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Where a scheme’s approval is withdrawn or approval automatically ceases to apply, the scheme no longer qualifies for the special tax treatment given to approved schemes (see Part 17 Section 1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)]

6. 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)]

7. 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)]

8. Any contributions paid by the scheme members will not be admissible for expenses relief under section 592 (7) ICTA 1988.

[PN19.3(C)]

9. 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)]

10. 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)]

11. 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:

1. 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)]

2. under section 599A on repayment of surplus funds arising from the payment of additional voluntary contributions, and

PN19.3(e)(ii)]

3. 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:

1. immediately before the date of cessation of approval had less than 12 members (members means pensioners, deferred pensioners as well as active members), or
2. 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
3. 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.