A special commissioner decided that a taxpayer was chargeable to tax under Sch. E pursuant to ICTA 1988, s. 600 on the payment transferring deferred benefits from one pension scheme to another where the transfer was unauthorised because the taxpayer failed to show that he was employed by the second company as required by the rules of its pension scheme.

Facts

The taxpayer was a member of the Lattice scheme (formerly the British Gas Pension Scheme) an approved occupational pension scheme. Under the rules of the Lattice scheme, the taxpayer was only entitled to a pension from his sixtieth birthday on 30 December 2019.

A second scheme (‘the Holme scheme’) was granted Revenue approval with effect from 1 February 2001.

Under its rules the trustees could accept a transfer from another pension fund in respect of a member of the Holme scheme. A person could only be a member if he was an employee of Holme Ltd, a company incorporated for the sole purpose of assisting people to gain access to accrued pension benefits in advance of their retirement.

In March 2001 Holme Ltd requested from the Lattice scheme details of the transfer value of the taxpayer's pension benefits, referring to him as one of its employees. In August 2001 Holme Ltd informed the Lattice scheme that the taxpayer wished to transfer his non-protected rights benefits amounting to £43,632.88 to the Holme scheme. The transfer of funds was completed in September 2001 when an insurance company issued the taxpayer with a single premium annuity. The premium for the annuity was £43,632.88.

Payment under the annuity would commence on 30 December 2034 (the taxpayer's seventy-fifth birthday) with a monthly payment of £1,351.78.

Also in September 2001 a finance company made a loan to the taxpayer in the sum of £33,600. The loan was secured against the single premium annuity to be repaid on or before 30 December 2034. In the event of non-repayment of the loan by the said date the taxpayer would forfeit all claims to the single premium annuity which would be treated as full and final settlement of the loan debt.

The taxpayer appealed against an amendment to his self assessment return for the year ending 5 April 2002 which showed an increase in tax liability of £14,160.06, and an overall liability of £17,155.49. The taxpayer asserted that he had received no payment from the pension schemes and that he was an employee of Holme Ltd. The Revenue contended that the transfer was a sham, devised to enable the taxpayer to gain access to accrued pension benefits in advance of retirement. They submitted that the taxpayer was not an employee of Holme Ltd and that he had obtained early payment from the pension fund in the form of a loan.

Issue

Whether the transfer of the taxpayer's accrued pension benefits from one pension scheme to another was chargeable to tax under ICTA 1988, s. 600 on the basis that he was not employed by Holme Ltd.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that, under ICTA 1988, s. 600, the taxpayer was chargeable to tax on the transfer of his nonprotected rights benefits amounting to £43,632.88 from the Lattice scheme to the Holme scheme unless he could demonstrate that the transfer was expressly authorised by the rules of the Lattice scheme. The sole dispute was whether the taxpayer was employed by Holme Ltd.

The irreducible minimum of mutual obligation necessary to create a contract of service was a contractual obligation on the employer to provide work and on the worker to do it when offered.

The onus was upon the taxpayer to persuade the tribunal on the balance of probabilities that he was so employed. The taxpayer had declined to co-operate with the Revenue's enquiries about his employment status and had supplied no evidence of his employment to the Revenue or the tribunal. The Revenue were under no obligation to demonstrate that the taxpayer was not an employee of Holme Ltd. They were entitled to base their case upon whether the taxpayer had discharged his evidential burden on the question of employment. The Revenue, however, had not restricted their opposition to the appeal to the taxpayer's burden but had called evidence of the nature of the relationship between Holme Ltd and other people in the same position as the taxpayer.

The evidence was compelling as it described a situation where the taxpayer was not expected to do any work for Holme Ltd, and given no instructions on how to carry out his employment duties. So-called employees were entitled to choose where and when they worked and their contracts of employment contained no provisions about notice to terminate, holiday and sickness pay, and disciplinary procedures.

The relationship with Holme Ltd bore no hallmarks of an employment relationship. There was no evidence of the irreducible minimum of mutual obligation between Holme Ltd and the taxpayer necessary to create a contract of service. The taxpayer's period of purported employment with Holme Ltd from 1 July 2001 to 26 October 2001 was short and coincided with the transfer of his deferred pension benefits and the receipt of the loan.

Accordingly, in all the circumstances, the ‘employment’ relationship between the taxpayer and Holme Ltd was a sham, operating as a cover to enable the taxpayer to draw out pension benefits in advance of his retirement. The taxpayer had supplied no evidence to contradict the conclusion that his ‘employment’ with Holme Ltd was a sham and the taxpayer was not employed under a contract of service with that company.

(2007) Sp C 654.

Decision released 11 December 2007.