Back in October 2013, I wrote an article for the Tax Journal (18 October 2013, The QROPS Regime and EU Law) in which I argued that the operation of the qualifying recognised overseas pension scheme (QROPS) system, introduced by Finance 2004, breached EU law and was unlawful. The recent changes introduced by the 2017 Budget not only preserve the inherent unlawfulness which has existed in the system since at least October 2008 but introduces a further breach of EU law rights.
The background to my October 2013 article was my involvement in representing individuals who had transferred their UK pensions into a fund called ROSIIP.
The ROSIIP GLO
When the QROPS system was introduced, would-be QROPS fund trustees were obliged to submit a questionnaire form to HMRC indicating whether their fund met the legal requirements of a QROPS. Depending on what the trustees said, HMRC would then write to the trustees either confirming that the fund was registered as a QROPS and would be included on the ‘QROPS list’ published on HMRC’s website, or that it did not qualify as a QROPS.
ROSIIP was one such fund and appeared on the QROPS list between late 2006 and May 2008. It was then removed by HMRC. In the meantime, around 120 individuals had transferred their UK pensions into the fund.
HMRC formed the view that the initial registration (the form described above) contained errors which undermined ROSIIP’s status as a QROPS. The point was litigated in TMF Trustees v HMRC  EWCA Civ 192, and the fund lost which meant that ROSIIP was not and had never been a QROPS. HMRC then began issuing assessments against those individuals who had transferred into the fund claiming 55% of the value of their pensions at the date of transfer, together with interest.
The pension holders themselves had done nothing wrong. They had relied in good faith on information provided to them by HMRC and were being penalised merely for selecting the wrong fund at the wrong time. Many challenged HMRC by way of judicial review proceedings and after a year of litigation, on 21 June 2013, HMRC withdrew from the case, withdrew all of the assessments it had issued against the ROSIIP investors and notified the Administrative Court that it would do the same in relation to all pre-October 2008 transfers. This date was important because in October 2008, HMRC introduced a caveat to the QROPS list indicating that its contents could not be relied upon.
No judgment was delivered in the above judicial review because HMRC withdrew from the case during the course of the hearing. Consequently, several arguments which were at issue in the case were left unanswered. The most interesting was whether HMRC’s interpretation and administration of the QROPS system as a whole represents a breach of EU law.
Free Movement of Capital
The pensions system is heavily regulated in the UK and an individual who transfers money into a UK pension scheme enjoys an array of protections, not least the fact that if a UK pension fund is registered as such by HMRC, it will not be possible for that status to be retrospectively changed in the future.
By contrast, the QROPS system enabled people to transfer their funds to foreign jurisdictions outside of UK regulation. The QROPS system was introduced in an attempt to make UK law compatible with the UK's obligations under EU law. Such a system was deeply unattractive to HMRC and accordingly HMRC built into the system a significant number of hurdles which in turn generated a degree of uncertainty for the pension holder.
Broadly speaking, the system operates as follows. The QROPS system permits the transfer of a UK pension to an overseas pension, provided the receiving scheme satisfies the conditions of an ‘overseas pension scheme’ (Finance Act 2004, section 150(7); SI 2006/206) which is ‘recognised’ (Finance Act 2004, section 150(8); SI 2006/206) and ‘qualifying’ (Finance Act 2004, section169(2); SI 2006/208). Such a transfer is referred to as a ‘recognised transfer’ (Finance Act 2004, section 169(1)) and is free from tax.
If, however, a transfer is made from a UK fund into a non-QROPS, the penalties are significant: an unauthorised payment charge and surcharge of 55% of the value of the fund at transfer (Finance Act 2004, sections 208 and 209), together with interest. This "change" in status could occur after transfer, transforming a 'recognised transfer' into an unauthorised payment if HMRC later decided that the relevant fund did not fulfil the requirements of a QROPS. The potential and largely open-ended risks to a pension holder are significant.
The cross-border transfer of a pension engages rights under Article 63 of the Treaty on the Functioning of the European Union (TFEU) (free movement of capital) and associated EU law principles of, in particular, legal certainty and the associated concept that those who are subject to the law must be able to know what the law is in advance so that they may plan their actions accordingly.
So far as HMRC is concerned, the QROPS system is "self-assessed" by the trustees of the fund and the pension holder. If it transpires that a fund on the QROPS list does not meet the requirements of a QROPS, any transactions which were made in the meantime will be subject to the unauthorised payment charge and surcharge.
All that is available to the pension holder is the assurance he or she received from the fund itself, its promoter or reliance on the empty vessel that is HMRC's QROPS list. The result is a minefield for the pension holder who has to decide if they take the risk that HMRC may one day come knocking demanding more than half their pension or keep their money where it is. The uncertainty produced by this system breaches the EU principle of legal certainty and consequently the UK's obligations under the treaty.
There are two reasons why HMRC might operate a system in this way:
(1) to ensure the minimum level of compliance burden on HMRC; and
(2) to dissuade people from using QROPS in the first place.
If there was any doubt as to which of these reasons was the more significant, the 2017 Budget would suggest the latter.
2017 Budget Changes
The Chancellor announced the introduction of a 25% exit tax for those seeking to move their pensions on or after 9 March 2017, if at least one of the following applies:
• both the pension holder and the QROPS are in the same country after the transfer;
• the QROPS is in one country in the EEA and the pension holder is resident in another EEA country after the transfer;
• the QROPS is an occupational pension scheme sponsored by the pension holder’s employer;
• the QROPS is an overseas public service pension scheme as defined in regulation 3(1B) of SI 2006/206 and the pension holder is employed by one of the employer’s participating in the scheme;
• the QROPS is a pension scheme established by an international organisation as defined in regulation 2(4) of SI 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation.
The scope of the changes extend to a 5 year period and a charge will apply (or be withdrawn) where the residency of the pension holder changes within that period in a way which would change the engagement of the exemptions.
Many commentators have indicated that the EEA exemption has been introduced to make the new legislation 'EU law proof', but this ignores the fact that the scope of EU law on the transfer of capital not only applies to cross-border transfers within the EU, but also to 'Third Countries' ie those outside of the EU.
The system which existed before the 2017 Budget did not comply with the UK's obligations under the EU treaty. It failed due to the uncertainty which was built in to the system by HMRC and the dissuasive effect this had on those considering transferring their pensions. The changes introduced by the 2017 Budget compound the problem by introducing an unlawful exit charge.
It was clear at the time of the ROSIIP litigation that HMRC was not prepared for the industry which Part 4 of Finance Act 2004 created. When the legislation was drafted, HMRC expected that the provisions would only be of interest to a small number of people and that the number of QROPS would consequently be low. They were mistaken and HMRC has spent the intervening years attempting, with varying degrees of success, to get the QROPS genie back into the bottle.
This latest attempt is expected to net HM Treasury £60m-£65m of additional revenue year on year to 2021/22. Interestingly, HMRC's policy document indicates that these figures take into account what it calls the "behavioural responses of both individuals and pension providers to the changes". This estimate appears strange in its uniformity. The real intention appears to be to make the regime so uncertain and expensive that only a small number of people would ever consider using it.
The risk HMRC runs in introducing these new rules is that the issues which it successfully managed to side-step in ROSIIP, by conceding the case before the Court delivered its judgment, will resurface and the unlawful elements of the regime will be struck down by the courts.