Tribunal confirms surcharge on pension liberation scheme user

"The appellant’s belief that the scheme did not contravene pensions legislation was not based upon reasonable grounds. She undertook little if any due diligence and an almost careless disregard of the risks that were inherent in the scheme. She chose not to consult an independent competent professional adviser. This was not a reasonable response," Judge Michael Connell said in his judgment in the First–tier Tribunal (13-page / 495KB PDF).

Payments made out of a pension which do not meet the conditions to be authorised are subject to the unauthorised payment charge of 40% and a surcharge of another 15%.

Tax disputes expert Steven Porter of Pinsent Masons, the law firm behind Out-Law.com, said: "There have been many pension liberation schemes tested in the Tribunal and for some time it has been clear that members are fighting an up-hill battle to demonstrate that arrangements are compliant with pensions legislation. For members, this can mean an unauthorised payment charge and an unauthorised payment surcharge."

"Members can avoid the 15% surcharge if they can persuade HMRC or a Tribunal that they acted in ‘good faith’. Many pensioners argue that their reliance on what a promotor of the pension liberation scheme, or other advisor, told them is adequate for them to establish they acted in good faith, even if that faith was misplaced. This decision is another case considering what amounts to 'good faith' and unfortunately for pensioners this decision may indicate a hardening of the Tribunal’s view in this area," he said.

Pension liberation schemes are arrangements designed to get around the restrictions on accessing pension income before the age of 55.

The individual in the recent case, Clare Franklin, had entered into a pension backed loan scheme in 2011 which involved transferring her existing pension into a self invested personal pension (SIPP). The SIPP purchased shares in a company which lent money to another company which lent the individual 50% of her pension fund. In 2015 these two companies were wound up following an investigation by the Insolvency Service.

Before she embarked upon the scheme Ms Franklin was made aware that some individuals using the scheme had had unauthorised payment charges levied on them by HMRC. However, the tax advisers to the scheme, Optimum, gave a generic opinion that no tax was payable on loans under the scheme.

HMRC said that the loan to Ms Franklin was an unauthorised payment from the SIPP and imposed an unauthorised payments charge of 40% of the gross amount of the £26,842 loan (before deducting charges paid to the scheme promoters) and an unauthorised payment surcharge of 15% of the gross loan together with a penalty.

In 2016 the first-tier tribunal decided in a case concerning an individual called Mark Danvers that money advanced in the form of a loan to the member of the same scheme as used by Ms Franklin, was a payment for the purposes of the unauthorised payment rules.

Although Ms Franklin originally contested all the amounts assessed on her, she eventually accepted the authorised payments charge but continued to contest the surcharge.

The judge said that Ms Franklin "must have realised that entering any scheme in which it was proposed that no tax charges would result, came with some risk" and she was put on notice of the fact that HMRC’s opinion was that loans under the scheme could result in a 55% penalty.

He said it was not necessary to demonstrate that Ms Franklin was dishonest or negligent, or that she was aware that the payment to her was an unauthorised payment, in order to establish that the surcharge was just and reasonable.

"She honestly believed, albeit mistakenly, that the scheme and the payments were compliant and authorised. She relied on the generic advice of Optimum, who owed her no personal duty of care, that no tax charges would follow. She was relying upon the opinion of a third party agent who was simply expressing a view rather than providing advice. The local agent through whom she entered the scheme and who had a financial interest in selling the product stated in clear terms that he was not providing independent advice. His literature stated that he was not regulated by the FSA. This should have put the appellant on her guard," the judge said.

The tribunal expressed "some sympathy" for Ms Franklin, who had said in an email to the tribunal: "I have no fight left and no chance of winning, or retiring as I have no pension funds left it seems."

However, because the judge found that Ms Franklin did not act reasonably in relation to entering into the scheme and receiving the unauthorised payment, he said that it would not be just and reasonable for the unauthorised payment surcharge to be discharged.

"As a First-tier Tribunal decision, the case is not binding and a tribunal should approach every case on its individual facts. In this case, the tribunal concluded that Ms Franklin had not acted in good faith based on the facts but it is conceivable that similar circumstances could result in the opposite result," Steven Porter said. 

"Deciding whether an individual has acted in good faith is a difficult task for a tribunal. Individuals should be measured against their own circumstances and knowledge (which in many cases is likely to be less than that of a tribunal judge), which should mean taking into account the individual’s understanding and awareness of their pension finances and the faith they might place in the advice by a party even calling them self a ‘tax advisor’, he said.

"In this case, the tribunal commented that the agent’s lack of FSA regulation ‘should have put Ms Franklin on guard’. However, this may not be a fair assumption and to many individuals this may mean very little; the same is also true of the lack of ‘personal duty of care’ between Ms Franklin and Optimum, despite the Judge picking this out, for many individuals this may not be something they consider. Individuals are vulnerable to exploitation when it comes to complex and unfamiliar matters such as pensions and the tribunal faces a fine line between protecting the vulnerable and punishing non-compliance," Porter said.