Motion made, and Question proposed, That this House do now adjourn.—(Mark Lancaster.)
I begin by expressing my personal gratitude to you, Mr Speaker, for selecting this important subject for an Adjournment debate this evening. The Ark pension schemes were put in place a few years ago to offer an apparently lawful method by which participants could realise a substantial proportion of their pension pot many years before the relevant retirement age. At the heart of these schemes was a structure called a “maximising pension value arrangement”—MPVA. That involved a pension reciprocation plan by which members could gain access to their pension capital prior to the minimum retirement age without, it was claimed by its promoters, breaching Her Majesty’s Revenue and Customs rules. That was achieved by one of the schemes under the control of the trustees “loaning” funds to a member of another scheme under their control and, reciprocally, the same amount being “loaned” back to a member of the first scheme.
In a High Court judgment in December 2011 on the Ark schemes, Mr Justice Bean said that the arrangements, including the MPVA loans, were “beyond the scope” of the trustees’ powers. They were “made for ulterior motives” and were a
“fraud on the trustees’ powers.”
According to Mr Justice Bean, the Ark schemes in question had funds originally of approximately £25 million, with a total membership of at least 487 members. Those members were from across the United Kingdom, and their situation has been a matter of concern to many Members of this House. One of those scheme members, however, is my constituent. For reasons that are readily understandable, he does not wish to be publicly identified, so although I have provided the Minister with his full details in confidence, in this debate I will refer to him simply as Mr Smith.
Mr Smith is in his late 40s. At 18, he showed rather more foresight than is usual for people of that age and took out membership of a private pension scheme, initially with Britannic Assurance but this was later transferred to Standard Life. After almost a quarter of a century paying into the scheme, he decided in 2008 to stop paying his monthly instalments, which had latterly been about £300 per month. The earliest payout date under the scheme was 2022, at age 55. The total pension pot—the fund—was valued at £122,000 in 2011. Mr Smith had for almost the whole of his working life been employed in a specialist sector of the building supplies industry, as a salesman, and had been employed by the same company for 23 years. However, as one of the many consequences of the 2008 world financial crisis, that company went into liquidation in 2010, and his job with it was no more. He found employment with another firm in the same sector, but by February 2011 it became apparent to Mr Smith that because of trading conditions he was likely to be made redundant from that firm, too.
Given that uncertainty, compounded by his age, Mr Smith thought that the best thing he could do was to set up a shop in the sector and work for himself. On the internet, he saw an advertisement that promised that he could “release 50%” of his “pension tax free”. The scheme claimed to be
“registered with HMRC, and the Pension Regulator”.
It was under the name of “Ark” pensions, with Minerva and Athena as trustees. Ark claimed around that time that
“both HMRC and the FSA”—
the Financial Services Authority, as was—
“have conducted detailed enquiries (with the full cooperation of Ark) but neither has seen fit to take any action”.
Ark also claimed that the schemes were lawful and that it had been advised so by leading counsel.
Mr Smith decided to participate in the Ark scheme. He duly completed all the application forms, and transferred the whole of his pension pot of £122,000 from Standard Life to Ark. His wife also transferred her smaller pension pot of £20,000 to Ark. The issues raised by her case are the same, so for simplicity’s sake I shall concentrate on Mr Smith’s position in this debate.
On 20 April 2011, Mr Smith received from Ark a cheque for £58,725—50% of his pot, less a 5% charge and other charges levied by Ark. Two weeks later, on 6 May 2011, Mr Smith, as he had anticipated, was made redundant for the second time in less than a year. Three weeks after that, on 31 May 2011, the Pensions Regulator decided to impose independent trustees, Dalriada, in place of those operating the Ark schemes, owing to
“concerns over the behaviour of the previous trustees.”
Fourteen days later, on 14 June 2011, Dalriada wrote to all Ark members, including my constituent Mr Smith, to say that they had been advised by leading counsel that there was a “strong possibility” that the MPVA arrangements by Ark were void. Dalriada said:
“This would mean that the arrangements would not be recognised as ever having taken effect.”
The subsequent court action between Dalriada and the original Ark trustees resulted in the judgment of Mr Justice Bean, to which I have already referred, declaring that, as Dalriada had anticipated, the MPVA arrangements were indeed void. The judgment has not been appealed, and therefore stands.
As soon as Mr Smith had had a chance to digest the implications of both the Pensions Regulator’s decision to impose different trustees and the High Court decision, he took the initiative and asked his accountant to contact HMRC about his likely liability to pay tax on the £58,000 received from Ark pensions in April 2011. In a letter to me on 24 February 2014, the chief executive of HMRC, Lin Homer, said:
“Mr [Smith] ... cooperated throughout the process.... and in January 2014 he made the decision to make a payment”
“on account in the sum of £32,300.”
This sum is currently held on Mr Smith's self-assessment account, and to date HMRC has not raised an assessment about it.
Over the past few years, I have come to know Mr Smith very well. He is a thoroughly decent, honourable man. He is expert in his own field of work, but not in pension law. He was led to believe that this MPVA method of releasing funds early from his pension account was entirely lawful. Mr Smith now finds himself in limbo.
I hope that in this short debate the Minister can clarify what the future holds for Mr Smith and other members of the Ark schemes. What Mr Smith most wants is to be put back to the status quo ante. In other words, he refunds the total of what he has received from Ark—£58,000—and it is invested by respectable trustees in the usual way, and the benefits of his pension pot then become available to him, in the usual way, from the age of 55. Of that sum, £26,000 would be paid direct by him, and the other £32,300, which is currently held in a suspense account by HMRC, would be paid by HMRC to the new trustees. That seems to be entirely consistent with the statement of the new trustees, Dalriada, that if, as indeed happened, the MPVA arrangements were declared void, then they would
“not be recognised as ever having taken effect.”
My first and key question to the Minister is therefore this: can what Mr Smith is seeking happen, and if not—with respect—why not? Mr Smith fears that he may end up being the subject of a double whammy: first, he will have to pay the £32,000 in tax on the moneys released; and secondly, he will then find that the £61,000—the 50%—that was left in his pension pot under the arrangement is considerably reduced in value because of poor decisions by the Ark trustees, even though they had control of his moneys for less than six weeks. As I have already mentioned, HMRC has yet formally to raise an assessment against Mr Smith, so my second question to the Minister is this: are Mr Smith’s fears justified, and when is HMRC likely to decide whether or not to require the payment of the £32,300 held in the suspense account against a tax liability?
My third question builds on the second. Mr Smith fears that a considerable part of his outstanding pension pot will be absorbed by fees and legal costs incurred by the new Dalriada trustees. Are those rational fears?
My fourth and final set of questions relates to the assertion that Ark claimed its scheme was
“registered with HMRC and the Pensions Regulator”.
Are those claims correct? If they are, does that not imply that some responsibility for what has happened to individuals such as Mr Smith, who were acting in good faith, must lie with HMRC and the Pensions Regulator? If Ark’s claims are not correct—they were claims that my constituent and, I suspect, every other person who became a member of the schemes relied on—and they were fraudulent, what civil and criminal action is being taken against those responsible?
In short, it seems to me that my constituent has been the innocent victim of an elaborate and sophisticated arrangement designed to evade our pension laws. I have no sympathy for the architects of the scam or for those advising them. I have every sympathy for Mr Smith and his wife, and indeed for others in the same situation. I very much hope that the Minister does too and that he can offer the couple some better hope for their future.
I congratulate the right hon. Member for Blackburn (Mr Straw) on securing the debate and on setting out his case so clearly and with such forensic skill, which has been a characteristic of his role as a Member of Parliament for some 36 years.
As the right hon. Gentleman outlined, the Ark pension schemes are a number of schemes that were administered by Ark Business Consulting. The schemes operated a pensions reciprocation plan that involved loans being paid between schemes and their respective members. That was on the basis that members could access a proportion of their pension savings without breaching tax rules intended to ensure that members access their tax-relieved pension savings only from age 55, under a practice known as pension liberation.
The right hon. Gentleman raised a number of concerns about the tax implications for individuals involved in the schemes. It might help if I set out the tax rules in a little more detail before turning to the particular points he raised. Tax relief is provided on pensions savings with the expectation that the funds are used by the member to provide benefits later in life. The tax rules therefore set out the various payments that a pension scheme is authorised to make to, or on behalf of, a member. They include payments of authorised benefits—pensions and lump sums—as well as such payments as transfers to another registered pension scheme. To be an authorised payment, these benefits cannot be paid before the minimum pension age, currently 55.
Where payments are made that are not authorised, they are classed as “unauthorised payments” and are subject to certain tax charges. These charges are intended to recover the tax relief previously given on the savings, as they have not been used as intended by the tax rules. Where savings are taken before age 55, this is an “unauthorised payment” and tax charges will apply. A loan made to a member from a registered pension in connection with their pension savings is also an “unauthorised payment”. This guarantees fairness to the taxpayer and ensures that pensions are not simply used as a tax-efficient savings tool. HMRC is looking into whether the payments made to the members of the Ark schemes are authorised by the tax rules.
The tax position in relation to the Ark pension schemes is by no means straightforward. The right hon. Gentleman asked whether, if the loans are repaid, they can be treated for tax purposes as though they had never happened. That is not the case, as loans are “payments” for the purposes of the tax legislation under consideration, whether or not they are repaid. He asked why we cannot return to the status quo ante. To do otherwise than treat loans as “payments” would enable people to withdraw funds early from their pension pots without any tax implications, and then return them to their pension pots at some point in the future if they so wished, with no consequences. Clearly, we do not want to encourage that type of speculative behaviour. The rules essentially comply with the principles that have been in place since tax relief was introduced many years ago.
Of course I accept, as does, I think, everyone in this House, that if we are going to have arrangements by which people are able to save up for their retirement and to gain tax advantages in doing so, we cannot, in principle, have a situation where, in advance of their retirement age, they can simply pick and choose what they take out of the scheme, or not. However, does the Minister recognise the inequity of the fact that my constituent, who has acted in good faith, has been the victim of circumstances where he believed that what was happening was lawful—as indeed, at the time, it was—and accept that, in the special circumstances in which he finds himself, arrangements ought to be made by which he can return to the status quo ante, because otherwise he will suffer a huge penalty for no benefit?
The right hon. Gentleman puts his constituent’s case very well. In the situation as he describes it, it is hard not to be sympathetic to an individual placed in that position. However, the law is very clear that a loan payment of this sort constitutes a “payment”, and certain consequences follow. I take his point, and this may well be a hard case. The challenge arises if we have a situation whereby people are able at least to attempt to access some of their pension pot, and then subsequently find, for one reason or another, that that was not the right thing to do. However, simply putting them in the position they were in to begin with is, to use a snooker term, a bit of a shot to nothing. Although this might be unfair—I am sure that it is—on the right hon. Gentleman’s constituent, others who are acting in not quite such a degree of good faith might attempt to liberate, as it were, their pension in the hope that it does not get picked up, and in the knowledge that if it does, they are in no worse a situation. That is one of the challenges that a Government of any description would face, and that is why the law in this area has been tightly drawn for many years.
In the right hon. Gentleman’s second question, he asked when the matter might be settled so that he could provide some certainty for his constituent. I fear that I cannot provide such certainty about when the tax position will be settled. This is a complex case, and it may ultimately be for the tax tribunal to determine the correct tax position. Until that has been determined, it will not be possible for HMRC to settle the specific case, and that timetable is not within the control of HMRC. I have asked HMRC when it anticipates dealing with this case, but given that it will have to go to a tribunal, HMRC is not willing to provide a precise date.
The Government have a duty, not least to the taxpayer, to apply the legislation fairly and consistently in line with statutory provisions. Where a liability to tax arises, the normal rules in relation to interest accruing on any outstanding tax charge apply. Existing arrangements that allow individuals to get more time to pay or to pay their tax bill in instalments will be available to help those who want to use them.
On the specific case, in May 2011, the Pensions Regulator decided to appoint Dalriada Trustees Ltd as the independent trustee of the Ark pension schemes. It did so because it was satisfied that the interests of scheme members were at risk due to the schemes being used for pension liberation. Under trust law, Dalriada has a duty to act in the best interests of the members. I am sure that it will seek to locate as much of the scheme’s funds as possible, and to recover assets wherever it is reasonable and proportionate to do so, bearing in mind that the standard practice is for the costs of investigating and recovering assets to be met from member funds.
On the right hon. Gentleman’s third question, there are responsibilities on Dalriada as the trustee to ensure that its actions are proportionate and that the pension funds of Ark members are not frittered away. None the less, it faces a challenge in recovering the assets. I suspect that Dalriada as the trustee is better placed to give an estimate of the risks of legal costs substantially diminishing the pension pot in the Ark scheme.
The right hon. Gentleman has raised the concern that Ark scheme members entered the arrangements in good faith. As I have mentioned, Dalriada was appointed because the schemes were suspected of being involved in pension liberation. He will doubtless be aware that pension liberation is a threat to individuals’ hard-earned pensions savings. It occurs where a scheme is set up to enable someone to access their pensions savings early—usually before age 55. Scheme promoters often fail to tell people about the tax consequences of accessing their pension savings early, and promoters often charge high fees. In some cases, people are promised cash if they invest their pension funds in esoteric investments, on which a high return is promised, and people unfortunately often lose all their pension savings in those cases.
Some products claim to unlock, liberate or provide early access to pension savings without giving rise to tax charges. That is not true: anyone receiving money from their pension scheme before the age of 55 will normally be subject to tax charges aimed at recovering tax reliefs. It is therefore vital for individuals to recognise the danger of entering into such schemes. If they choose to access their pensions savings early, they need to be aware of the tax charges and risks. HMRC is continuing to take action in pursuit of those who deliberately bend or break the rules by offering schemes to liberate pensions savings. That is part of a continuous strategy to combat pension liberation, as is the ongoing review of pension tax legislation. The Government will not hesitate to make further changes if necessary.
It may be that the Minister is coming to my fourth question, but I would be grateful to know whether it is correct, as my constituent claims, that Ark held out that it was regulated by HMRC and the Pensions Regulator. If that is correct, does he believe that any responsibility for the fact that the scheme was advertised in that way rests with those two regulators?
I reassure the right hon. Gentleman that I will turn to his fourth question in a moment, but before I do I hope it will be helpful if I first say a little more about what HMRC is doing in this area, and then I will deal with his question directly.
In addition to the measures I have mentioned, HMRC has been working extremely closely with partner agencies—the Pensions Regulator, the Financial Services Authority and the Serious Fraud Office—to detect, disrupt and deter promoters, and to warn people of the dangers of entering into these schemes. Although HMRC and its partners are taking action to raise awareness of potential threats, the Ark case highlights the need for people to be on their guard against promises of tax loopholes, offers of unrealistic investment returns, or other dubious advice linked to their pension pot or cash lump sums. If it sounds too good to be true, it probably is. Individuals need to consider carefully what is on offer and whether it is appropriate to their circumstances, and ensure they have carried out sufficient due diligence, taking professional advice as they deem necessary.
The right hon. Gentleman asks whether the Ark pension schemes were registered with HMRC, and I confirm that they were. As he will appreciate, it is difficult to know at the point an application for registration is received whether any particular pension scheme will ultimately be misused, but that is not to say that the Government should be complacent. Changes have recently been made to the process for registering a new pension scheme with HMRC to make the system more robust and disrupt any fraudulent intentions.
Legislation in last year’s Finance Act provided greater powers to check that pension schemes are being set up for the genuine provision of retirement benefits, and to impose penalties where wrongdoing is identified. That includes a “fit and proper person” test for those running the pension schemes applying for registration. Essentially, these changes provide stronger powers for existing pension schemes to be deregistered, or for new schemes to be refused registration where there are concerns.
HMRC’s role is to ensure that the tax system is being complied with. It is not there to perform a role of consumer protection, but to ensure that pensions are not liberated, and we have made a number of changes in recent months to strengthen its powers in that area. As the right hon. Gentleman will appreciate I cannot discuss individual cases, but I assure him that HMRC continues to ensure that the tax rules are applied fairly and consistently, that it will continue to pursue those behind pension liberation schemes, and that the British taxpayer continues to get a fair deal.
Question put and agreed to.