The Upper Tribunal has recently had to consider the liability of a pension scheme administrator to a tax charge in connection with a so-called "pensions liberation scheme". Pensions liberation involves members of schemes being given access to pension savings before the age of 55. Such schemes are effectively a scam, incurring high charges for the members and tax penalties once they are discovered by HMRC.


The liberation scheme in this case was a complex structure:

1. The member transferred his/her pension saving to Sippchoice Bespoke SIPP (the SIPP).

2. At the request of the member, Sippchoice Limited (Sippchoice), the scheme administrator of the SIPP, invested the savings into shares in Imperium Enterprises Limited.A pension scheme is required to have "scheme administrator" under the Finance Act 2004, and the role is to ensure compliance with tax legislation.

3. Imperium lent the funds to BOH Investments Limited

4. BOH funded a subsidiary, SKW Investments Limited, by way of share subscription

5. SKW loaned up to 25% of the value of the savings to the Member, which was expressed to be repayable out the Member's pension from the SIPP.

Although this case was not concerned with whether the loan was an unauthorised payment for the purposes of the Finance Act, the Upper Tribunal and First Tax Tribunal had considered similar structures in other cases and concluded that there were unauthorised member payments.[1] The case proceeded on the assumption that the loans in the case were similarly unauthorised payments.

The consequences of an unauthorised member payment are that:

a) The member is subject to a charge to income tax, known as the unauthorised payments charge.This is charged at 40% of the unauthorised payment and

b) The scheme administrator is subject to a "scheme sanction charge".This is at 40%, but will be reduced to 15% if the member has paid the unauthorised payments charge.

However, section 268 Finance Act 2004 allows a scheme administrator to be discharged from the scheme sanction charge if:

a) The scheme administrator reasonably believed that the unauthorised payment was not subject to the scheme sanction charge and

b) It would not be just and reasonable to impose the scheme sanction charge

Sippchoice began making investments in Imperium Enterprises Limited in May 2010, when it received assurances that it was engaged in property investment and would not be making loans to members. From August 2010 Sippchoice appeared to have concerns which culminated in a meeting with Imperium on 7 July 2011. Finally, on 4 August 2011, a member complained to Sippchoice and revealed that the transfer to the SIPP had been made in order to secure a loan from SKW Investments Limited. At this point, Sippchoice notified HMRC.

While HMRC accepted that Sippchoice did not know that the arrangements in place meant that a pensions liberation scheme was being operated, it refused to discharge Sippchoice from the scheme sanction charge. Sippchoice successfully appealed that decision to the First-tier Tribunal (FTT). HMRC appealed the decision to the Upper Tribunal.

Upper Tribunal Decision

HMRC's appeal focussed on two grounds.

First, that the FTT had erred in law in applying the "reasonable belief" test in section 268 as it had relied on a decision of the Court of Appeal[2] concerning VAT fraud which involved a different test. This was rejected by the Upper Tribunal. Although the FTT's reference to that case was inapt, the FTT had nonetheless applied the correct test. The FTT had concluded that Sippchoice had made reasonable enquiries of Imperium and it had been reasonable to be reassured by the responses, which turned out to be misleading.

Helpfully, the Upper Tribunal agreed with the parties that for the discharge under section 268 to apply it was not necessary for a scheme administrator to be aware that an unauthorised payment was being made. Although that was a possible literal interpretation of section 268 it would mean the scope for relief would be too narrow.

Second, the FTT had erred by finding that, following the meeting on 7 July 2011, the evidence did not disclose circumstances which would have indicated to Sippchoice that a more sophisticated pensions liberation scheme was being operated. This was rejected by the Upper Tribunal, which – as an appellate tribunal – was concerned with whether this was a finding that no reasonable tribunal could have reached.

Pensions liberation continues to be a problem for the pensions industry. Not only is HMRC taking action to impose tax charges on members, but the Pensions Regulator has taken action to appoint independent trustees to shut down liberation schemes and, there have been winding up orders against companies involved in liberation. The Pensions Ombudsman has also had to consider whether transfers should have been made to suspected pensions liberation vehicles.

This case highlights the risks for an innocent scheme to become involved and, potentially, subject to tax charges. While it shows the need for scheme administrators to be vigilant against possible scams in order to fall within the protection of section 268, it also helps to illustrate what will constitute reasonable conduct on the part of pension administrators.