Case: Pensions: loan arrangement is unauthorised member-payment
First-Tier Tribunal (Tax Chamber)
Judge Tony Beare
Decision released 30 August 2019
Income tax – Pension taxation – Unauthorised-payments charge and surcharge – Finance Act 2004 (‘FA 2004), s. 208, 209 – Whether third-party loan to scheme member an unauthorised member-payment – Yes – Whether just and reasonable for member to be liable to the surcharge – FA 2004, s. 268 – Yes – Appeal dismissed
Alison Turner  UKFTT 0555 (TC) [TC07349]
Dismissing the appeal, the First-Tier Tribunal (‘FTT’) held that a third-party loan made to the appellant as part of an arrangement under which the appellant’s self-invested personal pension plan (‘SIPP’) also invested in the preference shares of a company was an unauthorised member-payment to which the unauthorised-payments charge and surcharge applied and that it was just and reasonable for the surcharge to apply to the member.
As part of an arrangement in respect of which she had received generic advice only, the appellant directed her SIPP to invest in the preference shares of a company (KJK Investments Ltd) and then entered into a loan agreement with a third-party company, under which she borrowed an amount approximately equivalent to 50% of the SIPP funds. The terms of the loan provided, inter alia, for repayment of the principal to be deferred until the appellant received the proceeds of the plan and for the maximum amount of the repayment to be the proceeds net of tax.
She was assessed to the unauthorised-payments charge of 40% on the amount of the loan under FA 2004, s. 208 on the grounds that the loan was an unauthorised member-payment as defined under FA 2004, s. 160(2), and to the unauthorised-payments surcharge of 15% on the amount of the loan under FA 2004, s. 209 on the grounds that the unauthorised member-payment exceeded the surcharge threshold of 25% of the pension-plan funds, as defined in FA 2004, s. 210.
At no time did the appellant obtain independent, specific advice on these transactions, into which she had entered in response to a ‘cold call’ e-mail from the promoters. She was aware, from both the promoters and from telephoning HMRC, that HMRC was challenging earlier users of the same scheme.
The Tribunal was prepared to overlook certain procedural defects and treat her appeal as being against both the imposition of the unauthorised-payments charge and surcharge and the implicit refusal by HMRC to waive the discharge on the grounds that its imposition was not just and reasonable in the circumstances, as allowed under FA 2004, s. 268 and 269.
The Tribunal found that the facts of the case were indistinguishable in all but trivial details from those in Mark Danvers v R & C Commrs  UKUT 0569 (TCC), where the same investments were made and a loan from the same third-party lender was received by the appellant in that case.
Following Danvers, the loan was a payment by way of a transfer of assets (cash) “made … under or in connection with an investment … acquired using sums or assets held for the purposes of a registered pension scheme” for the purposes of FA 2004, s. 161(2) and (3). The payment was also an unauthorised member-payment as it did not fall within any of the definitions of an authorised member-payment in FA 2004, s. 164(1). Accordingly, it was liable to the 40% unauthorised-payments charge. Moreover, as the amount of the payment exceeded the ‘surcharge threshold’ of 25% of plan funds within 12 months of the ‘reference date’ as defined in FA 2004, s. 210, it was also a ‘surchargeable unauthorised member-payment’ and liable to the 15% surcharge on such payments.
As to whether the imposition of the surcharge was just and reasonable in the circumstances, it was established that the purpose of the surcharge was primarily to recoup the tax advantages otherwise obtainable from premature access to pension funds and not to punish the taxpayer for allowing the circumstances to arise in which an unauthorised payment was made. Moreover, a reasonable person in the circumstances of this case should have known that entering into the arrangement carried a considerable risk.
The appeal was therefore dismissed.
This case illustrates how inadvisable it is to enter into a marketed scheme to obtain premature access to pension funds (or indeed any tax-mitigation scheme) without taking independent advice specific to one’s circumstances. Had the appellant done so, she would have been made aware of HMRC’s success in the Danvers case with respect to precisely the same scheme and that there was consequently a very high risk that she too would face a 55% tax charge. It also seems quite irresponsible of the scheme promoters to continue marketing essentially the same scheme without at the very least a prominent ‘health warning’.