Substitution of beneficiary under unapproved pension scheme

Irving v The Commissioners of HMRC found that in specie contributions to 'funded unapproved retirement benefits schemes' were subject to income tax.

17 March 2014

Prior to January 2008, it used to be common for privately owned companies to make in specie contributions to FURBS. However, the case of Irving v The Commissioners of Her Majesty's Revenue and Customs [2008] EWCA Civ 6 found that such contributions were subject to income tax.

One suggested way out of this was for the original employee to cease to be a beneficiary of the FURBS – perhaps resigning in favour of another family member. That is what happened in the Dhanak case.

The relief, however, is in HMRC's discretion. So what happens when HMRC refuses to exercise a discretion in your favour?

HMRC v Mitesh Dhanak (FTC/52/2012 – 11 February 2014)

A company had established an unapproved Guernsey pension scheme for the sole benefit of its controlling director, Mr Dhanak. The company transferred two properties into the scheme. Following the decision in Irving v HMRC, transfers of real property are considered to be 'sums paid' into a scheme and therefore count as taxable employment income of the employee under s.386 of the Income Tax and Employment (Earnings and Pensions) Act 2003 (ITEPA). HMRC amended Mr Dhanak's tax returns - which had been prepared quite legitimately on the basis of the previous understanding of the law - accordingly.

In 2010, Mr Dhanak applied for relief under s.392 of ITEPA on the basis that he was no longer a beneficiary under the scheme and that his brother had been substituted for him. Section 392 allowed a taxpayer to apply for relief in circumstances where he can show that some event has subsequently occurred by reason of which no relevant benefits will become payable and that no payment has been received by him in respect of or in substitution for those benefits.

HMRC refused the claim. Mr Dhanak appealed, but HMRC rejected this on the basis that there is no statutory right of appeal against the refusal of an application of relief under s.392. The relief is in HMRC's discretion. To protect his position, Mr Dhanak challenged HMRC's decision not to apply the relief by way of judicial review. The Upper Tribunal dismissed his appeal but allowed his claim for judicial review.

David Richards LJ upheld HMRC's contention that there was no statutory right of appeal, but also held that the HMRC officer who had rejected Mr Dhanak's original claim may have misinterpreted s.392(1) and they should reconsider their decision. The Upper Tribunal did not consider it 'inevitable' that, if required to retake the decision, HMRC would refuse the application for relief.

However, rather than quashing HMRC's decision, the Upper Tribunal circulated its ruling in draft form and left it to the parties to agree the way forward. HMRC agreed to grant relief. On reading the judgment HMRC's immediate concession might appear somewhat surprising, but - as in all cases - clearly the judgment only tells part of the story and there were presumably good reasons for this concession.

The case confirms that, in the absence of a statutory right of appeal, taxpayers can avail themselves of their right to a judicial review. The decision of the Upper Tribunal to circulate its decision in draft, leaving it up to the parties to agree the final outcome on the basis of the Upper Tribunal's analysis, is also interesting. However, it is also clear that HMRC do retain discretion in this area so each case will have to be judged on its own facts.

For more information please contact the tax team.

Key contact

Ian Carnochan

Ian Carnochan Partner

  • Tax
  • Corporate Tax
  • Real Estate Tax

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