The term actually arose in the 19th century referring to an annoying skin complaint which reputedly only disappeared in the seventh year of infection.
What has this got to do with QROPS? Well, in the years since QROPS were introduced to the marketplace on 6 April 2006 they have been something of an annoying itch for HMRC. The extent of the itch has been growing with £467 million transferred to QROPS in 2009/10.
QROPS were intended to allow individuals living overseas to transfer their UK pensions to a pension based in their new country of residence and draw broadly similar benefits to those available in the UK. Instead, some individuals have used QROPS to transfer their pensions to countries bearing no relation to where they live. These schemes typically offer a variety of tax breaks, including access to 100% of the pension as a tax free lump sum.
In December, HMRC tackled its QROPS complaint, announcing measures to ensure QROPS are used for their intended purpose, not tax avoidance. The measures should take effect from 6 April 2012, six full years after QROPS first became available. HMRC will be hopeful that its QROPS itch also disappears in its seventh year.
The measures tighten up every aspect of transfers to QROPS:
The transfer request - When a QROPS transfer request is made, within 30 days of the request, the transferring scheme must ask the individual to provide detailed information and declare they understand the transfer could lead to significant tax penalties. The individual must provide this within 60 days of the transfer request.
After the transfer – Once the transfer is complete the transferring scheme must provide a significant amount of information to HMRC regarding the transferring individual, the transfer, and the receiving QROPS within 30 days of the transfer.
Under current rules HMRC is only provided with limited information annually about all transfers made in the previous tax year. Information only needs to be supplied by 31 January in the tax year after the tax year in which the transfers took place.
HMRC will also have the power to request detailed information from QROPS providers about any transfer. QROPS providers must provide this within 60 days of the request.
Payments from the QROPS – Currently, QROPS providers must report all lump sums and some pension payments to HMRC if the payments are made within 5 years of the individual leaving the UK.
An individual who left the UK over 5 years ago, can exploit this by receiving a lump sum from the QROPS immediately after the transfer safe in the knowledge that this will not be reported to HMRC.
Under the new rules, these payments must be reported to HMRC for ten years following the date of the transfer, regardless of whether the individual has left the UK.
Payments must also be reported more promptly. QROPS providers must report payments within 60 days of the payment date. Current rules only require payments to be reported to HMRC by 31 January in the tax year after the tax year in which the payment is made.
We will move from a system where unreported payments can be made immediately following a QROPS transfer, to one where they must be reported for ten years.
QROPS approval – QROPS providers must apply to HMRC for approval of their schemes. To date, the application requirements have been limited.
HMRC has beefed up these conditions. QROPS have always had to be open to residents of the country in which the scheme is based but will also comply with a new condition that any tax exemptions offered to non-residents are also available to residents of the country in which the QROPS is based. This will cause issues for those QROPS which pay lip service to the requirement to be open to residents by limiting the tax breaks to non-residents.
HMRC has also introduced a separate requirement for QROPS providers to provide further information upon request. HMRC can, for example, ask for the names and addresses of the directors of the QROPS provider.
The arguments used against the draft regulations have, to date, been weak. One is that closing off QROPS jurisdictions like Guernsey will force overseas individuals to transfer pensions to less secure locations. The argument misses the point that the rules are designed to allow individuals to transfer pensions to their country of residence, which typically won’t be Guernsey. If security were really the concern why not leave the pension in the UK?
Will the QROPS itch be cured? HMRC will hope for a significant fall in transfers. Only time will tell whether the regulations are the cure-all.
Gareth James
Technical Marketing Manager
A J Bell