Out-Law News 3 min. read

Tribunal dismisses challenge to tax charge resulting from use of 'pension liberation' scheme

Money advanced in the form of a "loan" to the member of a so-called 'pension liberation' scheme was a "payment" for the purposes of the tax rules, and therefore subject to a 40% income tax charge and additional surcharge, a tax tribunal has ruled.

Although decided by the first-tier tribunal and therefore not binding on another tribunal or court, the case appears to be the first reported one arising out of the taxation of individuals getting caught up in suspected pension liberation schemes, according to pension disputes expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com.

"This shows that the threat of tax assessments is very real and, based on this decision, it might not be straightforward to find a way of successfully challenging them in the tax tribunal," he said.

"Given what we know already about the companies involved in the purported investment and loan arrangements for the scheme going into liquidation back in June of last year, the position overall looks bleak for the members of the HD SIPP. There will no doubt be many more accounts to follow over the coming months of individuals losing their pensions to scams, as well as having to meet tax charges like this where payments were made," he said.

The individual in this case, Mark Danvers, transferred around £35,000 from two existing pension schemes into the HD SIPP in November 2009. The tribunal said that these transfers were made "specifically with a view to the obtaining of a loan" from a company called G Loans Ltd. Danvers' pension fund was then invested in a company called KJK Investment Ltd, with the expectation that this would 'unlock' the loan to him from G Loans, the tribunal said. Danvers borrowed £18,656.69 from G Loans, with the idea being that this would be repaid from his pension fund.

Rules governing pension schemes prevent an individual from claiming pension benefits until they reach the age of 55, unless doing so on ill-health grounds. Tax charges on any unauthorised payment can be as much as 55% of the value of that payment. In May 2011, HM Revenue and Customs (HMRC) opened an enquiry into Danvers' pension arrangements for the 2009/10 tax year, which ended with it imposing an unauthorised payment charge of £10,260.80 on the loan he received from G Loans.

The tribunal's job was to determine whether the loan Danvers received from G Loans could be classed as "a payment by" the HD SIPP, and therefore be caught by the tax rules. Although the structure of the arrangements meant that this was not immediately obvious, the rules are drafted in such a way that they would apply to the loan if it was made "in connection with an investment acquired using" the assets held by the SIPP, the tribunal said.

Based on the facts of the case, the tribunal found that the investment by the HD SIPP in KJK Investment was "inextricably linked" to the loan made to Danvers.

"We accept that KJK used the money received from its issue of preference shares (including the issue made to HD SIPP in respect of [Danvers'] fund) for its purposes generally and did not specifically allocate the money received from any particular investor for lending to any particular borrower; nonetheless it is quite clear that the entire arrangement was orchestrated from beginning to end to ensure that [Danvers] received his expected loan as a result of transferring his pension funds to the HD SIPP and instructing it to investment them in the KJK preference shares," the tribunal said in its ruling.

"In the absence of fraud (i.e. the theft of the appellant's pension funds) there was in our view never any realistic likelihood that the transfer of his pension funds to the HD SIPP would not result in those funds being invested in the KJK preference shares and [Danvers] receiving a loan of an agreed amount from G Loans. That, we find, was certainly [Danvers'] expectation," it said.

Tax expert Ian Hyde of Pinsent Masons said that the decision was "the first round of what looks like a long battle" for HMRC, as it sought to impose tax penalties on pension liberation schemes.

"The inventiveness of scheme designers and the variety of structures adopted means that this decision does not address all the issues," he said. "Indeed, the way the tax code on pensions is drafted means it is far from obvious that all arrangements will be caught in the way HMRC intends."

"Further, for members – many of whom relied upon HMRC registration as an endorsement of their arrangements - there will be a real concern that their already-depleted pensions will be further eroded by tax charges," he said.

KJK Investment and G Loans were wound up by the High Court last year after an investigation by the Insolvency Service. The court was told that the companies received an estimated £11.9 million worth of investments from clients who were "misled" into participating in a pension liberation scheme.

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