HMRC: McCloud Unauthorised Payments Guidance for Tax Refunds

• The McCloud judgment can change the status of pension payments, leading to new or altered unauthorised payment charges for members.
• If an unauthorised payment decreases and an excess lump sum is repaid, the original charges are cancelled, allowing members to claim tax refunds.
• Scheme administrators must report new or increased unauthorised payment charges on the next event report and can use mandating procedures for tax payments.
• Specific offsetting processes allow scheme administrators to reduce charges on remedy lump-sum top-ups for Chapter 1 members by accounting for overpaid tax.
• Chapter 1 legacy scheme administrators can reclaim scheme sanction charges if they were paid by a new administrator for payments no longer deemed unauthorised due to the remedy.

The public service pensions remedy, widely known as McCloud, has introduced significant complexities for pension scheme members and administrators, particularly concerning the classification and tax treatment of unauthorised payments.

The public service pensions remedy, widely known as McCloud, has introduced significant complexities for pension scheme members and administrators, particularly concerning the classification and tax treatment of unauthorised payments. This remedy can lead to fundamental alterations in the benefits payable to members, potentially differing from the amounts originally disbursed. Consequently, members may find that payments previously deemed authorised are now reclassified as unauthorised, or vice versa, necessitating careful review and adjustment.

Under established tax regulations, specific conditions must be met for a payment from a pension scheme to be considered authorised. Any payment that fails to satisfy these criteria is automatically categorised as an unauthorised payment, triggering potential tax charges. The implementation of the McCloud judgment directly impacts these classifications, creating scenarios where the status of past payments needs to be re-evaluated, leading to either an increase or decrease in a member's unauthorised payment liability.

When the remedy results in a reduction of previously identified unauthorised payments, scheme administrators must first ascertain if an excess lump sum was originally paid. Should such an excess be identified, administrators have the option to request its repayment from the member. Crucially, if this excess lump sum, initially classified as an unauthorised payment, is repaid in full, it is retrospectively treated as if it was never an unauthorised payment. This reclassification means that the associated unauthorised payments charges are no longer applicable, allowing the affected member to claim a refund for any overpaid tax charges.

Members who settled their unauthorised payments charges through their Self Assessment tax returns will need to directly contact HMRC to initiate a refund request. Scheme administrators should anticipate members reaching out to them for the necessary information to support these claims. Conversely, if a member's unauthorised payment increases due to the remedy and the member bears the charge, they are required to submit relevant information to HMRC. This specific requirement applies to tax years spanning from 2019-2020 through to, and including, 2022-2023. Scheme administrators are obligated to report any new or additional unauthorised payment charges on their very next event report, but they must not amend the original event report where the payment was first documented.

Pension scheme administrators have defined procedures for handling tax due on unauthorised member payments. They can utilise the mandating procedure to pay the tax at the point the unauthorised payment is made, although the ultimate liability for this payment consistently rests with the member. Furthermore, specific mechanisms exist for offsetting charges. If the original unauthorised payment was processed using the mandate procedure and the member subsequently receives a top-up payment, the offsetting process can be applied. This is part of the broader HMRC McCloud unauthorised payments guidance designed to streamline adjustments.

In certain circumstances, scheme administrators can also offset new unauthorised payments charges for Chapter 1 members. This involves reducing charges on remedy lump-sum top-ups by taking into account any overpaid tax on the original lump sum. This particular process, which is critical for managing public service pensions remedy tax implications, is now detailed in a newly added section titled 'Offsetting unauthorised payments for Chapter 1 members,' which directs users to a dedicated page outlining the full procedure. The 'Secure Data Exchange Service' has also been rebranded as the 'Transfer files securely with HMRC service,' which is the designated channel for submitting required information.

Scheme administrators are also provided with a pathway to reclaim overpayments of scheme sanction charges, provided certain conditions are met. A key aspect of the McCloud judgment tax implications is the treatment of scheme sanction charges paid by a Chapter 1 new scheme administrator for a payment that, due to the remedy, is no longer considered unauthorised. In such cases, this charge is deemed to have been paid by the Chapter 1 legacy scheme administrator.

Consequently, the Chapter 1 legacy scheme administrator is then eligible to reclaim the scheme sanction charge if it was originally paid by the Chapter 1 new scheme administrator. To facilitate this, administrators must complete a credit spreadsheet, including all pertinent information, as detailed in the 'What information to include on the credit spreadsheet' section of the guidance. This information must be submitted via the 'Transfer files securely with HMRC service.' Upon review, HMRC will issue a scheme sanction charge credit through the managing pension schemes service, which will then be reflected in the scheme's financial information.

Lawyers advising pension scheme administrators or individuals affected by the McCloud remedy must understand and apply HMRC's specific procedures for adjusting, reporting, and offsetting unauthorised payments to ensure compliance, facilitate correct tax treatment, and advise members on claiming refunds.

Source: Original reporting via GOV.UK