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.

Background

"In specie" pension contributions (ie contributions made in a form other than cash) have been around since A-day.  AMPS (the Association of Member-Directed Pension Schemes) engaged with HMRC shortly after A-day to establish a shared understanding, and HMRC updated its Registered Pension Schemes Manual (the predecessor to the Pensions Tax Manual) in August to 2006 to explain how the concept of in specie contributions worked.  The Manual explained that the legislation only permitted monetary contributions, but that it was possible for the member to agree to pay a monetary contribution and then to settle the debt by way of a transfer of assets.  The Manual explained that it was necessary to create a recoverable debt obligation.

The Sippchoice case involved a member who had signed a declaration expressed to create a "legally binding and irrevocable obligation" to make a contribution of a specified amount.  For the purpose of satisfying such obligation, the member made a transfer of shares with an equivalent value to the scheme.  HMRC refused a claim for tax relief on the contribution.  The SIPP provider appealed, and the First-tier Tribunal (FTT) allowed its appeal.  HMRC then appealed to the Upper Tribunal.

The FTT decision

A key issue before the FTT was whether a legally binding obligation had been created to pay an amount to the scheme prior to the shares being transferred.  A declaration that a "legally binding and irrevocable obligation" is created does not as a matter of law create a legally binding obligation unless (a) it is made by deed, or (b) it forms part of a contractual agreement.  In the Sippchoice case, there was no suggestion that the declaration had been made by deed, so the issue was whether there had been a contractual obligation to make the contribution.  The law of contract requires there to be an offer and acceptance and "consideration" from both parties in order for a contract to come into existence.  "Consideration" broadly means that a party to a contract must have agreed to do something.

The FTT concluded that there had been a legally binding obligation on the member to make the contribution.  It considered that the contract between the member and Sippchoice was contained in part by the correspondence between the member and Sippchoice and in part by the trust deed and rules and terms and conditions.  The application form completed by the member constituted an offer for the purposes of forming the contract.  There was no contract at that point because Sippchoice had absolute discretion to refuse to accept an individual as a member.  There was no specific correspondence showing that Sippchoice accepted the individual in question as a member, but the fact that the member went on to complete a contribution form showed that Sippchoice must have accepted him as a member.  The application form had contained a clause whereby the member agreed to be bound by Sippchoice's T&Cs and by the trust deed and rules.  The rules specified that contributions could only be paid in particular ways.  These included a transfer of assets in satisfaction of an obligation by the member to pay a monetary amount by way of a contribution.  

The FTT's analysis was that when the member completed the contribution form, he agreed to make a contribution of a specified monetary amount as contemplated by the T&Cs and trust deed and rules and, in consideration, Sippchoice agreed to administer the scheme and apply contributions in the acquisition of eligible investments.  The FTT considered that the completion of the contribution form created a legally binding obligation to make the specified contribution.

The FTT judgment records that HMRC argued that the term "contributions paid" in Part 4 of Chapter 4 of the Finance Act 2004 (FA04) should be given its natural meaning which would require the Tribunal to find it meant a "money" payment.  However the FTT judgment also records that HMRC accepted that tax relief would be available if there was a legally binding obligation to pay a sum of money and the member had transferred the shares to Sippchoice in satisfaction of that obligation.  This seems inconsistent with the position taken by HMRC in the Upper Tribunal.

Latest decision

The Upper Tribunal of the Tax and Chancery Chamber allowed HMRC's appeal.  The key issue between the parties was the meaning of the term "contributions paid" in section 188 of the Finance Act 2004 (FA04) and whether this could include a transfer of shares.  

The Upper Tribunal accepted that in isolation the term "paid" was broad enough to encompass non-monetary payments, but it said the context in which the word was used was key.  The Upper Tribunal noted that section 195 of the FA04 provides that a transfer of shares does count as a "contribution paid" for tax relief purposes where the individual has acquired them under a SAYE option scheme or share incentive plan and the shares are transferred within 90 days of an individual exercising the rights under such an arrangement.  (It was common ground in the Sippchoice case that the share transfer in question did not fall within the scope of section 195.)  The Upper Tribunal agreed with HMRC's argument that the purpose of section 195 was to extend the tax relief available under section 188, and that it made no sense to restrict relief for transfers of shares under share option schemes/incentive plans to transfers made within 90 days if transfers of other shares were not so limited.  However, if the words "contributions paid" in section 188 were interpreted as restricted to monetary contributions, the restrictions in section 195 did make sense.

The Upper Tribunal also noted that section 161(2) of FA04 provides that "payment" includes "a transfer of assets and any other transfer of money's worth".  However, section 161 is expressed to apply to Chapter 3 of Part 4 of FA04, whereas section 188, which deals with tax relief on contributions, is in Chapter 4.  The Upper Tribunal took the view that the fact that the extended meaning of "payment" provided for by section 161 was expressly restricted to Chapter 3 indicated an intention that it should not apply elsewhere in FA04.

Did it make a difference if the shares were transferred in satisfaction of a pre-existing money debt?

The Upper Tribunal held that the answer to this question was "No".  It could not see why legislation should provide for different tax treatment of a transfer of shares to a pension scheme depending on whether they were transferred in satisfaction of a pre-existing monetary obligation.

What about HMRC's Pensions Tax Manual?

Sippchoice had referred the Upper Tribunal to HMRC's Pensions Tax Manual, which said, "…contributions to a registered pension scheme must be a monetary amount.  However, it is possible for a member to agree to pay a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets."  The Upper Tribunal accepted that this supported Sippchoice's case, but noted that HMRC's manuals do not have the force of law, and that if the legislation is inconsistent with a statement in HMRC's manual, the legislation takes precedence.  It said that the passages in HMRC's manual supporting Sippchoice's case carried little weight because Sippchoice had not sought to make any argument that it relied on the passages or had a legitimate expectation that HMRC would not resile from them.

Was there a debt from the member to the SIPP?

In case it was wrong it its conclusion that that transfers of non-cash assets made in satisfaction of pre-existing money debts are not "contributions paid" for the purposes of section 188 FA04, the Upper Tribunal considered whether the documentation completed by the member in the Sippchoice case had created a debt on the part of the member.  It concluded that it had not.  The member had never been contractually obliged to make a payment of the amount in question.  The member had argued that his application form and contribution form were a "package deal" which had been completed and sent at the same time to Sippchoice and that Sippchoice agreeing to accept either or both was consideration for the member's promise to pay the contribution, thus giving rise to a legal obligation on the member to pay that amount.

The Upper Tribunal rejected the idea that the application form and contribution form were a package in the sense of constituting a single offer.  It said there was an obvious conceptual distinction between becoming a member of a pension scheme and the making by a member of a specific contribution to the scheme.  The letter acknowledging receipt of the member's contribution form had contained a membership number, which strongly suggested that Sippchoice had already accepted him as a member of the scheme at the time when it acknowledged the contribution form.  It held that the member was never obliged to pay the amount in question.

Our thoughts

It has been a source of much frustration and disbelief by the SIPP industry that after years of allowing in specie contributions on the basis of a shared understanding set out in HMRC manuals, HMRC has effectively done a U-turn and sought to reclaim tax relief already paid by asserting that the legislation never allowed it.  The amounts (and potential liability) involved if HMRC starts seeking to reclaim past tax relief on in specie contributions generally will be very significant.  Many SIPP providers will be watching closely to see whether the latest judgment is appealed.  It has been reported that Sippchoice has said it will "pursue the implications of the defective guidance with HMRC" and look into appealing the Upper Tribunal's decision.

Because Sippchoice had not argued before the Tribunal that it had relied on the Pensions Tax Manual, one big question left unanswered by this judgment is how a tribunal would rule in relation to such an argument.  The starting principle applied by the courts is that a taxpayer's only "legitimate expectation" is that he or she will be taxed in accordance with legislation.  A taxpayer arguing for a different approach would need to show (a) that HMRC's behaviour gave rise to a reasonable expectation on the part of the taxpayer of being treated in a particular way; and (b) given that legitimate expectation, it would, in all the circumstances, be unfair and an abuse of power for HMRC to act inconsistently with that legitimate expectation.  

In the non-pensions case of R (Aozora GMAC Investment Ltd) v HMRC, the Court of Appeal confirmed that statements in HMRC manuals can give rise to legitimate expectations.  However, in order to win a case against HMRC on this basis, a taxpayer will need to show that the statement was clear, unambiguous and unqualified (eg not stated to be simply HMRC's opinion), and that for HMRC to change its position would be so unfair as to amount to an abuse of power. This is a subjective test based on all the facts, making it difficult to predict in advance what conclusion the court will reach.  In the Aozora case, the Court of Appeal held that it was particularly relevant that the taxpayer had employed an expert tax adviser.  This diminished the taxpayer's ability to claim to have been influenced by HMRC's statement, since it would have relied on its adviser.  Applying this to cases involving in specie contributions, one obvious argument for HMRC to run would be that the members were relying on advice from their SIPP providers as technical experts.