28 March 2018

The issue

HMRC has long argued that member contributions to a registered pension scheme must be paid in cash with very limited exceptions.

However, they had suggested a workaround in guidance by which a member incurs an irrevocable obligation to pay a monetary contribution, and then gives effect to the cash contribution by way of a transfer of an asset or assets.

HMRC has declined applications for tax relief from a number of Self-Invested Personal Pensions (SIPP) schemes who thought that they had followed the guidance correctly. This tribunal hearing was an appeal of HMRC’s decision to reject tax relief for a member of one such scheme.

The issue was whether member contributions were ‘paid’ within the meaning in the Finance Act 2004 and therefore qualified for tax relief.

SIPP provider Sippchoice appealed on two grounds: firstly, that their procedures complied with HMRC’s guidance; and secondly, that in any case, a payment can be made in cash or in kind.

The Finance Act 2004

Both sides submitted a number of arguments predicated on the structure of the act lying at the heart of the problem. Section 188 allows tax relief on ‘contributions paid’ while section 195 then makes specific provision for the transfer of shares, acquired through a share scheme to be treated as a payment of a contribution at the market value on the date of transfer. HMRC argued that this indicated that a transfer of shares could not otherwise be treated as a contribution to a registered pension scheme.

On the other hand, Sippchoice argued that the word ‘paid’ includes not only a transfer of money, but also the discharge of a debt and a transfer of money's worth.

The tribunal’s decision

In the event, the tribunal agreed with Sippchoice.

In relation to the first ground, the tribunal acknowledged that a declaration in a form to pay a certain contribution does not by itself create a legally binding obligation. Seen in the wider context of the membership contract though, it formed part of the member’s offer, which was accepted by Sippchoice.

The second ground for appeal was not considered in detail, but the tribunal’s discussions made comments that will be of particular interest to the wider Small Self-Administered Pension (SSAP) schemes and the SIPP industry. The tribunal decided that the term ‘payment’ was not confined to the payment of cash. Section 195 is included simply to put the position of employees in Save As You Earn (SAYE) and incentive plans beyond doubt.

The tribunal’s decision considers at length whether HMRC could rely on an explanatory note to clause 177, the Finance Bill (later to become section 188), which indicated that the term ‘contribution’ meant a monetary contribution. The tribunal decided that it could only have regard to the note if the meaning of the disputed words ‘contribution paid’ was ambiguous or absurd (the rule in Pepper v Hart), which was not the case here.

Explanatory notes reflect the wishes of government, not the will of Parliament. It therefore follows that an explanatory note can be used against HMRC’s construction of the act, but cannot itself be used by HMRC to support its arguments about the meaning of the legislation.

What happens next?

Sippchoice will undoubtedly be happy that the tribunal allowed the appeal. The decision supports the way that the workaround in HMRC’s guidance was applied. Based on this appeal, future tribunals may decide that the legislation will permit contributions to be made directly in specie without the need for binding agreements to pay monetary amounts.

The parties have 56 days after the decision however, to decide whether to appeal. At the time of writing we are waiting to see HMRC’s next step.

Key contact

Ian Carnochan

Ian Carnochan Partner

  • Tax
  • Corporate Tax
  • Real Estate Tax

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