Case: Upper Tribunal upholds decision that a pension transfer to a trust that was void for uncertainty was an unauthorised member payment

[2018] UKUT 0397 (TCC)

The Hon Mr Justice Arnold, Judge Timothy Herrington

Decision released 26 November 2018

Appeal against decisions Clark [2016] TC 05366 and Clark [2017] TC 05856

Income tax – Pension scheme – Unauthorised payments charge – Scheme to extract funds from SIPP and to provide member with access to funds by loans and investment management – Whether transfer to trust which was void for uncertainty was an unauthorised member payment – Whether payment was within scope of discovery assessment.

Clark v Revenue and Customs Commissioners [2018] BTC 530

Summary

Mr Clark was a member of a SIPP (Suffolk Life SIPP) holding assets worth in excess of £2m. He wished both to control his own pension fund and access funds by way of loan to finance speculative property transactions for which, for commercial reasons, he would otherwise have had difficulty raising finance. He also wished to realise gains personally in order to utilise his own capital losses. After taking advice from financial advisers (Aston Court), the funds from the Suffolk Life SIPP were transferred to a new company pension scheme (LML pension) established by LML, a company incorporated in Cyprus and the shares of which were held by CIM, a BVI incorporated company of which Mr Clark was a director and bank signatory. Mr Clark was the sole employee of LML (and performed a minimal amount of work for which he received no remuneration) and was thus the sole member of the LML pension. A number of steps then took place, the basis for which was unclear, but which resulted in the pension funds from Suffolk Life SIPP, less Aston Court’s fee, ending up in CIM, via a payment to LML. Subsequently Mr Clark borrowed funds from CIM to fund speculative purchases of short leases, at rates of interest that reflected the lack of security provided by the property acquired.

The First-tier Tribunal (FTT) in Clark [2016] TC 05366 had decided that:

The trusts of the LML pension were void for uncertainty. It was not a pension scheme or a registered pension scheme, Mr Clark was not a member of a registered pension scheme as far as the LML pension scheme was concerned and therefore the transfer from the LML pension could not be an unauthorised member payment (FA 2004, s. 160(2));

The transfer to the LML pension gave rise to a resulting trust in favour of the Suffolk Life SIPP and it was ineffective to transfer beneficial ownership, but it was nevertheless a ‘payment’ by a registered pension scheme in respect of a person who was or had been a member of a pension scheme. The payment was not authorised by FA 2004, s. 164 and therefore the payment was an unauthorised member payment (FA 2004, s. 160(2)).

In Clark [2017] TC 05856, the FTT considered whether the discovery assessment dated 25 March 2014 encompassed the transfer to the LML pension being an unauthorised member payment and the FTT held that it did.

The taxpayer appealed to the Upper Tribunal (UT) on the basis that the FTT erred in law in concluding that:

the transfer to the LML pension was a ‘payment’ within the meaning of FA 2004, s. 160(2) as the beneficial title to the sums were not transferred;

the scope of the assessment dated 25 March 2014 encompassed the transfer to the LML pension being an unauthorised member payment.

On the first issue, like the FTT, the UT considered three cases that were persuasive, but not binding on the Tribunal. These were:

Hillsdown Holdings plc v Inland Revenue Commissioners [1999] BTC 194;

Venables & Ors v Hornby (HM Inspector of Taxes) [2002] BTC 412; and

Thorpe v Revenue and Customs Commissioners [2009] BTC 177.

The taxpayer argued that:

there was a strong indication that unauthorised payment charges were only concerned with transactions that transferred value and this was reinforced by the formula in FA 2004, s. 210(9);

a similar indication could be found in the wording of FA 2004, s. 161(2); and

FA 2004, s. 279(2) indicated that a ‘payment’ required sums or assets to leave the pension fund as required by the transaction.

The UT did not consider that any of the arguments compelled the conclusion that a payment within the meaning of FA 2004, s. 160(2) must transfer beneficial ownership. The UT considered that equally, the wording did not compel the apposite conclusion and therefore the purpose of the provision must be considered.

The UT agreed with HMRC’s characterisation of the purpose of the legislation which was to preserve pension funds by discouraging unauthorised transfers from them. The UT also agreed with the FTT that the reasoning of Chadwick LJ in Venables, although not directly applicable, was persuasive by analogy.

On the second issue, the taxpayer argued that the scope of the assessment was confined to the transfer by LML to CIM. The UT did not accept this as:

the discovery asserted in the letter dated 25 March 2014 was of an insufficiency of tax in the 2009–10 tax year in respect of an unauthorised payment from a pension scheme;

the letter made it clear that the assessment was provisional; and

the letter stated that it was assessment was made in connection with ‘the ongoing enquiry into the transfers into [the LML Pension] … and the subsequent payment from the scheme to [LML] [emphases added by UT]’.

The UT considered that the scope of the assessment was extended to the transfer from the Suffolk Life SIPP to the LML pension. It commented that this was reinforced by the fact that at the time of the letter, it was common ground that the LML pension was a registered scheme and it was the taxpayer who later challenged the status of the LML pension leading to the issue over the transfer to the LML pension.

The appeal was dismissed.

Comment

This decision highlights how trust law applies to pensions. Both the FTT and UT considered that unauthorised transfers for the purposes of the pension scheme rules are likely to involve a breach of trust. However, it did not follow that just because trust law operated so that there was not an effective change in beneficial ownership, there was not a payment that could be subject to an unauthorised payments charge.

For commentary on unauthorised member payments, see the Direct Tax Reporter at ¶381-000.

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