Hymanson – HMRC's decision to revoke the taxpayer's fixed protection was unreasonable
In G Hymanson v HMRC  UKFTT 667, the First-tier Tribunal (FTT) has held that HMRC’s decision to revoke the taxpayer's fixed protection was unreasonable and directed that it be reinstated. In so finding, the FTT applied the equitable maxim ‘that which should be done should be treated as having been done’.
The Lifetime Allowance (LTA) is the total amount of tax-relieved pension savings that an individual can build up over their lifetime without incurring an additional tax charge.
Fixed Protection 2012 was introduced to allow individuals to maintain an LTA of £1.8 million when it reduced, on 6 April 2012, from £1.8 million to £1.5 million. In exchange for Fixed Protection, contributions to a defined contribution arrangement by or on behalf of the individual had to cease and an individual could not build up additional defined benefit pension above an allowable “relevant percentage”. If the conditions are not met, Fixed Protection is lost.
Mr Hymanson (the taxpayer) made a number of contributions into his pension schemes. In 2012, on the advice of his actuary, he applied for and was granted a 'certificate of fixed protection' (the certificate), pursuant to paragraph 14, Schedule18, Finance Act 2011.
Having obtained the certificate, the taxpayer failed to stop monthly direct debits in relation to two of his pension schemes until April 2015. HMRC therefore revoked the certificate. This was on the basis that paragraph 14 had ceased to apply because there had been "benefit accrual in relation to the individual under an arrangement under a registered pension scheme" (paragraph 14(4)).
The taxpayer argued that he had made a mistake when he made the additional contributions and that therefore those payments should be set aside and treated as if they had not occurred.
HMRC rejected the taxpayer's contentions and revoked the certificate.
The taxpayer appealed to the FTT.
The appeal was allowed.
In determining the appeal, the FTT considered:
1. whether the taxpayer would be granted the remedy of rescission of the payments made after April 2012, were he to take his case to the High Court?; and
2. if the taxpayer would be able to obtain such an order from the High Court, should the FTT apply the equitable maxim ‘that which should be done should be treated as having been done’ and proceed on the basis that the additional payments should be ignored for the purposes of paragraph 14?
The taxpayer contended that he had made a mistake as to the tax consequences of the payments to the pension funds and so the transactions should be set aside.
The FTT considered Pitt v Holt  UKSC 26, which confirmed that a voluntary disposition (such as the additional contributions to the pension schemes) may be set aside on the grounds of mistake. It is necessary to examine the nature and seriousness of a mistake in order to establish if it is appropriate to set aside the transactions in question. The mistake must be causative of the disposition ie but for the mistake, the disposition would not have been made and sufficiently serious. The gravity of the mistake must be assessed by a close examination of the facts including the circumstances of the mistake and its consequences for the person who made the vitiated disposition.
The FTT concluded that, on the balance of probabilities, the taxpayer's explanations for the failure were inconsistent and that he had not cancelled the direct debit payments because he had a genuine belief that it would be acceptable to continue making the monthly payments to the pension schemes.
The consequences of the taxpayer's mistake were serious. The payments made totaled £7,000 but his tax loss (resulting from the reduction in his lifetime allowance) was estimated at £50,000. The FTT said:
"This is clearly a totally disproportionate loss of tax and the question I must ask is: if Mr Hymanson had understood the tax consequences of his making the additional contributions would he have done so? Undoubtedly the answer must be that he would not.
I therefore find that if Mr Hymanson were to take his case to the High Court then they would issue an order for rescission of these additional contributions because of his mistaken belief as to the tax consequences of the payments."
The FTT concluded that if the taxpayer were to take his case to the High Court, it would issue an order for rescission of the additional contributions.
The equitable maxim
Having established that the equitable maxim would be applied by the High Court to rescind the additional payments, the FTT had to decide whether it had jurisdiction to apply the maxim.
The taxpayer relied on the decision of the Upper Tribunal in Lobler v HMRC  UKUT 152 (TCC), where Mrs Justice Proudman said:
"… although the FTT did not itself have power to order rectification, it could determine that if rectification would be granted by a court who does have jurisdiction to grant it, Mr Lobler’s tax position would follow as if such rectification had been granted."
HMRC attempted to distinguish Lobler, and argued that Lobler concerned rectification whereas the instant case related to rescission. The FTT noted, however, that Proudman J had been at pains to point out in her decision that her approach could be applied to any equitable remedy, and in fact implied that she was exploring the boundaries of what was permitted by applying rectification rather than one of the more conventional remedies, such as specific performance or rescission. Proudman J referred to rescission specifically at  of her decision, where she said:
“the tax consequences of a transaction may, in an appropriate case, be sufficiently serious to warrant rescission and thus rectification.”
The FTT noted HMRC's admission that it would have been prepared to rescind the payments if they had been made by a bank in contravention of an instruction from the taxpayer, but it had not considered the possibility that the payments could be rescinded because of the taxpayer's mistake. In the view of the FTT, this was a relevant factor which HMRC had not taken into account. HMRC’s decision was therefore unreasonable.
The FTT allowed the appeal and directed HMRC to issue a new certificate.
Notwithstanding the fact that HMRC had stressed during the course of the appeal hearing that if the FTT allowed the taxpayer's appeal such a decision would cause it serious issues in relation to the way in which it administers the fixed protection rules, the FTT found in favour of the taxpayer commenting that any such practical difficulties could no doubt be overcome by HMRC.
This decision confirms that taxpayers can, in appropriate cases, rely on equitable maxims to achieve a just result without the need to seek an appropriate order from the High Court. This should be borne in mind in cases where taxpayers are fiscally worse off as a result of an innocent mistake.
A copy of the decision can be viewed here.