The ruling by the First-tier Tribunal of the tax courts in the case of Clark v Revenue & Customs has raised the risk that a transfer made to a scheme which has been registered by HMRC may subsequently be held to be an unauthorised payment on the grounds that the scheme is not a "pension scheme" at all due to the trusts of the scheme being void for uncertainty.
The judgment also illustrates that a payment to a party other than the member can still be "in respect of" the member and therefore an unauthorised member payment, and that courts will be willing to look behind complex legal structures to the reality of whether the member can access the funds transferred out of a scheme.
The facts of the case were somewhat complex. The scheme member's funds had initially been held by a reputable SIPP. However, the member wished to obtain access to his funds to invest in the residential property market. The court found that the member himself was honest, but had become involved with an organisation, characterised by the Tribunal as "unprofessional" which put forward a plan whereby the member would be able to obtain access to his funds. This involved the member transferring funds from his SIPP to a new scheme of which the member was the sole member, and which had as its employer a newly established company which would purportedly employ the member, though in practice the member never received any remuneration from his "employer". The scheme was registered with HMRC.
The precise nature of transactions which followed is somewhat unclear, the Tribunal commenting that the relevant documents gave "every impression of having been cobbled together from unreliable precedents". However, the member executed a deed surrendering his rights under his new pension scheme "for the purpose of funding an authorised surplus payment". The funds were paid out of the pension scheme and held by another company (referred to in the judgment as CIM). CIM was owned by the organisation which had put forward the proposed series of transactions which would enable the member to access his funds. The member was a director of CIM. CIM subsequently made substantial loans to the member, which he used for the purpose of property development.
One notable element of the transaction was a deed purporting to provide for an annuity for the benefit of the member's widow and dependants. This appears to have been an attempt to circumvent the statutory prohibition on surrender of pension rights, which allows for a surrender to provide dependants' benefits. However, the Tribunal had doubts as to whether there was any real intention to provide dependants' benefits, the terms of the document being very unclear. In any event, the Tribunal pointed out that existing case law had already held that the exception permitting a surrender to provide dependants' benefits only applied to benefits provided under the same scheme.
HMRC's case was that an unauthorised member payment had occurred at the point when the single member scheme to which the member had transferred his funds made a payment to CIM. However, the Tribunal held that an unauthorised payment had actually occurred at an earlier point, namely when the transfer was made from the SIPP to the newly established single member pension scheme. The wording of the single member scheme was in all material respects identical to a scheme considered by the High Court in the case of LPA Umbrella Trust. Following the law as established by that case, the Tribunal held that the beneficial interests of the scheme members were void for uncertainty. It held that it followed from that the scheme was not a pension scheme at all and therefore (notwithstanding the fact that it had been registered by HMRC) could not be a registered pension scheme.
In case it was wrong on the question of whether the receiving scheme had been a registered pension scheme, the Tribunal went on to consider whether (assuming the receiving scheme was a registered pension scheme) the payment out of the pension scheme to CIM was a payment "in respect of" the member and therefore unauthorised. Looking at the reality of the way the entirety of the arrangements had been structured and had operated in practice, the Tribunal held that the "common thread" was the individual member, who had in reality been able to get the benefit of loans from CIM whenever he wanted. It therefore held that the payments to CIM would be unauthorised payments if the scheme from which they were made was in fact a registered pension scheme.
Schemes faced with a transfer value request in circumstance where they suspect pension liberation are in a difficult position. If the member has made a valid request to exercise a statutory right to take a transfer value, it is clear that the scheme must action it within the statutory time limits. An inherent element to a valid transfer request is that the member must specify the pension scheme to which he wishes to make the transfer. However, this case highlights a risk that a scheme which on the face of it appears to be a registered pension scheme may ultimately be held not to be a pension scheme at all if the benefit provisions are held void for uncertainty. Since the events giving rise to this case, HMRC has tightened its procedures for registering schemes. This may reduce the risk, but does not eliminate it.
Another key point illustrated by this judgment is that when assessing whether a payment from a scheme is an unauthorised member payment, courts will look to the reality of the situation. If the reality is that the member has access to the funds once they have left the scheme, the court is likely to hold that the payment was "in respect of the member" and therefore an unauthorised payment unless it falls within the recognised list of authorised member payments specifically authorised by the Finance Act 2004.