The Upper Tribunal Tax and Chancery Chamber has allowed HMRC’s appeal ( UKUT 1049 (TCC)) from the decision of the First-Tier Tax Tribunal in Sippchoice Limited v HMRC ( UKFTT 122 (TC)), a case involving an in specie transfer of assets (shares) in settlement of a debt from a SIPP member to his scheme. In doing so, it could undermine confidence in long established HMRC guidance.
The case involved issues of construction of (i) the ambit of “contributions paid” under section 188(1) Finance Act 2004 (FA 2004) to establish an entitlement to tax relief; in particular whether that term is confined to money payments only or extends to transfers of non-cash assets, and (ii) the nature of any binding contractual obligations the specific arrangements of that case gave rise to.
Applying this decision, as the law currently stands, transfer of non-cash assets are not “contributions paid” for the purposes of section 188(1) FA 2004 and, accordingly, do not qualify for tax relief.
During the Spring of 2016, HMRC audited relief at source (RAS) claims made by many SIPP administrators in respect of in specie transfers. Many of those claims for RAS were rejected with HMRC making further tax assessments on other such transfers. HMRC also challenged historical in specie arrangements to the extent that time limits had not expired.
A test case beckoned, in response to an outcry within the SIPP industry to such an unexpected challenge to perceived wisdom and widespread industry practice of accepting non-cash assets in settlement of monetary debt obligations as allowable contributions.
Taxpayer (T) wished to take out a SIPP with Sippchoice and to make a pension contribution by way of an in specie contribution of shares in an unlisted company, to which he wished to claim income tax relief.
The Sippchoice scheme rules allowed contributions to be made by a transfer of assets in specie in satisfaction of an obligation by the member to pay a monetary amount by way of contribution.
On 9 March 2016 T executed a Sippchoice contribution form which had a section entitled “In-Specie contribution” containing the following provisions:
§ Declaration to Sippchoice Limited; I propose to make a net contribution of the amount shown below to the SIPPCHOICE Bespoke SIPP and this notification constitutes an irrevocable and binding obligation to make this contribution.
§ Agreement; I understand that by signing this declaration I am creating a legally binding and irrevocable obligation to make the specified contribution and that it will not be possible to change my mind even if, for whatever reason, I am unable to proceed with the asset transfer that was originally envisaged.
On 16 March 2016 Sippchoice acknowledged receipt of the contribution form T had signed just over a week before and advised T that “by signing the declaration [in the Contribution Form] you created a legally binding and irrevocable obligation to make the contribution and as such we now require written confirmation from you as to how you intend to settle the debt.”
T wrote to Sippchoice on 24 March 2016 confirming that the contribution would be made by way of an in specie transfer of the unlisted shares. T also acknowledged that he recognised the value may change and that, if this were the case, there would be an appropriate adjustment to be made (either by way of additional monies being required from him or by way of a mechanism to do with any overpayment he made).
On 29 March 2016 Sippchoice accepted the in specie contribution and asked for a stock transfer form to be executed in the name of the SIPP trustee.
HMRC did not consider the above transactions to be eligible for tax relief. Given that the assets (shares) did not constitute taxable property, there were naturally no issues about the pension scheme holding those assets so the debate centred on the tax treatment of the contribution of the assets by T.
What does “contributions paid” mean?
The meaning of the term “contributions paid” must be construed in a contextual as opposed to a standalone manner; by reference to other wording within FA 2004 to deduce its “special and technical meaning”. Whilst the Upper Tribunal accepted that the word “paid” is not restricted to monetary payments per se, the analysis of that term needs to be put into its specific context by reference to sections 161 and 195 FA 2004. Notwithstanding that the term “payment” under section 161(2) FA 2004 expressly included “… a transfer of assets and any other transfer of money’s worth”, that clarification was peculiar to that section and did not extend to section 188(1). Had Parliament intended that it applied to section 188(1) FA 2004, then it would have specifically stated so.
This resulted in the Upper Tribunal holding that the term “contributions paid” in section 188(1) FA 2004 “.. is restricted to contributions in money (whether in cash or other forms)”. The Upper Tribunal did not go on to clarify what forms money can take other than by way of cash.
Does a transfer of non-cash assets to satisfy a monetary debt constitute “contributions paid”?
The Upper Tribunal then considered whether transfers of non-cash assets (in this case, shares) made in satisfaction of a pre-existing money debt are “contributions paid” within section 188(1) FA 2004. Sippchoice’s submissions on that aspect drew on passages from HMRC’s internal Pensions Taxes Manual (PTM042100) which provided that “.. 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 held that the nature of the transaction in this case was a transfer of shares and not a payment to the scheme, regardless of the transfer having been in purported satisfaction of a monetary debt. The Upper Tribunal remarked that statements in HMRC’s manuals are merely its interpretation of its internal guidance which do not carry the force of law (akin, perhaps, to FCA’s analysis of the regulatory perimeter in PERG) and any inconsistency between the meaning of words applying the principles of construction expounded in that judgment and HMRC’s views expressed in its manuals needed to be decided by applying those principles. The Upper Tribunal expressly pointed out that Sippchoice had not sought to run any reliance based arguments on PTM042100.
Did the arrangements in this case give rise to a contractually enforceable debt?
On this point, the Upper Tribunal went back to basic principles of contract law without any need to consider more technically complex rules of construction of statutory provisions.
Rejecting Sippchoice’s views that a purposive interpretation of the intentions of each of the parties should be taken, the Upper Tribunal held that T had never promised and was never obliged to make a monetary payment of that amount as T’s promise was to make an in specie contribution. This part of the decision was very fact specific. Substance trumped form.
Outworkings of this decision
Given the significance of this judgment, it is likely that Sippchoice will explore all avenues of appeal with any appeal focussing on rules of interpretation of statutory provisions, perhaps with greater intensity than in this judgment. One matter of interesting legal debate will be whether it was correct for the Upper Tribunal to use the absence of expansive wording as a launchpad to construe a positive intention on the part of Parliament to confine the ambit of terminology in section 188(1) FA 2004. Alternatively, if Parliament had intended to confine contributions to be cash only in nature, then why did the statute simply not add a few, simple words to that effect?
The basis of HMRC’s challenge to many RAS applications in Spring 2016 was that it accepted that it was conceptually possible for a contribution to be made by way of a non-cash asset but that the procedures set out in PTM042100 had simply not been followed. If this judgment holds good, then HMRC does not even need to justify that point and can rely on the non-cash nature of the contribution.
Leaving aside the windfall HMRC will see this judgment as giving it, there will be concern about reliance upon HMRC guidance which have been used for tax planning. In specie contributions were not generally considered as being aggressive tax planning.
SIPP administrators will be highly wary of accepting in specie transfers unless in exceptional circumstances and this will mean that, if assets are to be placed into pension funds, then they will need to be liquidated and the cash proceeds used as contributions into schemes. This may be practicable for listed shares (subject to any taxation consequences on any disposal) but not for commercial property.