Two important developments: Judgment re in specie transfers, and clarification of SSAS master trust exemption

In this update we take a look at two recent significant legal developments: firstly, a case in which a tax tribunal found that HMRC had been wrong to deny tax relief on an "in specie" contribution; and secondly, developments regarding the SSAS exemption under the master trust authorisation regime.

Tribunal holds HMRC wrong to deny tax relief for in specie contribution

In an important case for SIPPs and SSASs, a tax tribunal has found in favour of a SIPP provider that appealed against HMRC's denial of tax relief in relation to an "in specie" contribution by a member.

The case (Sippchoice Limited v HMRC) involved a member who signed a declaration, expressed to be "a legally binding and irrevocable obligation" to make a contribution of £68,324 into a SIPP. The member then made a transfer to the scheme of shares equal in value to that amount. The transfer was expressed to be in settlement of his obligation.

HMRC's Pensions Tax Manual says that a member may make a contribution by creating a monetary obligation of a specified amount from the member to the scheme and then having a separate agreement to pay an asset across to the scheme in satisfaction of the debt. However, HMRC denied tax relief on the contribution, arguing that where the legislation provided for tax relief in respect of "contributions paid", it referred to a money payment, and that the documentation executed by the member and the provider prior to the share transfer had not created a legally binding obligation on the member to pay a sum of money to the scheme.

A key issue which the judge needed to consider was whether a legallybinding obligation on the member to contribute the requisite amount to the scheme had been created. HMRC apparently accepted that the member would be entitled to tax relief if this were the case. As a matter of law, a declaration promising to pay an amount (even if expressed to be "irrevocable") will not of itself be binding unless (a) it is made by deed, or (b) it forms part of a contract. For there to be a contract, there must be an agreement between two parties whereby both agree to do something. The legal jargon for this is that there must be "consideration" from both parties. It was common ground that the declaration did not meet the legal requirements for a deed, but the judge held that there the provider's commitment under the rules to administer the scheme and apply contributions to make investments amounted to "consideration" meaning that the member's obligation was legally binding. 

Having found that a legally binding obligation to pay the amount of £68,324 into the scheme had been created, the judge held that the fact that the obligation had been satisfied by the transfer of shares rather than a money payment did not prevent it from being a "contribution paid" within the meaning of the tax legislation. The judge rejected HMRC's argument that the absence of a statutory mechanism for valuing shares was an indication that the term "contributions paid" should be given a narrow meaning, holding that argument was flawed in the context of assets being transferred in satisfaction of a specified monetary amount/debt. She said this was especially so where, as in the case in question, the scheme administrator required valuations of the assets transferred to discharge the debt and top up payments, if necessary, from the member. The judge noted that this very process was set out in HMRC's own guidance to taxpayers which was still on HMRC's website at the date of the judgment.

HMRC had also tried to argue that the judge should have regard to Hansard reports of a statement made by a minister in relation to the legislation as it made its way through Parliament. The statement suggested that it was not intended to allow contributions to be made by means of share transfers. The judge rejected this argument. Case law only allows judges to have regard to Hansard reports as an aid to interpreting legislation if the legislation is worded ambiguously or in a way that would produce an absurd result. The judge held that neither of these tests were satisfied.

Our thoughts on the in specie contribution case

This judgment will be welcome news for members seeking to claim tax relief on "in specie" contributions, but we do not see the making of contributions via "in specie" transfers as risk free. We understand that HMRC is considering an appeal. We can see the potential for HMRC to argue, in particular, that the requirement to create a monetary obligation from the member before transferring the shares to the scheme was not met in this case. From the wording of the judgment, it appears that HMRC's arguments may to some extent have been contradictory. On the one hand, the judgment indicates that HMRC accepted that the member would have been entitled to tax relief had he made his declaration by deed (thus creating a legally binding obligation). However, HMRC appear to have also argued that the transfer of shares could not constitute a payment.

Where members wish to go ahead with "in specie" contributions, great care needs to be taken to document them correctly. As the judge recognised in this case, a member declaration agreeing to make a contribution does not of itself create a legal obligation to do so unless the declaration is made by deed.

Master Trusts: what does the Government's consultation response say about the SSAS exemption?

On 19 March 2018, the Government published the response to its consultation on draft master trust regulations (though not the final regulations themselves). The draft regulations contained an exemption specifically intended to ensure that SSASs are not caught by the master trust authorisation regime. Key points relevant to SSASs in the consultation response are:

• some points were raised about how the exemption might apply to the circumstances of single member schemes. The Government says it has amended the regulation to make this clearer;
• some respondents queried how the Regulator would respond to unintentional or temporary changes in a SSAS which might bring the scheme outside the terms of the exemption, eg a change in the number of members in the scheme which results in less than 50% of the trustee board being members. The Government says that to continue to qualify for the SSAS exemption, the trustees of these schemes will need to address any change to their structure or governance arrangements "in a timely manner". However, it says it recognises this balance may be particularly difficult to achieve where a SSAS has a single member and has amended the regulation to allow for this;
• the Government says that drafting improvements have been made to make sure that where schemes fall within an exemption under other regulations, they are not inadvertently brought back into the master trust regime by the "cluster scheme" provisions, ie the rules designed to avoid the master trust authorisation requirements being circumvented by providers operating lots of small schemes in parallel.

Our thoughts on the Master Trust consultation response in relation to SSASs

It seems clear that SSASs are, generally speaking, not the intended target of the master trust authorisation regime. However, until the Government publishes the final form wording of the regulations, it is not possible to be certain whether the wording will put beyond doubt that no SSAS requires authorisation under the master trust regime.