SIPP and SSAS providers face further test following in-specie ruling in favour of HMRC
The Upper Tier Tribunal has overturned a decision of the First Tier Tribunal and found in favour of HMRC in a case that is likely to place further pressure on the SIPP and SSAS markets.
The in-specie issue
In late 2016 / early 2017 it came to light that HMRC had raised a number of assessments on SIPP and SSAS providers involving in-specie contributions. An RPC blog at the time documented these issues (https://www.rpc.co.uk/perspectives/financial-services-regulatory-and-risk/in-specie-pension-contributions-what-is-the-fuss-all-about/).
In a nutshell, in-specie contributions involve a taxpayer making a contribution of an asset in lieu of a cash contribution and tax relief is claimed on the asset contribution. HMRC provided guidance on in-specie contributions since 2009 broadly stating that a taxpayer making such a contribution must first create a legally binding debt which the pension scheme is required to collect and an asset can then be used to meet that binding debt provided the asset is transferred at its open market value.
Following a change of forms documenting relief at source claims in 2016, splitting out in-specie from cash contributions, it appears alarm bells went off at HMRC as to how much tax relief was being claimed on in-specie contributions. Enter the SIPPChoice case.
The First Tier Tribunal Decision
Before the First Tier Tribunal SIPPChoice succeeded and as our tax team covered at the time (https://www.rpc.co.uk/perspectives/tax-take/sippchoice-ltd-taxpayer-can-claim-income-tax-deduction-for-contribution-in-specie-to-sipp/), HMRC's argument that contributions attracting tax relief meant only "money" payments was rejected.
The First Tier Tribunal at the time also rejected HMRC's argument that no binding agreement to make a contribution had been agreed on the facts of the case. Although the First Tier Tribunal did not accept the contribution form alone was enough to create a binding agreement between the taxpayer and SIPP provider, taking the circumstances as a whole (including the Trust Deed and associated rules and terms and conditions of the SIPP) a binding agreement had been reached.
The Upper Tier Tribunal Decision
HMRC appealed the decision on two grounds (1) the legislation provides tax relief for money payments only and not for transfers of assets, that is the case whether or not the asset is transferred in satisfaction of a money debt and (2) the First Tier Tribunal had erred in law in concluding that a binding contract had been entered into, to pay a sum of money to the SIPP and/or in determining that there was such a contract.
The Upper Tier Tribunal considered section 188(1) of the Finance Act 2004 that provides "… An individual who is an active member of a registered pension scheme is entitled to relief under this section in respect of relievable pension contributions paid during a tax year if the individual is a relevant UK individual for that year…" (our emphasis), alongside section 195 of the Finance Act 2004 which provides that for the purposes of section 188 references to contributions paid by an individual include contributions made in the form of the transfer by the individual of eligible shares within a company within a permitted period (i.e. 90 days from the date the taxpayer has a right to acquire the shares).
The Upper Tier Tribunal went on to consider whether the express "contributions paid" in section 188(1) includes contributions by way of transfers of assets or is restricted to contributions of money (whether in cash or other forms). The Upper Tier Tribunal said that "paid" is not restricted to monetary payments. However section 195 was an extension of the tax relief provisions under section 188 and informs the interpretation of "contributions paid" under section 188(1). The Upper Tier Tribunal then said "… it makes no sense, in the context of provisions to relieve contributions to pension schemes, to restrict relief for transfers of eligible shares to a period of 90 days from acquisition if non-eligible shares are not so limited. The logical inconsistency disappears if "contributions paid" is interpreted as restricted to monetary contributions…".
The Upper Tier Tribunal then went on to consider whether the transfer of a non-cash asset made in satisfaction of a pre-existing monetary debt met the definition of "contributions paid". SIPPChoice argued that such a transfer did constitute "contributions paid" referring to HMRC's Pensions Tax Manual which states "… Giving effect to cash contributions. 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…".
Despite the language of the Pensions Tax Manual HMRC argued that the passage in the manual, although not clearly worded, was talking about set-off and did not mean that a transfer of assets could be substituted for a monetary payment. There was no material difference between a transfer of an asset where there is a pre-existing liability to pay a sum of money and a transfer where no such liability exists. In both cases, there was a transfer of an asset and no "contributions paid".
The Upper Tier Tribunal agreed with HMRC; as "contributions paid" means paid in money 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. However, the Upper Tier Tribunal also found that the Pension Tax Manual could not be interpreted in the way suggested by HMRC, finding that the natural reading 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 taxpayer and SIPP/SSAS provider both agreed to it.
The Upper Tier Tribunal also found that the taxpayer was never under an contractual obligation to SIPPChoice to make a contribution based on the documentation in the case.
The Ramifications for SIPPs and SSASs
We wait to see whether the decision is appealed. However, if the position for in-specie contributions rests with the decision of the Upper Tier Tribunal where does that leave SIPPs and SSASs with outstanding tax assessments and taxpayers also facing such assessments?
First, we wait to see whether HMRC now seeks to enforce any tax assessments given the detrimental remarks made in the judgment about their "misleading" manual and so raising questions for judicial review.
But on the assumption HMRC does seek to enforce its assessments, tax charges are likely to arise for both SIPP / SSAS providers by way of scheme sanction charges and for individual taxpayers as unauthorised payment charges. Most SIPP / SSAS providers include in their terms and conditions and/or as part of the trust documentation for the SIPP / SSAS that if a tax charge arises they can claw that back from the assets in the SIPP or the individual taxpayer.
Whether or not such a claw back from within a scheme's assets itself triggers a tax charge is open to debate, but if pension funds are depleted and/or taxpayers have to pay out money to meet outstanding tax charges, then claims are likely to follow as taxpayers assert that they would have made a cash contribution had they known that their in-specie contribution risked a tax charge and so they should not be responsible for the tax charge.
These type of claims will require an assessment of whether or not taxpayers could have made a cash contribution as alleged in the first instance. However even if taxpayers get over this causation hurdle, on the basis of the judgment as it stands, it would appear that SIPP and SSAS providers can assert as part of any defence to such a claim that they reasonably relied on HMRC's tax manual at the time and so were not negligent for permitting in-specie transfers as a way to contribute to pension arrangements.
It is also worth noting that the issues here have a likely knock-on effect with respect to other complaints/claims we are seeing involving SIPPs and SSASs and investments in Elysian Fuels and Omega (unquoted shares in a bio-fuel business). In particular, it is understood that many taxpayers that purchased shares in Elysian Fuels and Omega utilised in-specie transfers. There are other fact patterns where shares were sold to SIPPs and SSASs, but the SIPPChoice judgment as it stands will give rise to tax charges on in-specie transfers and may lead to further complaints involving Elysian Fuels and Omega as a result.
The judgment has the potential to raise issues beyond SIPPs and SSASs as it could affect final salary scheme contributions. However, what appears clear is that the judgment will cause further uncertainty for SIPPs and SSASs in what is already a difficult market.