Marketing of tax avoidance schemes could see pension scheme administrators fail new 'fit and proper' test, says expert

As of 1 September 2014, HMRC has had the ability to deregister or to refuse to register a pension scheme if it believes that the scheme administrator is not a 'fit and proper' person to hold the position. New guidance published by HMRC states that a scheme administrator may fail the test if that person has "participated in or been connected with" the design or marketing of a tax avoidance scheme (10-page / 186KB PDF) or employs a person who has been involved in tax avoidance as an adviser, amongst other criteria.

Pensions litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said that the new powers gave HMRC much greater scope for refusing to register new pension schemes or to deregister existing schemes where the scheme administrator did not meet the requirements of the test.

"The origins of this new power come in response to concerns over pension liberation, but it will potentially knock out potential administrators for a far wider range of activities and behaviours involving suspect schemes or tax avoidance vehicles," he said.

"The new guidance seems to be drafted so as to give HMRC as much flexibility as possible to catch the real scammers, but not to stop legitimate pension schemes and administrators from going about their business. HMRC has a fair amount of discretion when using its new power as the guidance makes clear, but there is plenty here that trustees will have to be aware of when appointing scheme administrators," he said.

Changes introduced as part of this year's Budget gave HMRC more power to refuse to register a pension scheme or to deregister an existing scheme if it believes that the scheme has not been set up and maintained for the main purpose of providing authorised pension benefits. Previously, it was only able to refuse to register a scheme that provided incorrect or false information, and was only able to deregister schemes in limited circumstances.

The new 'fit and proper' person test is the last of these changes to come into force. When registering a new pension scheme, the person doing so is now required to declare the fit and proper status of the scheme administrator. According to the new guidance, HMRC will assume that anyone appointed as a scheme administrator is fit and proper unless it holds or obtains information which "calls that assumption into question". Schemes that are deregistered will be subject to a 40% tax charge on the aggregate value of the assets within the scheme, for which the administrator will be liable.

The guidance states that a scheme administrator is likely to be considered a fit and proper person if "they are familiar with, and capable of competently performing, the scheme administrator's responsibilities and there is nothing in their past behaviour to suggest that they should not be responsible for the financial management of the pension scheme". Factors that HMRC may refer to when deciding whether an administrator is fit and proper could include their working knowledge of the pensions and pensions tax legislation; any previous involvement in pension liberation, pension schemes which have been de-registered for some other reason, tax fraud or tax avoidance; disqualification from acting as a company director; and any criminal convictions or adverse civil proceedings relating to finance, corporate bodies, dishonesty or misconduct.

According to the guidance, a person who is not considered suitable to be a trustee of a pension scheme by the Pensions Regulator may also fail the fit and proper person test, although suitability as a trustee does not guarantee that a person would be considered fit and proper to act as an administrator. If HMRC does not consider a person fit and proper, it may share this information with the Pensions Regulator and Financial Conduct Authority (FCA) where permitted by law to do so, according to the guidance.

"HMRC has set down a very wide range of factors which may count against an administrator, and it may investigate advisers too," said pensions expert Simon Tyler of Pinsent Masons. "The greater the level of involvement of the adviser with the scheme and its administration, the greater the weight given to the administrator's relationship with that adviser."

"The possible penalties are severe - de-registration gives rise to a 40% tax charge on all sums and assets held in the scheme - although there is a right of appeal," he said.

If HMRC decides to carry out an enquiry into a scheme administrator's fit and proper status, it will put the scheme registration process on hold, according to the guidance. If the scheme is already registered, HMRC will refuse to provide confirmation that the scheme is registered in connection with any proposed transfers to the scheme.