By Margaret Snowdon OBE, Chair of Pension Scams Industry Group
In summary, what does the trustee announcement say?
1. Dalriada is assisting HMRC in calculating individual tax charges and HMRC will start communicating these charges and agreeing payment plans directly with members of the Ark schemes from September 2024.
2. No compensation has yet been received by Dalriada, but it is expected in the ?rst half of 2025.
3. Dalriada will transfer the compensation along with remaining funds of the Ark schemes to an authorised master trust run by Standard Life, who will then pay benefits to the scheme members in the usual way.
4. Loans received by members as part of the transfer to the Ark schemes will be ofset against the compensation, so there will be no need to physically repay those loans.
Explanation
The announcement prepared by Dalriada is factually correct, but it is set against a background of confusion and misinformation and a desperate need by victims to understand what will happen to them. As a result, members of the Ark schemes are worried about the outcome. They have pleaded for help ever since regulated finnancial advisers advised them to transfer their benefits into the Ark schemes in the early 2010s only to discover that they had been defrauded by those trusted advisers and scheme managers. The Ark schemes were registered with HMRC at the time of the transfers, making them appear legitimate to both ceding schemes and victims. Despite victims reporting suspicions as soon as they became aware, no regulatory action was taken against the advisers and managers for some considerable time.
Now the Fraud Compensation Fund (FCF) has concluded that dishonesty led to the huge losses in the Ark schemes. Reasonable belief that fraud took place is essential to be eligible for compensation and calculations are under way to assess those losses to the Ark schemes. The calculations are set out in legislation and can’t be altered but are complicated by the fact that some scheme members received loans from certain schemes.
These loans were later deemed to be unauthorised payments, therefore HMRC levied “protective” claims for tax against the members who were known to have received or be eligible to receive such a loan. The charges have been unresolved for over a decade and hanging like a sword above members’ heads.
A tax tribunal case in 2020 confirmed the legal position that HMRC can make tax charges on the loan amounts. HMRC was not a party to this tribunal, but nevertheless, are able to act on it. The tax charge is calculated as 40% + 15% of the loan amount, plus interest at statutory rates while the tax remains unpaid.
HMRC is starting collection activity in September 2024, but this will take some time given the number of individual victims to process.
Any compensation paid by the FCF will be paid to the scheme, not to the individual members of the scheme. This is how the FCF works – it is compensating for fraud on the scheme only. The compensation amount has no ceiling, but is based on a statutory formula. It includes fees charged by Dalriada in their work to investigate and recover lost assets, expenses incurred as well as Scheme Sanction Charges levied on the scheme by HMRC. The compensation will not include normal everyday scheme management charges or investment losses, which is unfortunate, given the time taken to get to this point, but the legislation simply does not allow it.
The compensation to the scheme is also reduced by the amounts that the individual members received in loans. This is because those amounts were not “lost” but paid out to members.
Dalriada will receive the net compensation amount and will then transfer all of the scheme funds into an authorised master trust provided by Standard Life. This is reasonable because a transfer to a master trust will mean lower ongoing costs of running the scheme. The remaining shell of the Ark schemes will be wound up shortly after all the funds have been transferred to Standard Life and will no longer exist.
Standard Life will pay out future benefits to members in the normal way. Members of the scheme over age 55 will be able to apply to take their retirement benefits as they would with a “normal” pension scheme.
So, what are victims likely to receive?
The calculations have not yet been finalised and Dalriada is working with the FCF and HMRC to calculate the values, so it is impossible to know yet what victims will receive. Victims will not receive cash but will be granted a pension fund with Standard Life based on a proportionate share of the overall compensation less any loan amounts already received. Victims do not have to repay the loans to the scheme but will receive a lower pension fund compared to members who did not receive a loan. It is expected that the ?nal calculations will be completed and transferred to Standard Life by end March 2025.
The tax position
The tax charges against members who received or were eligible to receive a loan from the scheme remain a sore point. The fact that the Ark scam arose because of fraud is unfortunately irrelevant to the decision of HMRC to levy a tax charge. Notifying victims of their tax liability begins in September 2024 and is the start of a process where victims can negotiate with HMRC on the amount due and on any mitigating circumstances or hardship. HMRC are prepared to ofer a “time to pay” concession, but they should also include other normal options ofered to other customers who owe tax. HMRC has greater statutory power to ofer clemency on tax charges than they care to admit.
Clemency is permitted in certain circumstances, particularly where hardship or HMRC maladministration has contributed to the matter. There is a valid argument that taking over a decade to work out tax charges and to charge interest on estimate amount is not in the public interest and has a seriously negative financial and emotional impact on victims. HMRC has not yet agreed to consider clemency in the Ark cases.
Points of note
1. The 2020 tax tribunal confirmed HMRC’s right to levy a tax charge on loans received by members and on loans paid by the schemes. This hints at double taxation and needs to be explained and justified. Individual victims only received one amount, and the prospect of taxing double is unfair and unreasonable.
2. The only victims to pay a tax charge to HMRC are those who declared (either on tax returns to HMRC or by telling them in some other way) that they had received a loan as part of the transfer to the Ark scheme. Those who did not declare are not penalised, which is unfair.
3. By ofsetting the loan amounts received against future benefits, members have not benefited from the loan. The loans should not therefore continue to be deemed unauthorised payments by HMRC.
4. Scheme Sanction Charges are covered by the FCF, which is fair, but it means that the Fraud Levy paid by all other pension schemes is being used to pay tax to the exchequer. Individual victims get no such concession on their personal tax charges. This is unfair and against the spirit of the compensation scheme.
5. HMRC starts tax collection activities in September 2024, yet the FCF compensation to the scheme is unlikely to be settled before March 2025. Dalriada has suggested that victims over 55 could cash in their benefits to settle the tax owing. While legally correct, this means that more monies compensating for fraud end up with HMRC.
6. While the tax calculations are still being carried out, there should not be any tax collection activity. Discussions on tax options with HMRC were suspended by HMRC on the announcement of the July 2024 election and have not been reinstated, stopping eforts to come to agreement with HMRC. This is grossly unfair and mean-spirited.
7. HMRC has consistently refused to consider or ofer any alternative tax rates or settlement options, insisting they are strictly bound by law. This requires further clarification.
8. The cases have shown the need for formal support for victims of a pension scam, so that they can better understand the process, their rights, including advocacy to argue their case professionally.
What would be an acceptable solution?
• HMRC and other authorities should accept that where dishonesty by scheme managers or agents results in losses to a scheme or individuals, victims are not to blame, unless proven to have been complicit in the fraud.
• HMRC should redefine unauthorised payments to exclude payments paid to incentivise an individual transfer to a scam arrangement, where that payment is returned to the scheme or ofset against future scheme benefits.
• HMRC should treat victims with respect and empathy and assume innocence until proven otherwise. A victim’s rights and obligations should be clearly explained to them.
• HMRC should waive interest charges while a tax charge remains “protective” pending a final determination.
• HMRC should be bound by a time limit to collect tax and not use devices to keep matters ticking on without penalisation. Four years after the tax year of the event should be suficient to establish the validity of a charge.
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