HM Revenue & Customs could face new claims from savers due to a ruling that says it was wrong to remove an individual’s lifetime allowance protection.
The recently published case concerns Mr Hymanson who claims he had accidentally failed to cancel a direct debit to his pension scheme which, HMRC argued, should void his £1.8m lifetime allowance fixed protection.
Fixed protection 2012 was introduced following the cut in the lifetime allowance from £1.8m to £1.5m announced in the March 2011 Budget.
The measure was designed to ensure people who risked going over the new, lower allowance – having saved in a pension assuming the figure would be £1.8m – were not unfairly penalised.
Those who applied for fixed protection 2012 could continue to benefit from a £1.8m lifetime allowance but were not allowed to make any further pension contributions.
Doing so would void the protection and potentially open the member up to a six-figure tax bill.
Until now the extent to which “genuine error rules” could apply where savers mistakenly break these rules has not been explored.
While HMRC argued Mr Hymanson’s failure to cancel his standing order should render his fixed protection certificate worthless, the Judge Philip Gillett ruled the accidental nature of the breach meant the protection remained valid.
He says: “In this case it is quite clear that when HMRC made their decision to revoke Mr Hymanson’s certificate it did not take into account any possibility that the contracts under which Mr Hymanson continued to make payments to the pension schemes might be void as a result of mistake, even though the relevant arguments had been put to them at that stage.
“HMRC were prepared to rescind the payments if they had been made by a bank in contravention of an instruction from Mr Hymanson but HMRC did not consider the possibility that the payments could be rescinded because of Mr Hymanson’s mistake. This in my opinion was a very relevant factor which HMRC did not take into account.”
Reacting to the ruling AJ Bell senior analyst Tom Selby says: “This ruling potentially drives a coach and horses through HMRC’s hardline application of the lifetime allowance rules.
“It is refreshing to see the judge take a pragmatic approach in this case, particularly given the sheer complexity of the pension system UK savers are forced to navigate.
“It seems perfectly reasonable in the case of a genuine mistake such as this that the intention of the individual should be the main consideration, rather than blindly following the rules. Whether this forces HMRC to rethink its aggressive approach remains to be seen, however.”
Fixed protection at risk
The ruling against HMRC is also significant in relation to a Freedom of Information Act request to it from Royal London.
This shows more than 100,000 pension savers could face six-figure tax bills if guaranteed minimum pension requirements were equalised.
The request from Royal London shows that people’s fixed protection against any past cuts in the lifetime allowance for tax-relief purposes could be invalidated if they see an increase in their pension rights.
Following the December 2018 court case brought by Lloyds Bank employees, the High Court rules pension funds need to make changes to eliminate inequalities between men and women as a result of rules around GMPs.
However experts warn the application of the ruling in favour of Mr Hymanson against HMRC has limited application in the context of lifetime allowance breaches resulting from application of GMPs.
Squire Patton Boggs partner Garon Anthony says: “For this case to have wider implication generally a ruling will have to come from a higher court than the First Tier Tribunal.
“In my experience cases that have wider application and read across to other cases tend to go to appeal and are then decided in a higher court and that is the factor which ultimately determines how consequential a ruling is especially as judges in the higher are more likely to create law of more general significance.”
Royal London director of policy Steve Webb adds: “My assumption would be that you have to be a bit careful reading across from a specific piece of case law to a general principle.
“So while it’s possible that this court ruling could mean that people could appeal against a GMP related breach of their LTA, and they might win, it’s more likely that the court judgment is based on the specific features of that case (people accidentally forgetting to stop topping up their pension) and there’s not an automatic read across.
“Also, I suspect taxpayers would far prefer HMRC to fix the system so that no-one gets a tax charge if they have a GMP related breach, rather than be sent a big tax bill, appeal it, and hope to win the appeal.”