Clients accessing flexi-access income have a legal obligation - or face HMRC fine - to alert other schemes of drawdown
An interesting conundrum regarding the penalty faced by individuals accessing flexi-access drawdown for failing to notify other schemes of which he or she is a member of the drawdown has arisen at IFAC this week, thanks to a question from one of our members.
Looking at the statute books, an individual who does not report drawdown from a flexi-access scheme to his other scheme administrators (if any) within 91 days can face a fine of Â£300, and a further penalty of Â£60 per day until paid. This is in black and white in HMRCâ€™s rules. HMRC also put an obligation on the scheme to advise the individual on first drawdown of his liability. The basis for both is the consequential effect on the Money Purchase Annual Allowance.
See more here https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm160800#IDAX5NXH
From this there are two succinct and articulated potential liabilities created, one on the scheme administrator, and the other on the individual. The interplay of these is not the concern here, and is reasonable to assume in the event of no notification from the scheme to the client on 1st payment, the client could be forgiven for failing to report, providing he or she have not already been notified by another scheme. However, with a potential fine in the air, it would be wise for all IFAâ€™s to notify clients of their obligations to notify their other schemes, or advise the schemes on the clientâ€™s behalf.
For our readers, the concern must also be the obligation of the IFA to advise the client of this potential penalty/obligation. Having â€˜combed the web carpetâ€™ I have failed to identify any articulated responsibility/liability placed firmly at the adviserâ€™s feet for this. The responsibility may be found in the duty of care, which as always invites a discussion with the â€˜man on the Clapham Omnibusâ€™ as to what that is. This would suggest a tortious potential liability as opposed to contractual, unless the firmâ€™s â€˜client agreementâ€™ covers liability for this. There is no formal or verbal contract otherwise creating liability, unless the adviser has drafted one, in which case he would have been wise to have sought advice from â€™the man in Claphamâ€™ in the first place!
Advisers are not walking statute books, they are regulated by the FCA who employ 11 principles for advisers concerning business. â€˜Honestyâ€™ is perhaps the key here, I submit. If an adviser honestly knows of the rule and can alert the client, then it is common sense to advise those clients it effects and to whom he or she owes a duty of care.
It follows from this that IFAC advise from immediate effect that all IFAâ€™s need to notify their clients of this either at outset in a suitability report, or as a notice to those already in flexible drawdown. Where clients are already in drawdown, IFAâ€™s could ask the scheme for a copy of the notice they sent to the client in the first place, and remind the clients of the obligation. IFAC will be updating the suitability reports on our system in the coming days to cover this eventuality.
The recent obligation placed on advisers by HMRC in January this year to notify UK resident clients with offshore accounts of their obligations to declare to HMRC any income, did not remove the clientâ€™s obligations for his or her tax affairs, it created an obligation and potential penalty to advisers for not notifying clients.
So, in conclusion, I do not believe that HMRC would have intended individuals to shirk their tax reporting obligations by shifting the blame to the adviser, but where tortious liability might be possible, if at all, I believe, is where an adviser who is aware of this duty the client has, dishonestly remained schtum! Whether there is liability on the IFA is a matter of common sense, in my opinion.
I would welcome any comments, disagreement or whatever on this subject - particularly if we can establish whether the HMRC are actually fining clients for not providing this information to other schemes. Max.email@example.com