Tribunal: no unauthorised payment surcharge where transfer out of pension not ‘abusive’

The first-tier tribunal agreed with HM Revenue and Customs (HMRC) that the transfers out of two registered pension schemes were ‘unauthorised payments’, as they were not made directly to another pension scheme. However, the tribunal used its discretion to overturn a 15% surcharge made on the payments by HMRC because the adviser, Peter Browne, had not intended to “frustrate the purposes of the pension scheme tax regime and abuse its tax reliefs and exemptions”.

Unauthorised payments from pension schemes are taxed at a rate of 40%, plus a 15% ‘unauthorised payment surcharge’ in cases where the payments amount to more than 25% of the pension. This was the case here, as Browne had transferred all of his savings out of two separate schemes with the intention of consolidating them in a single pension operated by his new employer.

As both schemes issued cheques for the transfer amounts in Browne’s name, as well as that of his then employer, he opened a business bank account in that name in order to deposit them. Ultimately, he was unable to complete the transfers to the new scheme before his employment with that firm was terminated. The transfer was eventually completed three years later, when the funds were paid into a self-invested personal pension plan (SIPP).

Pension disputes expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said that the use by the tribunal of its discretion in this case appeared to come down to the language used in the relevant legislation.

“The language used in relation to the unpaid tax – ‘frustrate’ and ‘abuse’ – suggests the 15% surcharge that HMRC applies in respect of unauthorised payments that amount to more than 25% of a pension is only likely to stick where there is evidence of attempted tax avoidance,” he said. “This was not obvious from a plain reading of the provisions of the 2004 Finance Act, but gives us a steer as to how the tax tribunal might approach future cases.”

“This might bode well, too, for scheme administrators who sometimes unwittingly facilitate unauthorised payments – and, as a consequence, face tax penalties themselves in the form of scheme sanction charges. They have not always found much sympathy from HMRC when seeking to rely upon the ‘good faith’ discharge test – yet, as in the recent Sippchoice case, the tribunal has adopted a softer approach here,” he said.

The fact that Browne had not been able to avoid the main 40% charge, however, reflected the fact that “a circuitous route cannot be used to transfer pension funds from one registered pension scheme to another – or, at least, not with an intervening three-year delay, as in this case”, Fairhead said.

The 2004 Finance Act defines a ‘recognised transfer’ out of a pension scheme as one made in order that the assets “become held for the purposes of, or to represent rights under … another registered pension scheme”. Any other payment is an unauthorised payment. According to the tribunal, the phrase “so as to become held” in the legislation “plainly indicate[s] that the transfer cannot have an intermediate stage where the sums or assets are not held for the purposes of another registered pension scheme, even though eventually they come to be so held”.

The Act does, however, allow the taxpayer to appeal the 15% unauthorised payment surcharge where “in all the circumstances of the case, it would not be just and reasonable for” that person to be liable for it. Although HMRC refused Browne’s application to have this reconsidered, the tribunal found that such as charge would not be “just and reasonable” here.

“We find that at all relevant times [Browne] did hold the intention to transfer his pension funds into another registered pension scheme,” it said in its judgment.

Although there were a number of things that Browne could have done with the transfer payments rather than pay them into an ordinary bank account, the errors that he made were “made because of foolishness”, the tribunal said.

“We agree with HMRC that, as an IFA, Mr Browne should have known how to avoid the errors he made. Nevertheless, we find that his conduct was caused by his foolishness rather than any desire to obtain pension funds under his own control without suffering the accompanying tax consequences,” it said.