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Martin Tilley: Get the right pension scheme protector

A recent court case highlights the importance of a deep understanding of pension legislation and company law

As a small self-administered pension schemes practitioner of nearly 40 years, we have always maintained the need to keep a tight ship. When dealing with legislation surrounding tax-exempt funds there should be no shortcuts, as errors and omissions could lead to tax consequences of huge proportions.

No better example of this is the correct and full documentation process of a loan to a sponsoring employer. Despite numerous legislative requirement changes over the years, the release of funds from a SSAS back to an employer on which tax relief has been granted has always been a concern to HM Revenue & Customs. This is to such an extent that, with the introduction of pension simplification, loan-back requirements were made all the more complex by a mandatory need for such a loan to be secured.

Section 179 and Schedule 30 of the Finance Act 2004 requires a loan to be secured at all times, by a first charge, with the amount of the security being no less than the face value of the loan, including interest.

It goes without saying that a loan payment to the employer which does not conform to these requirements is unauthorised at the date it was made, and for its full value. The unauthorised payment will be subject to a 40 per cent tax charge on the loan and, in addition, the scheme administrator will be liable to a further scheme sanction charge of a minimum of 15 per cent.

Member trustees and lay practitioners will no doubt be aware of the headline requirements, but a recent case shows, even with the best will, one slip can have draconian consequences.

The court ruled against an employer in the case of Eden Consulting Services (Richmond) Ltd v Revenue and Customs Commissioners (HMRC).

Security criteria not met

Eden Consulting Services (Richmond) Ltd took advantage of two loans from a registered occupational pension scheme in 2007 and 2009 respectively. The loan payments were documented and otherwise met the criteria of an authorised employer loan, with the exception of the security element.

Although a security document was prepared, securing the loan against the chattels, furniture and telephone system installed at the employer’s property, the charge was not recorded at Companies House. Whether this omission was in error or by purposeful design, as a matter of company law an unregistered charge over the company’s assets is void in relation to a company’s liquidator, administrator or creditors.

HMRC deemed that the failure to register the charge meant the loan was unenforceable and so did not meet employer loan requirements.

The employer argued that as long as there was a charge in place and there was no other charge over the assets, the unregistered charge must therefore take priority.

But the court ruled in favour of HMRC in that the provisions of the act were clear in purpose and designed to protect the pension scheme’s assets. It should therefore be implicit that any charge must have an effective priority for the payment “when priority is in point”.

The court further ruled that an unregistered charge would be void against a future liquidator or administrator of the company and against the company’s creditors, and this condition was not satisfied.

The ruling highlights the need for a deep understanding not just of the headline requirements of the legislation governing pensions, but also of company law.

Legislation requires a SSAS to have a “fit and proper” scheme administrator on whom the responsibility for paying penalties or fines levied on the scheme lies.

Sufficient working knowledge

If the scheme administrator does not have sufficient working knowledge of the pensions and pensions tax rules, it or the scheme trustees must appoint an adviser such as a pension practitioner or provider who does have such a working knowledge.

They should also appoint other appropriate professionals to assist where investments involve the transfer of funds outside of the scheme in exchange for assets, including loans.

While HMRC supervision of SSASs may have appeared low key since the introduction of the Registered Pension Scheme regime in 2006, the annual registered pension scheme return required since then will have provided them with the information necessary to identify schemes of which a more detailed examination of affairs may be required.

The recent interest in SSASs, following their misuse in pension scams, is only likely to sharpen their interest further.

Martin Tilley is director of technical services at Dentons Pension Management

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