In the case of Boardman v HMRC, the First-Tier Tribunal of the Tax Chamber has found that a SIPP's purchase of shares from a member was not on an arm's length basis and therefore gave rise to an unauthorised payment. 

The Tribunal also concluded that it should not relieve the member from liability for the surcharge.

The member had personally purchased shares and interests in various related companies and LLPs all connected with a proposed hotel and apartment development project in Montenegro.  A significant proportion of the purchase price was funded by means of limited recourse loans made to the member by a company associated with the development. The member subsequently sold the shares to his SIPP at a price of £1 per share, resulting in him receiving sale proceeds of approximately £385,000.  HMRC concluded that the shares had no value and that the arrangements amounted to a pension liberation scheme.  It therefore treated the purchase price paid from the SIPP to the member as an unauthorised payment.

It is possible for a SIPP to purchase assets from a scheme member without this giving rise to an unauthorised payment, but only if the amount paid does not exceed the amount which might be expected to be paid to a person at arm's length.  The member contended that the transaction must be regarded as being at arm's length because the shares had been purchased by the corporate trustee of the SIPP, with whom the member had no relationship other than that of member and scheme trustee.  The Tribunal rejected this argument.  It found that the scheme trustee had purchased the shares on the member's instructions, meaning that the trustee could not automatically be regarded as acting at arm's length.  

Having regard to the member's use of limited recourse loans to fund his original share purchase, the Tribunal concluded that a hypothetical arm's length purchaser would conclude that the original investment had involved arrangements which meant that the effective purchase cost of the shares for the member was intended to be nil overall.  The Tribunal found that the companies' prospects of being able to provide a return to shareholders depended entirely on the development project being completed.  However, at the time when the SIPP purchased the shares in 2011 and 2012, the business plan showed that the project still required substantial financing and had not progressed beyond initial drawings, despite having apparently started in 2008.  The Tribunal therefore concluded that even a "cautiously optimistic hypothetical purchaser" would have considered that the prospect of any return on the shares at that time was "very remote and highly speculative even in the context of a very high risk speculative project".  The Tribunal ultimately therefore concluded that the shares alone had no value.  Accordingly, it concluded that the price paid by the SIPP for the shares exceeded that which might have been expected to be paid by an arm's length purchaser.  This meant that an unauthorised payments surcharge arose in respect of the shares.

Section 268 of the Finance Act 2004 provides that a surcharge may be discharged where "in all the circumstances of the case, it would not be just and reasonable for the person to be liable to the unauthorised payments surcharge in respect of the payment.  The Tribunal accepted the member's assertion  that he invested in good faith, but it did not accept that this meant it would be just and reasonable to discharge the surcharge.  The Tribunal took into account that the member was being offered a structure which apparently permitted him to extract for his own use a substantial amount of money from his pension fund before the age at which benefits were payable, and that the member had done relatively little research into the arrangement.  To the extent that the member had relied on the pension provider regarding the purchase of the shares, the Tribunal noted that the evidence indicated that discussions had related to whether the SIPP was able to purchase the shares rather than any tax implications of doing so.

Our thoughts

The job of the Tribunal in this case was to reach a decision on the member's tax liability to HMRC, not whether the SIPP provider breached any duties to the member.  Given the apparent high risk, speculative nature of the investment, it may well be that the Financial Ombudsman Service would take the view that the SIPP provider should have carried out some degree of due diligence on the investment, including considering its appropriateness for a pension scheme.

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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