RPSM15108140 - Technical Pages: Special annual allowance: Relevant refund amounts: Scheme sanction charge

This guidance only applies for the 2010-11 and 2011-12 tax years.

Scheme sanction charge

The arrangements that are put in place in relation to paying ‘contributions refund lump sums’ are a matter for those who manage the pension scheme. However, the scheme administrator of the pension scheme might be concerned that there could be a scheme sanction charge should it turn out to be the case that a refunded amount is an unauthorised payment because all of the necessary conditions for a ‘contributions refund lump sum’ have not, in fact, been met.

Scheme administrators are able to apply to HMRC to ask it to discharge their liability in respect of a scheme sanction charge. Such an application can be made where the scheme administrator considers that the grounds for such a discharge are just and reasonable. The scheme administrator must set out those grounds as part of the application.

Reasonable grounds would, for example, in the case of a member who is arm’s length from the pension scheme and the scheme administrator, be where

• a scheme administrator asks the member, who is about to receive a refund, to declare whether or not the lump sum meets all of the necessary conditions for a ‘contributions refund lump sum’
• the member declares to the scheme administrator that all of the necessary conditions have been met, and
• despite the declaration to the contrary to the scheme administrator, not all of the necessary conditions, as requested from the member under the declaration, were met.

However, where a scheme sanction charge liability is discharged in respect of a particular refund (that is an unauthorised payment), that discharge does not stop the unauthorised payment from being a scheme chargeable payment. In the circumstances, such scheme chargeable payments would still be included in any review to ascertain whether or not one of the possible grounds for de-registration applies - the ground in question being that the amount of scheme chargeable payments in a 12 month period exceeds the de-registration threshold.

Should the threshold be exceeded, HMRC officials would then consider whether or not the registration of the pension scheme concerned should be withdrawn. It is unlikely that HMRC would withdraw registration if the scheme chargeable payments that led to the de-registration threshold being exceeded were payments that turned out not to be ‘contributions refund lump sums’ and, because there were reasonable grounds, HMRC had agreed to discharge the scheme administrator’s scheme sanction charge liability in respect of those payments.

More detailed guidance concerning the taxation of unauthorised payments is at RPSM04104000.