In John Mander Pension Scheme Trusts Limited v Commissioners for Her Majesty's Revenue and Custom's , the Supreme Court has allowed the appellant's appeal holding that the tax charge on withdrawal of approval for a retirement benefits scheme arose in 1996/97, when the scheme ceased to qualify, rather than in 2000/01, when the Revenue issued the withdrawal notice and thus imposed a stringent time limit on HMRC when seeking to charge tax on loss of approval by the pension scheme.
The John Mander Ltd Directors Pension Scheme was approved by HMRC (then the Inland Revenue) on 24 September 1987. On 5 November 1996, the funds of the scheme were transferred to a new scheme and it ceased to qualify for approved status. However, it wasn't until 19 April 2000, that HMRC notified the administrator of the scheme that approval was withdrawn under section 591B(1) of the Income and Corporation Taxes Act 1988 (ICTA 1988), with effect from 5 November 1995.
The question for determination was whether the tax fell to be assessed in the tax year when the scheme administrator was notified of HMRC's decision to withdraw approval (2000/01), or when the scheme ceased to be eligible for approved status (1996/97).
The issue was of greater significance than the above question might suggest. If, as the taxpayer contended, the tax fell to be assessed in 1996/97, HMRC would be out of time to raise a fresh assessment.
HMRC considered that the 40% tax charge fell to be assessed in the year 2000/2001, when the withdrawal was notified, and raised assessments accordingly. The appellant appealed the assessments to the First-tier Tribunal (FTT).
The FTT, Upper Tribunal (UT) and Court of Appeal all agreed with HMRC. They concluded that the pension scheme ceased to be approved under section 591(B) ICTA 1988, when the approval was withdrawn by notice, and the date of the withdrawal notice determined the relevant year of assessment.
Although the pre-2006 pensions tax regime is now redundant, the issue affects a number of taxpayers as this appeal was the lead case of a number of appeals awaiting decision in the FTT.
The Supreme Court's decision
The Court, by a majority of 3:2, allowed the taxpayer's appeal.
Lord Sumption, giving the leading judgment, considered section 591C, ICTA 1988, which imposed a charge to tax in circumstances where approval is lost in any of the ways contemplated by sections 591A or 591B, ICTA 1988. He commented that in principle, the date at which the tax is chargeable is the date when approval is withdrawn, however, where approval is withdrawn retrospectively (as in the present case) that altered the analysis.
In the circumstances, Lord Sumption was of the view that the tax charge had to arise on the date on which the withdrawal took effect i.e. 1996/97. The majority agreed with his analysis. Such an outcome made sense as a matter of language and principle.
Lord Sumption commented that HMRC's argument would expose the taxpayer an assessment after the expiry of normal time limits and the chargeable period would be wholly at HMRC's discretion. That, he said, would lead to a surprising conclusion that a charge to tax could be imposed without limitation any number of years after the facts which justified it. Lord Neuberger agreed and echoed similar concerns regarding the negative effect if there was to be no time limit on HMRC's ability to recover tax in such circumstances.
This is an important decision which imposes a strict time limit on HMRC when seeking to impose a charge to tax on loss of approval by pension schemes. The decision will affect those taxpayers whose appeals are currently before the FTT and awaiting this decision, and it may mean that HMRC's claims to tax are time-barred in many instances.
For the full judgment please click here.