Bella Figura – Unauthorised payment charge set aside
In HMRC v Bella Figura  UKUT, the Upper Tribunal (UT) held that a scheme sanction charge stood as a valid assessment and partially allowed the taxpayer's cross-appeal, setting aside HMRC's assessments of an unauthorised payments charge and surcharge as being out of time.
This blog is based on an article first published in Taxation on 9 June 2020. A copy of the article can be found here.
Bella Figura Ltd (BFL) was both the “sponsoring employer” and “scheme administrator” of the Bella Figura Pension Scheme, which was a registered pension scheme. The subject of the dispute was a loan of £200,000 to a connected separate company (the Loan).
Finance Act 2004 (FA 2004) contains a complex set of provisions imposing tax charges on 'unauthorised payments' out of registered pension schemes. By the time of the UT decision, it was common ground that the Loan was an “unauthorised employer payment” and a “scheme chargeable payment”, such that BFL was liable (as scheme administrator) for three separate charges: an “unauthorised payments charge” (at 40% of the Loan), an “unauthorised payments surcharge” (at 15%), and a “scheme sanction charge” (at 40%, reduced to 15% if the unauthorised payments charge is paid).
FA 2004 also makes provision (through section 268) for unauthorised payments surcharges and scheme sanction charges (but not the unauthorised payments charge) to be set aside. For the unauthorised payments surcharge to be set aside, BFL needed to show it was not “just and reasonable” for it to be imposed; for the scheme sanction charge to be set aside, BFL needed again to show it was not “just and reasonable” for it to be imposed, and also that BFL “reasonably believed” that the payment was not a scheme chargeable payment.
There were accordingly three issues for the UT to determine:
1. Whether HMRC could assess BFL to the scheme sanction charge. The First-tier Tribunal (FTT) had held that section 29, Taxes Management Act 1970 (TMA) (discovery assessments) did not allow for such an assessment.
2. Whether the assessments on BFL to the unauthorised payments charge and the unauthorised payments surcharge were in time. The FTT had held that BFL’s carelessness gave a 6-year window and thus the assessments were in time.
3. Whether section 268 entitled BFL to have the unauthorised payments surcharge and/or the scheme sanction charge set aside. The FTT had held that neither should be set aside, with neither the “just and reasonable” nor the “reasonably believed” conditions being met.
Statutory Interpretation and Issue 1
The UT noted that the scheme sanction charge is a charge to income tax (section 239(1), FA 2004), but that section 9(1A), TMA, takes it outside the scope of the normal income tax self-assessment regime. HMRC could not thus enquire into BFL’s return in the normal way and issue a closure notice; it had to rely on another statutory power to assess. The question was, what power?
BFL argued that the only candidate was section 29, TMA. The Registered Pension Schemes (Accounting and Assessment) Regulations (the Regulations) dealt with the assessment of the three charges in point in this case. Regulation 4 required an officer of HMRC to assess a person when he became liable to such a charge. Significantly, regulation 4(2) referred to tax assessed “under” this regulation, and regulation 4 was entitled “the making of assessments”. Further, regulation 9 altered the wording of section 29, TMA, in relation to assessments of the unauthorised payments charge and authorised payments surcharge, explicitly to include an unauthorised payment as a proper object for a discovery assessment; but it did not do so in relation to assessments of the scheme sanction charge.
Regulation 9 clearly altered section 29, TMA, to allow for discovery assessments for the unauthorised payments charge and unauthorised payments surcharge. However, the UT found that section 29 could not bring in the scheme sanction charge. Only if regulation 4 amounted to a standalone power to make assessments, distinct from section 29, could HMRC assess it.
For the reasons given above, the UT considered that the natural reading of regulation 4 was that it contained a standalone power to make assessments. Nevertheless, it recognised that alterations to section 29 by regulation 9 made this a difficult conclusion: why would alterations to section 29 for the other charges be necessary if regulation 4 could do all the work required? The UT decided that regulation 4 did provide the standalone power necessary to assess the scheme sanction charge "arising in these proceedings”. It emphasised that this was the limited extent of its conclusion on the basis that it did not have to decide whether regulation 4 gave a standalone power in all cases.
The problems arising from the interaction of regulations 4 and 9 had to give way, as did the difficulty of a power to tax being, in essence, implied into legislation; the sun has long since set on the traditional approach of only taxing the subject on clear words.
Carelessness and Issue 2
The second issue was whether the unauthorised payment charge and the unauthorised payment surcharge had been assessed in time. It was common ground that the assessments were in time if section 36, TMA, applied. That section provides: “[a]n assessment on a person in a case involving a loss of income tax … brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates” (emphasis added). Section 188(5), TMA, also provides: “a loss of tax … is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss”.
The question of carelessness was a mixed question of fact and law: the question of law being what it means for a loss of tax to be brought about carelessly for the purposes of section 36(1), TMA, and the question of fact being whether BFL’s behaviour met the legal definition. As BFL was challenging the factual finding of the FTT that BFL’s behaviour met the definition of carelessness, the law on the role of the tribunal on an appeal was also in point: the principle is that factual conclusions of the court of first instance (eg the FTT) can only be challenged when they are so flawed as to amount to an error of law, and they will only do so where “perverse or irrational”, lacking any supporting evidence, or “made by reference to irrelevant factors or without regard to relevant factors” (see Begum v Tower Hamlets LBC  2 AC 430).
Despite this high bar, the UT held that the FTT’s factual findings on carelessness were indeed flawed. It did so because the FTT had ignored two relevant considerations.
First, BFL had engaged advisers to assist with the arrangements for the Loan. If these arrangements had been properly made, no charges would have been due. Further, the advisers had not provided specific advice that the arrangements were adequate to prevent charges. The UT held that the FTT had failed to consider whether, “even in the absence of specific advice, BFL obtained implicit reassurance that the loans would qualify which was enough to amount to the taking of reasonable care. By analogy, a person who instructs a lawyer to act on the purchase of a house might be said to obtain implicit advice to the effect that the documents will operate to convey title simply from the fact that the lawyer prepares those documents and identifies no problem with them.”
Second, there was the question of causation. The FTT had identified the failure to obtain specific advice as a careless omission by BFL. However, it did not consider what would have happened if BFL had asked its advisers whether the arrangements had been properly made so as to avoid charges. This was a relevant consideration because, if the advisers had replied positively, this might well have demonstrated that BFL’s carelessness did not cause the loss of tax. In short, the “but for” test would not necessarily have been passed: it was not clearly the case that, but for BFL not asking for specific advice, there would have been no loss of tax. Importantly, the burden of proof in establishing carelessness was on HMRC, and BFL had produced evidence to rebut the prima facie case of carelessness by showing that at least some steps had been taken to ensure that the Loan met the relevant statutory requirements.
Readers will immediately see that the possibility of implicit advice, and the importance of causation, will frequently crop up in arguments about carelessness. Causation is also important to the 20-year window for deliberate conduct.
Having decided the FTT’s factual findings were flawed, the UT proceeded to make its own findings. It held that BFL had not been careless because it had both taken reasonable care to secure appropriate advisers and reasonably relied on implicit advice. Further, HMRC had not shown the causal link between the failure to obtain specific advice and the loss of tax. The UT considered it likely that even if specific advice had been obtained, there would still have been a loss of tax.
“Just and Reasonable” and Issue 3
Following on from Issue 2, the UT held, in respect of Issue 3, that the question of whether BFL obtained implicit reassurance from its advisors was as relevant to the question of BFL’s “reasonable belief” that the statutory conditions were met, as it was to the issue of its carelessness. It followed that, by failing to take into account that factor in deciding whether BFL had a reasonable belief for the purposes of section 268(7)(a), FA 2004, the FTT made an error of law.
As to the considerations that should be taken into account in evaluating the question whether it is 'just and reasonable' to set aside a scheme sanction charge or unauthorised payments surcharge, the UT endorsed the FTT's decision in O’Mara v HMRC  UKFTT 91 (TC), which held:
"152. The statutory test will not benefit from unnecessary gloss. It requires the Tribunal to examine all the circumstances and decide whether it would be just and reasonable for the appellants to be liable to surcharges.
153. It does not require any finding of dishonesty or negligence on part of the appellants. It allows the Tribunal to examine all the circumstances surrounding the making and receipt of the unauthorised payments in each appellant’s case. This in turn allows the Tribunal to examine an appellant’s conduct or any other relevant mitigating circumstances pertaining to the payments or the appellant’s circumstances. It also allows the Tribunal to take account of the statutory scheme and mischief the surcharge is designed to prevent."
Previous tribunals dealing with this issue have acknowledged an important point, namely, that the aggregate of the three charges that HMRC can impose in connection with a scheme chargeable payment is either 70% or 95% of that payment, and in either case more than the aggregate tax relief that an individual might be expected to obtain on a contribution to a registered pension scheme.
Upon examination of the purposes of the scheme, the UT held that it provided:
(i) for contributions made by employers and employees to benefit from tax relief at the point of payment;
(ii) for the funds contributed to be held securely to provide pension benefits that can, at least in usual cases, only be taken once an individual reaches the age of 55;
(iii) for most income and gains received by the registered pension scheme in connection with the investments of contributions not to be subject to tax; but
(iv) for amounts payable to an individual taking benefits to be subject, in most cases, to income tax (with the most important exception of the ability to take a tax-free lump sum equal to 25% of the accumulated fund).
It concluded that Parliament is content for the Exchequer to suffer immediate costs given the social utility of individuals saving for their retirement, but only where the entire bargain (set out above) is respected. It is for this reason that different aspects of the unauthorised payments regime apply to different potential breaches of the bargain.
The UT found that the FTT, in focusing almost exclusively on what it considered to be BFL’s “carelessness”, ignored two considerations that were relevant to the “just and reasonable” question. First, it did not take into account the fact that, even though it had not succeeded, BFL had at least tried to ensure that the Loan met the requirements necessary to be an authorised employer loan. Second, it did not take into account BFL’s case that the Loan had ultimately been repaid such that there was ultimately no loss to the Exchequer. Both of these factors were relevant to the seriousness of BFL’s behaviour.
The UT went on to indicate that, even if it had decided that HMRC had made an in-time assessment of the unauthorised payments charge, it would have held that it would not be just and reasonable for BFL to be subject to the scheme sanction charge or the unauthorised payments surcharge. The key factors were that BFL was not deliberately seeking to circumvent the regime set out in FA 2004, that BFL and had made a genuine and good-faith attempt to comply with the statutory provisions relating to authorised employer loans, and that the damage to both the Exchequer and the scheme itself was slight. It did not, however, feel it appropriate to exercise its discretion to set aside the entire scheme sanction charge, which would have left BFL liable to no charge at all.
Remaking the decision of the FTT
Having found material errors of law in the FTT’s decision, the UT was clear that that decision had to be set aside. The question was whether to remake the decision or remit the case to the FTT to be reconsidered. The UT’s approach was as follows.
Regarding issue 1, it was a simple matter to rule that regulation 4 of the Regulations gave HMRC a standalone power of assessment and thus the scheme sanction charge was valid. There were no new points of fact to be considered here that were more appropriate for a fact-finding tribunal.
Regarding issues 2 and 3, the matter was more balanced as they were more dependent on questions of fact. Clearly swayed by questions of proportionality (ie cost and time), the UT felt able to rely on the FTT’s detailed findings in coming to its own conclusions. In particular, there was no need to assess witness credibility anew in remaking the decision. Accordingly, the 6 year carelessness window was not open and only the scheme sanction charge assessment would stand.
The UT's approach in this case suggests that the UT will try to dispose of a matter by remaking the decision where it can, and will generally feel able to do so when equipped adequately with the facts found by the FTT and it is unnecessary to test witnesses on further points.
Although the decision largely turned on the specific facts of the case, aspects of it are of potentially wider import.
The question of whether HMRC has power to issue 'free-standing' assessments in certain circumstances is an interesting one. In the case of HMRC v Benham  UKUT 0389 (TCC), the UT held that, in the context of seeking to amend the taxpayer's CT return, Taxation of Chargeable Gains Act 1992, did not provide a free-standing power for HMRC to assess. The UT's decision in that case, however, largely turned on the question of whether the decision occasioned any attendant appeal rights (which it did not). In holding there was a free-standing power to assess in Bella Figura, the UT limited its conclusions as much as possible. It wanted to prevent HMRC having no power to assess the scheme sanction charge without establishing a wider principle.
Issue 2 demonstrates that taxpayers will not be held to have failed to take reasonable care if they have taken appropriate advice. In this case, the taxpayer implicitly relied on its professional advisors to exercise their skill and expertise in effecting the relevant loan transaction. The fact that the advisors did not do so could not translate, as HMRC sought to argue, into the taxpayer failing to take reasonable care. It was reasonable for the taxpayer to rely on its professional advisors, even if the reassurance needed was merely implicit.
Finally, the factors which the UT took into account when testing what was “just and reasonable” are widely applicable. It concluded, in essence, that as there was no material detriment to the Exchequer or to the integrity of the statutory scheme, it would not be just and reasonable for the taxpayer to be subjected to the full surcharge and scheme sanction charge. It was clear that the taxpayer had not acted abusively and that the “bargain” constituted by the pension provisions had been generally respected.
A copy of the decision can be viewed here.