also
continues to be chargeable under section 599 on commutation
payments (see
PSI17.2.16-26), the
computation being made in accordance with the rules in force
(taking account of any statutory override) when the scheme was last
an exempt approved scheme. However, in practice section 599
liability is to be pursued only where for whatever reason a section
596A charge on the commuted payment cannot be made to apply.) Any
benefits paid in the period between withdrawal of approval and 26
July 1989 which are not expressly authorised by the rules of the
scheme are chargeable under section 600 (see
PSI17.2.29-33).
Tax continues to be chargeable:
- under section 598 ICTA 88, on repayments to
employees of contributions paid before the scheme ceased to be
exempt approved (see
PSI17.2.36-40).
[PN19.3(e)(iii)]
- under section 599A on repayment of surplus
funds arising from the payment of additional voluntary
contributions, and
PN19.3(e)(ii)]
- under section 601 ICTA 88 on repayments to an employer out of
funds held at any time for the purposes of the scheme (see
PSI17.3.1).
In addition, for certain schemes which have their approval
withdrawn or otherwise cease to be approved on or after 2 November
1994, tax will be chargeable under section 591C, ICTA 1988 at the
rate of 40% on the value of the scheme assets on the day before
approval ceases. Except for debt due from the employer (or any
connected person) which will be taken at face value, the value of
the scheme assets will be their market value ascertained in
accordance with section 272, Taxation of Chargeable Gains Act 1992.
Schemes subject to this special (40%) tax charge are those which
either:
- immediately before the date of cessation of
approval had less than 12 members (members means pensioners,
deferred pensioners as well as active members), or
- in the year before tax approval ceased had as a
member a person who was in that year or had been at any time a
controlling director of a company which has at any time contributed
to the scheme, or
- in the three years before tax approval ceased*
received a transfer value from another approved scheme, personal
pension scheme or retirement annuity contract for a controlling
director of a company or a person whose earnings were chargeable to
tax under Schedule D
* paragraph 3 applies only to schemes which cease to be approved
on or after 17 March 1998.
The tax is chargeable under Case VI of Schedule D and
liability for paying it rests with the scheme administrator. The
administrator is normally the scheme trustees unless they have
appointed someone else to be responsible for the statutory duties
imposed under the tax approval legislation. Section 606 ITCA 1988
sets out the fallback position in the case of default by the
administrator. In such cases responsibility for complying with the
administrator’s duties reverts to the employer or, if the
employer defaults, to those scheme members whose entitlement under
the scheme (whether from the current or an earlier employment or
occupation) derives from controlling directorships or Schedule D
earnings.
The Divisional Manager will tell you what action to take in
the circumstances of your case; for example, where withdrawal is
retrospective, whether to impose a section 595 charge for the
period between the effective date of withdrawal and the current
date.
