Avoiding unauthorised payments: lessons from Morgan Lloyd Trustees Ltd v HMRC

Morgan Lloyd Trustees Ltd (MLT), a trustee of numerous pension schemes, including Small Self-Administered Schemes (SSASs), had a dispute with HM Revenue & Customs (HMRC). The case revolved around whether certain transactions relating to various items of IP with employers who had set up SSASs constituted "unauthorised employer payments," leading to unauthorised payment charges and scheme sanction charges.

Lessons from the case: 

Morgan Lloyd Trustees Ltd v Revenue and Customs Commissioners UKUT 102 (TCC)

• Scrutiny of Valuations: Trustees must ensure that valuations provided by third-party professionals are critically assessed. The judges highlighted that (MLT) relied on valuations without applying commercial common sense or scrutinising the assumptions made by the valuers. 
• Documentation and Processes: Trustees should maintain robust documentation and processes. The court observed that MLT had a "cavalier approach to documentation," with errors and omissions in critical documents. Trustees must ensure that all documents are thoroughly reviewed and completed accurately, and that processes are in place to identify and rectify any issues before finalising transactions. They should understand what they are agreeing to in the contracts made.
• Professional trustees: in reviewing the lower court's evaluation of HMRC's decision not to grant relief from scheme sanction charges, the variety of factors considered by that court was helpfully set out. These ranged from improvements made, the approach to documentation and processes, the repayment of the loans, and the identity of the parties. One further factor added by the judges in the higher court was the position of the professional trustee selling a service relied upon by employers often unable to find funding elsewhere.

Background:

MLT was a trustee for over 580 employers who set up Small Self-Administered Schemes (SSASs). These are occupational pension schemes typically set up by family companies for their directors and a small number of employees. They are registered with HMRC under Part 4 of the Finance Act 2004. 

The issues arose from transactions carried out by employers who had set up SSASs and involving items of the employer's IP, such as domain names, websites, and trademarks.  These were used to secure loans made to the employer, or as part of ‘sale and leaseback’ or ‘sale and license back’ arrangements. It was intended to structure these as authorised payments under the tax rules applicable to registered pension schemes by valuing the IP assets and structuring transactions to comply with the authorised payment rules. 

HMRC's Position

HMRC challenged the valuations and argued that the arrangements exceeded the authorised limits, resulting in unauthorised employer payments, leading to unauthorised payment charges and surcharges under sections 208 and 209 of the Finance Act 2004 (FA 2004). HMRC also assessed MLT to scheme sanction charges under section 239. HMRC estimated that between December 2004 and January 2013, around £52 million was paid out to employers in over 840 transactions.

MLT's Appeal

MLT appealed against the scheme sanction charges and HMRC's refusal of the application to discharge those charges on the grounds of it being ‘just and reasonable’ to give relief. MLT also argued that HMRC had misunderstood and/or misapplied the time limit provisions relating to applications for discharge. The First-tier Tribunal (FTT) rejected all the appeals, leading MLT to apply for permission to appeal to the Upper Tribunal (UT). 

UT Decision

The UT upheld the scheme sanction charges in most respects.

Authorised Payments 

Payments made by a registered pension scheme that do not comply with the authorised payment rules set out in the FA 2004 are considered unauthorised payments. If a scheme makes unauthorised payments, the scheme administrator may be liable for scheme sanction charges. 

Under FA 2004, a registered pension scheme can make certain payments to or in respect of a sponsoring employer, which are considered "authorised payments". These include "authorised employer loans" (due to separate pensions law restrictions, these are only available to certain types of registered scheme including SSASs) and "scheme administration employer payments".

Authorised Employer Loans

Section 179 of FA 2004 sets out the conditions for a loan to be considered an authorised employer loan:

1. The loan amount must not exceed 50% of the value held within the pension scheme immediately before the loan is made.
2. The loan must be secured by a charge of adequate value.
3. The repayment terms must comply with specific requirements, including the interest rate and repayment period.

Scheme Administration Employer Payments

Section 180 of FA 2004 defines scheme administration employer payments as payments made for the administration or management of the pension scheme. These payments must not exceed the amount that would be paid to a person at arm's length.

Valuation Issues

HMRC argued that the valuations provided by MLT were not accurate and did not reflect the market value of the assets. The FTT found that the valuations were often based on unrealistic assumptions and lacked proper scrutiny. Additionally, many of the valuations were carried out by local accountants who had business valuation expertise but no experience in valuing IP assets, and documentation relating to the valuations was often incomplete or erroneous.

Contractual Issues

The contracts between the employers and their SSASs were also problematic. The key issue was whether the IP transferred in each case was accurately described and whether the transactions complied with the authorised payment rules set out in the Finance Act 2004 (FA 2004). The contracts often contained ambiguous terms that led to confusion about the nature of the IP being transferred. Additionally, the FTT found that the IP transferred in each case was a domain name as a stand-alone asset, which was of negligible or nil value. 

This case highlights the importance of Trustees carrying out thorough due diligence when obtaining valuations to ensure strict compliance with authorised payments rules to avoid unauthorized payments, in turn leading to scheme sanction charges. 

It also highlights the importance of proper documentation in structuring such transactions, for all parties to understand the contracts they enter into, and the expectations of professional pension providers, administrators, and trustees to ensure they act within the law.

You can find a copy of the judgment here.

This post was written by Nancy Purle and Alice Honeywill. Please contact them or your usual Burges Salmon contact if you would like more information.