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Variance in how HMRC deals with pensions and ISA errors 

18 June 2018

Gareth James, head of technical resources at AJ Bell, looks at the different handling of errors made under pensions and ISA wrappers under HMRC rules.

Errors occur when dealing with payments to and from financial products like pensions and ISAs. Many readers will have seen warnings in ISA literature cautioning investors who are transferring between ISAs not to withdraw funds from the ISA wrapper because paying funds back in will use up their ISA allowance.

Readers may not be as familiar with how the options for putting errors of this nature right can vary between different products and transactions, so it’s worth taking a moment to look at how this works in practice.

The rules governing the correction of both pension and ISA errors are set by HMRC. So it is a little surprising to find variance between the two products in terms of whether mistakes can be fixed in equivalent circumstances. Given both pensions and ISAs are tax-advantaged products, you’d expect broad consistency in how HMRC allows errors to be fixed. Surprisingly, this isn’t the case.

HMRC’s pension team uses the concept of ‘genuine errors’ to cover the circumstances when mistakes can or can’t be fixed. The key to whether a ‘genuine error’ has occurred, and so whether or not it can be put right, is whether there was intent in relation to a particular transaction.

For example, if a pension scheme member asks their bank to pay £5,000 into a pension, but the bank moves £50,000 in error, the fact the intent was to pay £5,000 means that £45,000 can be refunded as a genuine error.

On the other side of the coin, if a pension scheme member contributed £25,000 on the instructions of their accountant on the basis that this was their remaining annual allowance, but it later transpires that accrual to a DB pension was forgotten, the contribution can’t be refunded. The intent on the day of payment was to pay £25,000 and £25,000 was paid, so no genuine error and no refund.

A similar principle applies to payments from pensions. For example, if a pension scheme member crystallised benefits of £400,000 on the basis that this was their remaining lifetime allowance, but it later turned out that the calculation was wrong – perhaps because a reduction in available lifetime allowance from a pre A-Day pension hadn’t been considered in the calculations – the transaction could not be reversed as a genuine error. On the BCE date the intent was to crystallise £400,000, which is what happened, so no genuine error. This could result in retrospective tax charges for the member.

Looking at ISAs, interestingly HMRC’s equivalent technical team doesn’t even recognise the concept ‘genuine errors’. With ISAs if a transaction has occurred, it can’t be fixed purely because the investor didn’t intend it to happen.

ISA subscriptions can typically only be refunded if the annual subscription limit has been breached. This breach is treated as an ISA manager error rather than an investor error, because the ISA manager should not have allowed the allowance to be breached, and so the amount subscribed above the limit can, in fact must, be refunded.

With the increasing use of electronic payments, and with the foibles of associated systems, this can cause unexpected issues.

It is more common than you might think for banking systems to indicate that an electronic payment has not fully completed, meaning the bank’s customer attempts to make the payment again only to find out that the original payment went through. The result, two payments.

You’d imagine this error could automatically be correct by the ISA manager returning the second payment. However, this will only be the case if, and to the extent, that the subscription allowance has been breached. For example, if a customer opened an ISA and instructed two payments of £10,000 in error, the allowance would not have been breached meaning the second payment could not simply be reversed. The investor could of course just withdraw the funds but, unless the ISA to which the payment was made was a flexible ISA, the investor would have used up all of their ISA allowance for that year. If the duplicated payment had been £15,000 rather than £10,000, the ISA manager would need to refund some of the second payment, but only to bring the investor back within the £20,000 subscription limit.

We regularly receive queries from customers and their advisers about the options for reversing payments to and from both pensions and ISAs. Many are surprised that ‘genuine error’ rules don’t cover situations where a pension transaction is carried out as intended, but only subsequently found to cause issues. Similarly, most are surprised that the ‘genuine error’ concept doesn’t exist at all for ISAs.