In what can only be described as a humiliating capitulation, HMRC have conceded defeat during the course of a hotly contested judicial review hearing in the High Court. HMRC withdrew the relevant assessments and were ordered to pay the applicants' costs on an indemnity basis. While HMRC's withdrawal means that a judgment is unlikely to be issued, the proceedings have been publicised by various investment advisers.1
Background to the judicial review application
The Recognised Overseas Self Invested International Pension Retirement Trust (Singapore) ('ROSIIP'), a personal pension scheme, was established in Singapore in 2007. ROSIIP's trust deed provided that any person (whether or not a Singapore resident) could be a member of that scheme. It was essential for ROSIIP that HMRC recognise it as a Qualified Recognised Overseas Pension Scheme ('QROPS') and include it in HMRC's public list of QROPS (the 'List'), which is updated twice a month. The List contains the names of pension schemes which have notified HMRC that they meet the conditions to be a QROPS, and asked HMRC to be included in the List. The advantage of being a listed scheme is that no tax is chargeable on transfers of funds into the scheme.
In 2006 HMRC accepted that ROSIIP was a QROPS and included it in the List on the basis of draft documents provided by ROSIIP's trustee (the 'Trustee') and an assertion by the Trustee that (a) Singapore residents could join ROSIIP and (b) there was no mechanism for the Singapore tax authorities to approve, recognise or register ROSIIP.
A significant number of UK pension holders transferred their pensions to ROSIIP, apparently relying in good faith on ROSIIP's inclusion in the List. HMRC decided in 2008 that ROSIIP was not a QROPS. ROSIIP'S recognition was withdrawn and it was delisted. If this was correct, all funds hitherto paid into ROSIIP were unauthorised transfers, giving rise to tax charges of up to 55% (i.e. a 40% charge plus a 15% surcharge, with interest and penalties likely to follow).
In 2011 the Trustee applied to the High Court for an order requiring HMRC to recognise ROSIIP as a QROPS. This argument failed in the High Court2 and, on appeal, in the Court of Appeal3 on the grounds that ROSIIP had failed to show that (a) Singapore residents could join it and (b) there was no mechanism in Singapore for the tax authorities to approve, recognise or register ROSIIP.
Judicial review proceedings
ROSIIP members applied for judicial review in the High Court claiming the delisting infringed:
- EU law (in that it restricted the free movement of capital between an EU member state and a non-EU state);
- The European Convention of Human Rights law (in that the circumstances of the assessments were such that the applicants could not have foreseen they would subsequently be chargeable); and
- English public law (in that the applicants had a legitimate expectation that HMRC would not retrospectively alter their tax treatment of ROSIIP).
A group litigation order ('GLO') was made in 2012 and permission to apply for judicial review was granted in May 2013. The substantive application was heard by Charles J in the High Court over four days in June 2013. He is reported to have been critical of HMRC, describing their behaviour as "shameful" and "aggressive", and taking them to task for failing to make full disclosure. He was apparently particularly critical of HMRC's attempt to distinguish this case from another delisted scheme in relation to which HMRC had not raised a tax charge. He rejected HMRC's application to withdraw from the case, saying he would only permit this if HMRC undertook to issue within 21 days a public policy statement clearly setting out their position in relation to QROPS. Failing that, he would hand down judgment.
HMRC were probably confident that the judicial review would fail in the light of their success against the Trustee in the earlier High Court and Court of Appeal proceedings. The reality is that those proceedings determined the technical issue of whether or not ROSIIP was a QROPS, whereas the judicial review was concerned with how HMRC had administered the QROPS regime.
The Judge criticised the aggression with which HMRC had pursued ROSIIP. HMRC's approach can possibly be explained, but not condoned, as the product of a growing tendency to view every tax dispute as inevitably involving tax avoidance (HMRC appear to be concerned that QROPS are being improperly utilised).
A further concern is HMRC's decision to continue fighting this case despite having afforded more favourable treatment in relation to a similar scheme. The Judge rejected HMRC's contention that the two schemes were distinguishable. What is especially troubling is that a senior HMRC lawyer is said to have been of the view that the two cases were materially similar.
The Judge's criticism of HMRC's attempt to withhold relevant evidence is of particular concern. The question arises whether HMRC's conduct in this case reflects a move towards a 'win at all costs' approach to litigation. Although one is hesitant to reach such a conclusion on the basis of this case alone - in which so much appears to have gone wrong - the case does highlight serious errors of judgment on HMRC's part.
Perhaps not surprisingly, HMRC appeared keen to withdraw and settle the case once they ran into difficulties and their conduct began to attract adverse judicial comment. When the Judge demanded that HMRC provide a policy statement, this was apparently resisted by HMRC on the ground that it might be relied on by those seeking to use QROPS improperly (HMRC also stated that they were already carrying out a high level review of QROPS). The Judge is reported to have insisted that the public are entitled to know what HMRC's policy is. HMRC have not yet published a policy statement but they are believed to have filed relevant documents at the High Court. It will be interesting to see what is finally published.4
The current version of the List contains clear health warnings such as that (a) the List does no more than provide an indication to interested parties that a listed scheme has notified HMRC that it meets the conditions necessary to be a QROPS; (b) HMRC may temporarily remove a scheme from the List while a review is carried out; and (c) if a scheme is incorrectly included in the List, any transfer could give rise to an unauthorised payments charge and surcharge for the member and to a sanction charge for the scheme administrator. This must inevitably result in a worrying uncertainty for potential investors in QROPS, which is compounded by HMRC's willingness to withdraw recognition without warning.5
HMRC's administration of the QROPS regime has at times fallen below the required standard. For example, 432 schemes were mistakenly omitted from the List published on 1 July 2013, apparently because of a technical glitch. HMRC apologised for this error.6
This case has also demonstrates the value of a well-targeted discovery application against HMRC. Other scheme members may also benefit from it, but only to the extent that they are not precluded from doing so by strict judicial review time limits and the terms of the GLO. The case may also have application in other areas of tax where HMRC have issued documents similar to the List and have failed to apply them consistently to all relevant taxpayers.