This month’s Chartered Accountants Tax Case digest looks at an Upper Tribunal (“UT”) case where HMRC were able to successfully argue that pensions tax relief is not available on in-specie or non-cash contributions to personal pensions.

‘In-specie’ contributions to personal pension schemes take place where to non-cash assets, such as shares or commercial property are transferred into a self-invested personal pension (“SIPP”) without being converted into cash first.

It is understood that the company involved in the case is examining whether to appeal the UT decision which allowed HMRC’s appeal against the First-Tier Tribunal’s (“FTT”) decision.

HMRC is also considering what further action to take as a result of the decision. The case is being lauded as a landmark win for HMRC which could potentially open up reclaims of millions of pounds for tax relief previously granted on such contributions.

Background

The Appellants were HMRC who had refused a claim for relief from income tax at source made by the Respondent, Sippchoice Limited (“SIPP Ltd”), in relation to contributions to a SIPP administered by them.

SIPP Ltd had originally appealed HMRC’s decision to the FTT in respect of the denial of tax relief for contributions made by four members transferring shares in companies to the SIPP relating to a contribution valued at £68,342 made in the 2015/16 tax year.

The sole issue in the appeal was whether transfers of shares were “contributions paid” by those members within the meaning of section 188(1) Finance Act 2004 and therefore conferred an entitlement to relief from income tax.

SIPP Ltd had offered this as a service to clients until 2016. At that time HMRC began to prevent tax relief for individuals on non-cash assets transferred into SIPPs as a result of concerns about possible abuse of the pensions tax relief system.

The FTT said that the meaning of contribution paid for the purpose of pensions tax relief was wide enough to cover a transfer of assets in satisfaction of a debt as occurred in this case.

HMRC appealed against the ruling to the UT putting forward two key grounds for appeal.

• It maintained that the FTT erred in law in construing the expression ‘contributions paid’ in section 188(1) FA 2004, arguing that contrary to the FTT’s conclusion, that section gives relief for money payments only and not for transfers of assets.

HMRC said that this was true, irrespective of whether or not the asset is transferred in satisfaction of a money debt.

• HMRC further argued that the FTT was wrong to conclude that the individual making the contribution had entered into a binding contract obliging him to pay sums of money to the SIPP and/or erred in law in determining the terms of any such contract.

Decision

The UT’s view was that the only issue in the appeal was whether transfers of shares were “contributions paid” by those members within the meaning of section 188(1) Finance Act 2004 and therefore conferred an entitlement to relief from income tax.

The UT agreed with HMRC that the expression contributions paid in section 188(1) Finance Act 2004 is restricted to contributions of money (whether in cash or other forms).

The UT further stated that if, as it had found, “contributions paid” in section 188(1) Finance Act 2004 means paid in money then it cannot encompass settlement by transfer of non-monetary assets even if the transfer is made in satisfaction of an earlier obligation to contribute money.

An agreement to accept something other than money as performance of an obligation to pay in money does not convert the transfer of shares (or other assets) into a payment in money.

For those reasons, the UTT found that the individual was never under any contractual obligation to pay £68,324 in money to SIPP Ltd.

SIPP Ltd cited the wording of HMRC’s internal Pensions Tax Manual which stated: ‘As explained above, contributions to a registered pension scheme must be a monetary amount. However, it is possible for a member to agree to pay a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets.’

The UT did agree that the natural reading of this is that HMRC did not see any objection to a promise to make a monetary contribution to a pension scheme being satisfied by a transfer of an asset or assets where the member and scheme administrator both agreed to it. However, the UT then went further and pointed out that statements in HMRC’s manuals are merely HMRC’s interpretation of the law in their internal guidance and they do not have the force of law.

The UT was required to interpret the legislation in accordance with the principles of construction described and if it concluded, as it did, that the legislation bears a different meaning to that found in the HMRC manual, the legislation must be preferred.

As a result, the UT found in HMRC’s favour, and said that in-specie payments to a SIPP are not eligible for pension tax relief.

The full judgment in this case is available from:- http://www.bailii.org/uk/cases/UKUT/TCC/2020/149.html