BLOG 156

WHOSE TO BLAME FOR WHAT I CHOOSE TO DO?

Do we any longer have any sense of responsibility for our own deliberate actions?  What sort of society are we living in when people think that they don’t?  There was an article in The Times recently entitled, “The taxman’s role in a pensions scandal”.  As I was not aware of any such scandal, I read on.  The more I read, the more astounded I became.

Apparently “UK investors have lost at least £500million in “pension liberation” scams that promised early access to their cash”.  I thought I knew what a scam is, namely something where a person is promised X which he believes is valuable, but instead receives something of no value.  But that is not what The Times describes.

Pensions are deferred salary.  A person is given tax relief for contributions to a pension scheme but in return for such relief cannot touch the funds until he reaches a minimum age and at that stage can take a quarter of his savings tax-free but pays tax on any excess.  That is so well known that I find it inconceivable that anyone could pay money into a pension scheme without being fully aware that he cannot touch the money until he reaches the minimum age.

Pension liberation is when someone enters into an artificial arrangement that is designed to give an individual the use of the funds in his pension scheme before he has reached the age at which the tax laws allow him access to those funds.  In common parlance it is tax avoidance.

I have no strong feelings about tax avoidance but The Times has repeatedly told me over the last few years that it is immoral and socially unacceptable and anyone who indulges in such activities ought to be publicly castigated.  Yet here it is giving its columnist, Mark Atherton, a two-page spread to exclaim how unfair HMRC is to seek to collect the tax and interest due from a person who attempts to avoid tax but whose tax avoidance scheme – like most such schemes – is found not to work.

How can this be?  Well apparently Mr Atherton thinks that HMRC encouraged people to enter into this tax avoidance scheme so it was wholly unreasonable to then turn round and seek to apply the law.  In Mr Atherton’s world, if the government gives a person tax relief on condition that they let the funds accumulate in their pension scheme until age 55, it is perfectly reasonable for the individual to renege on that bargain and enter into a tax avoidance scheme to give him access to the pension fund at age 50.

So how is it HMRC’s fault that individuals were trapped into using this tax avoidance scheme?  Perhaps I should explain how the scheme works.  The sub-article, “I owe £16,000 to HMRC.  How can I retire?” highlights the plight of an individual that I shall call Mr X.  Mr X was in a civil service pension scheme.  He was “persuaded” by the wicked scammer to transfer his pension from the civil service scheme into another registered pension scheme.  A total stranger then lent Mr X £27,000 using 50% of the funds in that stranger’s pension scheme and Mr X’s pension scheme would make a similar loan to another total stranger.  The scammer took a fee of a couple of thousand pounds for arranging the scheme.  Pausing there, taking a fee of £2,000 for arranging a £27,000 loan is a bit on the high side but hardly a scam.  So where is the scam?  Mr X certainly seems to have been ill advised to move from a civil service pension, which I imagine was a final salary scheme.  But it is not clear that he took advice.  I suspect that he wanted to get his hands on the money and like many would be tax avoiders, was not too concerned about the mechanics of achieving that objective.

It seems most improbable that he was sitting at home minding his own business and the scammer knocked on his door and “persuaded” him to avoid tax.  That is not how those things normally work.  Normally a person answers an advert telling him that the advertiser has a way to avoid the tax rules if that is what the individual wishes to do.  In other words, there is no persuading someone to avoid tax; the individual has already decided that is what he wants to do.  If there is any persuading, it is to adopt one particular tax avoidance scheme rather than another.

So how is it the fault of HMRC?  Well, the government requires HMRC to set up a register, i.e. create a list, of pension schemes that meet certain criteria.  A pension fund can be transferred without adverse tax consequences from one scheme on the register to another.  Apparently the civil service (or more likely, I suspect, the trustees of Mr X’s civil service pension scheme) did some research and found that the scheme to which Mr X wished his funds to be transferred was properly registered.  I am a bit puzzled that they had to do any research.  The register is a public document so all they needed to do was to look it up.

And that, in Mr Atherton’s view, is why it is all HMRC’s fault.  The pensions regulator and HMRC registered the schemes without doing any detailed checks.  That is actually what the law requires them to do; it does not require any checks other than to be satisfied that the qualifying conditions are met.  Prior to 2004, pension schemes had to be approved by HMRC, but the then government decided that this was not the best use of scarce taxpayer resources and that HMRC should merely draw up a register so that they could keep track of what pension schemes exist, ask the fund to make an annual return of transactions and tax any money that comes out of the fund in breach of the rules.  To seek to deter such breaches the tax charge is high – it can be up to 55% of the money unlawfully “liberated” from the pension scheme.

Mr X is not the only would-be tax avoider to have been caught out. The Times tells me that an Action Group has been set up “representing victims of the scam”.  I personally find it hard to call a would-be tax avoider a “victim” when his scheme to thwart the tax laws is shown to be unsuccessful, but that is apparently how Mr Atherton views those who try to avoid tax but fail.  The Action Group is headed by a Ms Brooks who told Mr Atherton, “The fact that the schemes were registered gave would-be investors the impression that they were approved by the government”.

I think that an extra-ordinary statement.  Why on earth should anyone think that putting someone’s name on a statutory list or register gives the impression that the government has “approved” everyone on the list?  My doctor is required by law to be on the Medical Register but if she makes a mistake and I become chronically ill as a result, I will sue her, not the government, because I do not think that by requiring the creation of the register the government is somehow approving my doctor’s medical advice to me.  If a limited company becomes insolvent owing me money, I do not believe that I can look to the government to pay me because by putting the name on the Companies Register the government were approving it and as such guaranteeing its continuing solvency.

Furthermore, what the Register listed was the pension scheme.  There is nothing in the article to suggest that it did not operate properly as a pension scheme.  The issue was not that it broke the pension scheme tax rules, but rather that lending money to a total stranger in return for a total stranger lending money to Mr X was held by the courts to be an unlawful distribution of the funds from the pension scheme, not the simple investment of the pension scheme’s funds.

Mr X believes himself to be a victim because he says, “I was told … that there would be no tax to pay on the money I received”.  Over the years I have seen a great many tax avoidance schemes but not one of them ever claimed to be risk-free.  The scheme promoter is indeed a scammer if he really told that to Mr X, but it would have been such an extraordinary thing to do that I find it wholly incredible.

I also find it hard to see how a person who deliberately seeks to take money out of a pension fund in breach of the law can legitimately be described as a “would-be investor”.  Taking money out is surely the antithesis of investing!

I obviously have a degree of sympathy for Mr X.  He is faced with an unexpected tax bill of around £15,000, plus a couple of thousand pounds of interest and does not have the resources to pay it.  Furthermore, he thought that his avoidance scheme worked and it took many years for the courts to hold otherwise.  He is not alone in that.  Many people who entered into tax avoidance schemes are now facing heavy tax bills under the new Accelerated Payment rules and are fearful that they do not have the resources to pay.  At least Mr X has the other half of his pension fund intact, so at the end of the day that might be available to pay the tax.

But Mr X sought to circumvent the rules.  He knew what the rules were.  He knew that what he was trying to do was against the rules.  I would feel a lot more sympathetic if he was prepared to accept responsibility for having sought out his tax avoidance scheme, rather than trying to blame HMRC.

ROBERT MAAS