Self-Invested Personal Pensions, or SIPPs, have been under HMRC's microscope for a number of years, but in a recent decision the First Tier Tax Tribunal (FTT) ruled against HMRC, finding that Relief at Source (RAS) for non-cash or in-specie contributions should be given to individuals.
In Sippchoice Limited v HMRC  UKFTT 12 the FTT overturned the decision by HMRC to refuse RAS on in-specie contributions made to a registered pension scheme. Although the FTT did not go as far as stating that all non-cash contributions are relievable, it did go as far as stating that the meaning of 'contributions paid' for the purposes of the Finance Act 2004 (the 2004 Act) was sufficiently wide to cover circumstances in which a non-cash asset was transferred to satisfy a previously agreed debt.
The 2004 Act sets out at s.188 that an individual is entitled to relief from income tax in respect of 'contributions paid' to a registered pension scheme including a SIPP. HMRC's position was that 'contributions paid' referred to payment of cash only, and other assets, such as shares, if transferred into a SIPP, were not relievable. However HMRC had also set out in PTM042100 (the Guidance) certain steps which, if followed, would give effect to a cash contribution and be relievable. The Guidance states that there must be:
- A clear obligation on the member to pay a contribution of a specified monetary sum, say, £10,000. This needs to create a recoverable debt obligation;
- A separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration;
- If the scheme agrees, the cash contribution debt owed by the member may be offset against the consideration payable by the scheme for the asset, thus giving effect to a cash contribution.
In around 2016, HMRC began to investigate in the steps being taken by SIPP providers when accepting non-cash contributions, and subsequently began rejecting new claims for RAS relating to non-cash contributions and commenced reviews of historic RAS payments.
One of the reasons that HMRC indicated for rejecting claims where parties sought to rely on the process set out in the Guidance was that the pension scheme member did not have any intention to make a cash contribution because it was their intention at all times to transfer an asset. HMRC considered that breached the first step of the Guidance. HMRC also claimed a number of other procedures relating to the member’s contribution were not compliant with the Guidance.
Sippchoice Limited v HMRC 2018
Sippchoice had claimed RAS on behalf of four members. Given the identical nature of the steps taken by the four members, the FTT concentrated on the claim relating to Mr Carlton, who made a claim for RAS on income tax between March and April 2016 in respect of in specie contributions of £68,342 made to the Sippchoice Bespoke SIPP (the Scheme).
Legally binding obligation
When joining the Scheme, Mr Carlton had agreed to its rules which included, amongst others, that contributions could be paid by a transfer of assets in-specie from a member in satisfaction of an obligation by that member to make a monetary contribution to the Scheme. There was a declaration within the form to be completed when agreeing to make a contribution, which was heavily relied upon by the FTT, which provided that completion of the form created a legally binding and irrevocable obligation, meaning it was not possible for a member, in this instance, Mr Carlton, to change their mind once the form had been accepted. In this case, Mr Carlton subsequently sent a letter to Sippchoice confirming his intention to make an in-specie contribution in order to satisfy the debt.
In considering the meaning of "contributions paid" in s.188 of the 2004 Act, the FTT held that a wide interpretation was appropriate. The judge referred to Lord Hoffman in MacNiven v Westmoreland Investments Limited where he stated that "satisfaction of a monetary obligation…..in cash or kind amounts to 'payment'". She also referred to a number of other judicial authorities which suggested that the term ‘contribution’ was wider than just a money payment.
There was significant discussion by the parties as to whether explanatory notes used in the lead up to the final draft of the FA 2004 ought to be considered, in particular as to the meaning of 'contributions paid'. In the end the FTT found against HMRC on this point.
HMRC had also argued that as no definition of 'paid' is contained within Chapter 4 of the 2004 Act which contains the relevant sections (s.188 – s.195) whereas a, wider definition (including non-cash contributions) is included with application expressly limited to Chapter 3 at s.161, 'paid' should be interpreted narrowly for the purpose of Chapter 4. The Judge however, held that s.161 does not in itself negate the appellant's argument that ‘paid’ be interpreted widely.
HMRC have indicated an intention to seek permission to appeal and we anticipate that these are points which they will focus any such application on. To ‘give effect to cash contributions’
The Guidance sets out a number of steps which, if followed, would allow the transfer of an asset from a member to give effect for a cash contribution and be relievable. The FTT Judge was clear that, in her view, the transfer of the non-cash assets by Mr Carlton, satisfied the irrevocable cash debt obligation, but not for the reasons set out by HMRC in the Guidance.
The FTT concluded that it was sufficient that the in-specie transfer satisfied the debt obligation without the need for the consideration for the sale of the assets to offset the debt. The creation of a legally binding obligation to contribute cash at the outset was the crucial requirement and, once created, a subsequent transfer of an asset could satisfy that debt and would be relievable.
The interpretation will depend on the particular facts of any individual case but for Mr Carlton, it was held that the completion of the 'Contribution Form' created the legally binding obligation which he then followed with his letter confirming how he intended to settle that debt. This, in the Judge's opinion "accords with" the Guidance and she found that "the legal obligation on Mr Carlton to make a contribution of a monetary amount exists even though Mr Carlton intended to settle the debt obligation he had created, by transferring the Shares to the Administrator."