Carey Pensions case: Adams v Options SIPP UK LLP and conflicting FOS decision

On 18 May the High Court handed down its long awaited ruling in the case of Adams v Options SIPP UK LLP (known as the Carey Pensions case).  In a judgment that has attracted much attention, the High Court rejected a claim by scheme member Russell Adams that his SIPP provider Carey Pensions should compensate him for an investment in store pod leases which turned out to be worth only a fraction of what his SIPP paid for them. The case required the court to consider to what extent a SIPP provider operating on an "execution only" basis has any liability for bad investment decisions by its members, in particular where the member has been introduced to the SIPP provider via an unregulated introducer.  For more detail on the case, see our e-bulletin.

The outcome of the High Court case contrasts with the outcome of a decision of the Financial Ombudsman Service (FOS), made shortly before judgment in the court case was handed down, in which FOS upheld a complaint against the pension provider Carey on the basis of similar facts (Ref DRN2076425).  Carey had requested FOS to put complaints on hold pending the outcome of the court case, but FOS declined to do so, noting that the case had been heard in March 2018 and judgment had not yet been given.  

Like the court case, the FOS case also involved a member who had transferred pension funds to a Carey SIPP and invested in store pods following an introduction from the unregulated introducer Commercial Land and Property Brokers (CLP).  As in the court case, the member had signed disclaimers acknowledging that his proposed investment was high risk and/or speculative and that Carey was acting on an execution only basis not providing any advice.  One notable difference in the factual circumstances was that the member in the FOS case stated that he had not been offered any cash inducement to carry out the relevant transaction, whereas the member in the court case admitted that a key factor motivating him to act as he did was CLP's offer of a £4000 cash inducement.

FOS accepted that Carey had no obligation to advise the member or otherwise ensure the suitability of a pension product or investment for him.  However, it upheld the complaint on the grounds that Carey had failed to conduct sufficient due diligence on CLP and had thus breached the FCA's Principles for Business which require firms to conduct their business with due skill, care and diligence, have adequate risk management systems, and treat customers fairly.  FOS held that had Carey carried out proper due diligence, it ought to have concluded that it should not accept any business from CLP.

FOS concluded that before accepting business from CLP as an unregulated introducer, Carey should have checked the FSA's list of unauthorised firms and individuals.  Had it done so, it would have seen that the FSA had published an alert against the name of one of CLP's directors stating that he was not authorised to carry out regulated activities.  Whilst the wording of the alert itself at the relevant time simply stated that the director was not authorised, the very fact that the FSA had issued an alert against the director's name was indicative that it had concerns about him, and should have resulted in Carey deciding not to do business with CLP.  

FOS went on to consider what other due diligence Carey should have conducted on CLP as a bare minimum.  It said it should have taken steps to understand much more about what CLP's business model involved.  It should have identified that it was unusual that CLP, an unregulated business based in Spain, was contacting customers in the UK about pensions investments, that it specialised in a few high risk esoteric investments and, following contact with CLP and without the involvement of any other regulated parties, many UK consumers were transferring their pensions to SIPPs to make these investments.

FOS considered what the member would have done had Carey refused to accept the business from CLP.  FOS found it "very unlikely" that the member would have tried to find another SIPP operator to accept the business, as it was likely the member would have had no trust in CLP once he became aware that Carey would not accept the business.  FOS ordered Carey to put the member in the position he would have been in had he not transferred his existing pensions, and to pay the member £500 for the trouble and upset caused.

Our thoughts

The FOS decision, made before the High Court judgment was handed down, reached the opposite conclusion to the court on the key issue of whether Carey was wrong to deal with CLP as an introducer at all.  One point covered in the court judgment, but not the FOS determination, is that Carey had been subject to an FSA visit in 2011 (shortly before the member in the FOS determination made his investment) in which the FSA itself had concluded Carey had adequate due diligence in place for its introducers.  It does not follow from the High Court judgment that all member claims against Carey will fail, as FOS will consider the individual circumstances of each claim and might still conclude that there were "red flags" in individual cases which should have caused Carey to reject the proposed investment. 

HMRC v Sippchoice: Transfer of shares not "contributions" for tax relief purposes

In a case which has sent shockwaves through the SIPP industry, the Upper Tribunal has held in the case of HMRC v Sippchoice that a transfer of shares to a pension scheme in satisfaction of an agreement to make a contribution was not a "contribution paid" for the purposes of being entitled to tax relief.  For more detail, see our e-bulletin.

HMRC v Bella Figura: Upper Tribunal rules on unauthorised payments tax regime

In the case of HMRC v Bella Figura Limited, the Upper Tribunal has ruled on the law around tax charges for unauthorised payments.  The case concerned a loan made by a pension scheme to company connected with the scheme employer.  The director of the scheme employer had intended the loan to be an authorised employer loan and had relied on a firm of pensions administrators to draft the loan documentation for him, but the loan was not secured by a registered charge, as was required in order for it to qualify as authorised.  The loan therefore gave rise to an unauthorised payment, in relation to which HMRC sought to impose three separate tax charges: an unauthorised payments charge, an unauthorised payments surcharge, and a scheme sanction charge.

Under the relevant tax legislation, an assessment to an unauthorised payments charge and an unauthorised payments surcharge cannot generally be made more than four years after the end of the tax year to which they relate.  However, this period is extended to six years if a loss of tax is brought about carelessly by the taxpayer.  "Carelessly" is defined as the person failing to take reasonable care to avoid bringing about the loss or situation.  In the Bella Figura case, HMRC was out of time if the four year time limit applied, so the issue as to whether Bella Figura had brought about the loss carelessly was key.  

The burden of proof lay with HMRC to show that Bella Figura's failure to take care had caused an insufficiency of tax.  The First Tier Tribunal had concluded that this test was satisfied, as the director of Bella Figura had not obtained advice that the loan drafted satisfied the requirements for an authorised employer loan.  However the Upper Tribunal overturned this decision, holding that although Bella Figura's director had not obtained specific advice from the pensions administrators that the loan would be authorised, he had taken reasonable care to select the firm of pensions administrators as advisers who could help him navigate the rules on authorised employer loans, and it was reasonable for him to conclude that the loan documentation drafted by the pensions administrators would achieve the desired result.  HMRC had also failed to show that it was the taxpayer's carelessness that had caused the insufficiency of tax, as had Bella Figura's director asked the pensions administrators to confirm that the documentation would give rise to an authorised employer loan, it was reasonable to infer that they would have given that confirmation.

In the light of its conclusions on the carelessness point, the Upper Tribunal set aside the assessments to the unauthorised payments charge and unauthorised payments surcharge on the grounds that they were out of time.

Because different legislation applied to the scheme sanction charge, this was not out of time.  Bella Figura had asked for this to be set aside under provisions which allow a scheme sanction charge to be set aside if (a) the scheme administrator had a reasonable belief that there was no scheme chargeable payment; and (b) in all the circumstances, it would not be just and reasonable for the scheme administrator to be liable to the scheme sanction charge.

The Upper Tribunal concluded that in determining what was just and reasonable, it was important to look at the pensions tax regime as a whole, which is predicated on Parliament being content for the Exchequer to suffer the costs involved in providing tax relief in relation to pension schemes, but only where "entire bargain" (ie the entire authorised payments regime) is respected.  In this context, a breach could be more or less serious depending on whether the Exchequer had suffered loss.  The Upper Tribunal held that the First Tier Tribunal had failed to take account of two relevant considerations: (a) that Bella Figura had at least tried to ensure that the loan met the requirements for an authorised employer loan; and (b) that the loan had been repaid so there was ultimately no loss to the Exchequer.  

The Upper Tribunal concluded that if HMRC's assessment to the unauthorised payments charge had not been set aside for being out of time, it would in all likelihood have concluded that it would not be just and reasonable for Bella Figura to be liable to the scheme sanction charge.  However, the Upper Tribunal did not consider that it would be appropriate for Bella Figura to suffer no tax charge whatsoever in respect of the unauthorised payment.  It therefore held that the scheme sanction charge should stand.

Our thoughts

This case illustrates that even where an unauthorised payment has not been made deliberately, HMRC may still seek to impose the maximum possible tax liability.  The Upper Tribunal's judgment is helpful in clarifying the factors to be taken into account in deciding whether it is just and reasonable to impose a scheme sanction charge, but as the test allows tribunals a broad discretion based on their assessment of all the circumstances of the case, it will often be difficult to predict in advance what conclusion a tribunal is likely to reach in any particular case.

Clark v HMRC: Appeal dismissed by Court of Appeal

The Court of Appeal has dismissed an appeal by the member in the case of Clark v HMRC.  As reported in previous Updates, this is a case in which HMRC had levied an unauthorised payments charge and unauthorised payments surcharge.  The member's fund had been transferred from a SIPP to what was purportedly a single member pension scheme, the "Second Scheme".  Funds were subsequently transferred from the Second Scheme to a company referred to in the judgment as "CIM".  HMRC's original case had been that the transfer from the Second Scheme to CIM was an unauthorised payment.  However, during the course of argument before the First-tier Tribunal, the Tribunal reached the conclusion that the Second Scheme was not as a matter of law a pension scheme at all, as the member's interest under the Second Scheme documentation was void for uncertainty.  As the Second Scheme was not a pension scheme, it followed that an unauthorised payment had been made at the point when funds were transferred from the member's SIPP to the Second Scheme.  

The member appealed to the Upper Tribunal based on a technical legal argument, namely that there had been no "payment" because the fact that the member's interest under the Second Scheme documentation was void for uncertainty meant that, as a matter of law, the original SIPP was still entitled to the funds.  However, the Upper Tribunal rejected this argument.  It also rejected an argument which challenged the assessment by reference to the fact that HMRC had originally considered that the unauthorised payment occurred at the point when funds were transferred from the Second Scheme rather than on the transfer from the SIPP to the Second Scheme.

On appeal to the Court of Appeal, the court dismissed the appeal.  It rejected the technical legal argument that the charges on unauthorised payments only applied to transfers of value and therefore did not apply where the original scheme had retained a right to the funds, concluding that there was nothing in the wording of the charge and surcharge provisions of the legislation to show that they were only intended to operate where "beneficial ownership" was transferred.  It also rejected an argument that HMRC's tax assessment was not sufficient in scope to encompass the transfer from the original SIPP, holding that it involved an unduly narrow reading of HMRC's assessment whereas when HMRC had made the assessment it had in mind the composite series of transactions involved.

Elston v King: court refuses to set aside bankrupt's income payments agreement 

In the case of Elston v King, the High Court has dismissed an appeal by a bankrupt seeking restitution of monies paid from his pension funds to his trustees in bankruptcy.  The bankrupt had argued that the income payments agreement under which the payments had been made had been entered into under a mistake of law and should therefore be set aside.

Legislation provides that rights under a registered pension scheme do not form part of a bankrupt's estate.  However, this does not prevent the court making an income payments order in respect of "payments in the nature of income which is from time to time made to him or to which he from time to time becomes entitled" including payments under a pension scheme.  In Raithatha v Williamson, the High Court held that pension payments which a bankrupt could elect to take were "payments in the nature of income to which he had become entitled" and therefore could potentially be subject to an income payments order.  

Following the court's decision in the Raithatha case, Mr Elston entered into an income payments agreement with his trustees in bankruptcy, the trustees in bankruptcy having made clear that if he did not enter into such an agreement, they were likely to apply to the court for an income payments order.  One month after the date of the income payments agreement, the High Court gave judgment in Horton v Henry, reaching the opposite conclusion to the judge in Raithatha, namely that a bankrupt's uncrystallised pension rights did not form part of his income for the purposes of the income payments order provisions.  The Court of Appeal subsequently held that the decision reached in Horton v Henry was the correct one.  Following this, Mr Elston brought proceedings seeking restitution of the monies paid out under the income payments agreement (approximately £50,000) on the grounds that the income payments agreement had been concluded under a mistake of law and should be set aside.  The county court judge dismissed the claim.  Mr Elston appealed to the High Court.

The High Court dismissed Mr Elston's appeal.  The judge held that the income payments agreement was a compromise agreement.  In considering whether it should be set aside, it was necessary firstly to consider whether one party had assumed the risk of the law changing in the future either by an express or implied term.  In such cases the agreement would not be set aside.  Where neither party had agreed (expressly or implicitly) to bear the risk of the law changing, it was necessary to consider the nature of the change in law relied on by the party seeking to set aside the compromise agreement and ask, "Does this retrospective change in the law give rise to a common mistake, or did one or both of the parties simply make a misprediction about the course of future legal events?"  A mistake would more likely arise where a well-established and unquestioned rule of law was dramatically overturned than where a single decision on a new and difficult point was overruled.  The latter case should be treated as a case of misprediction.  

Applying the relevant test to the case in hand, the judge noted that both parties had been aware that Raithatha was a first instance decision on a novel point of law.  There had been no common assumption by the parties as to the court's jurisdiction to make an income payments order.  Rather, each party had made a prediction of the likely outcome were an application to the court to be made, and had concluded the income payments order on that basis.  It followed that the primary requirement for setting aside the agreement on grounds of common mistake did not exist and the agreement should stand.

Harrison (Deceased) v HMRC: HMRC reasonable not to accept late fixed protection notification

In the case of Harrison (Deceased) v HMRC, the First-Tier Tribunal has held that HMRC acted reasonably in refusing to exercise its discretion to accept late applications for fixed protection.  The applications had been submitted more than three years after the deadline of 5 April 2012, as the members' financial adviser wrongly believed that the members had already been granted enhanced protection rendering fixed protection unnecessary.

Hayes v HMRC: Member had reasonable excuse for late enhanced protection notification

In Hayes v HMRC, the First-Tier Tribunal allowed the member's appeal against HMRC's rejection of his application for enhanced protection on the grounds that it had been received after the closing date of 5 April 2009.  

The member, who the Tribunal found to be an honest and credible witness, was a senior executive at a bank.  Prompted by the A-day changes to the tax regime, the member, with the support of his employer but at his own expense, instructed professional advisers to undertake a review of his pension arrangements.  Following this, the member's employer filled in the application for enhanced protection and advised him to check the details provided on his behalf, fill in his tax reference number, sign the declaration and send it to HMRC.  The instructions given to the member included the address to which the form should be sent and told him that HMRC would send him individual certification which he should send to Group Pension Services at his employer.  The member gave evidence that he duly completed, signed and dated the form on 20 July 2006.  He retained a copy and initialled and dated the covering letter from his employer.  He gave evidence that this was his usual method of recording when he had "dealt with something".  He gave evidence that the form would have been posted by his secretary/PA at the time, and that the processes for handling external mail were well developed and understood by all secretarial support.

The form was never received by HMRC, but that only came to light on the member's retirement in 2018, following which the member wrote to HMRC enclosing a copy of the original form which had been sent on 20 July 2006.

In refusing to accept the member's application, HMRC relied on the fact that the member's employer had informed the member that he would receive certification from HMRC, but that the member had never chased this up.

Taking all the facts into account, the Tribunal found that it was "inherently improbable" that the member did not send his enhanced protection application to HMRC on 20 July 2006, but it accepted that the application did not reach HMRC.  Whilst with hindsight, the member would no doubt agree that he should have followed up on receipt of the certification, the Tribunal noted that an on time application did not require HMRC to exercise any judgment, and accepted that there was therefore arguably less reason for the member to have been on notice to look out for a reply from HMRC.  The Tribunal found that the member had a reasonable excuse for the late notification which subsequently had to be given.  The relevant regulations allow HMRC to accept a late application for enhanced protection where the member had a reasonable excuse for not submitting the application by the closing date.  The Tribunal therefore allowed the member's appeal.