The First-Tier Tax Tribunal case of Sippchoice Limited v HMRC  UKFTT 0122 (TC) allowed an appeal in respect of "contributions" made by an in specie transfer of assets (shares) in settlement of a debt from the SIPP member to his scheme. HMRC's approach had come as a most unwelcome surprise to many SIPP administrators who considered that HMRC's approach was inconsistent with what had been agreed with the Association of Member-Directed Pension Schemes some years earlier.
During the Spring of 2016, HMRC audited relief at source claims (RAS) made by many SIPP administrators in respect of in specie transfers. Many of those claims for RAS were rejected with HMRC making further tax assessments on other such transfers.
The basis of HMRC's objections to RAS applications were disparate ranging from breaches of the substantive provisions of to the spirit of their requirements. There have been many instances of assets being transferred into registered pension schemes with little formality other than that they are to be treated as pension contributions given that their legal and beneficial ownership passes from the member to the scheme.
A key issue HMRC's approach raised is whether the definition of “contributions paid” of section 188(1) Finance Act 2004 is restricted to money payments or also includes assets being transferred. HMRC’s position is that the wording is so restricted and that the only way that a transfer of an asset can constitute a cash payment is if complies with all parts of PTM042100.
HMRC's view was that this required:-
the creation of a binding and irrevocable debt obligation on the part of the member to make a specified contribution of a monetary sum,
a separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration,
subject to agreement by the scheme trustees, payment of the cash contribution debt created by (a) above being made by offset against the consideration payable for the asset.
Challenges HMRC have made to various in specie contributions include arguments that there was never any intention to make a cash contribution (only to transfer an asset), that the wording of the contribution agreement does not have the purported legal effect and that the trustees are releasing any debt obligation rather than dealing with the asset transfer by way of offset.
The approach HMRC was seen as somewhat devoid from the reality of what actually happens since the various constituent of the PTM042100 rarely take place in the vacuum envisaged by its wording.
Taxpayer (T) wished to take out a SIPP with Sippchoice and to make a pension contribution to which he wished to claim income tax relief by way of an in-specie contribution of shares in an unlisted company.
The Sippchoice scheme rules allowed contributions to be made by a transfer of assets in-specie in satisfaction of an obligation by the member to pay a monetary amount by way of contribution.
On 9 March 2016 T executed a Sippchoice contribution form which had a section entitled “In-Specie contribution” containing the following provisions:
- Declaration to Sippchoice Limited; I propose to make a net contribution of the amount shown below to the SIPPCHOICE Bespoke SIPP and this notification constitutes an irrevocable and binding obligation to make this contribution.
- Agreement; I understand that by signing this declaration I am creating a legally binding and irrevocable obligation to make the specified contribution and that it will not be possible to change my mind even if, for whatever reason, I am unable to proceed with the asset transfer that was originally envisaged.
On 16 March 2016 Sippchoice acknowledged receipt of the contribution form T had signed just over a week before and advised T that “by signing the declaration [in the Contribution Form] you created a legally binding and irrevocable obligation to make the contribution and as such we now require written confirmation from you as to how you intend to settle the debt.”
T wrote to Sippchoice on 24 March 2016 confirming that the contribution would be made by way of an in-specie transfer of the unlisted shares. T also acknowledged that he recognised the value may change and that, if this were the case, there would be an appropriate adjustment to be made (either by way of additional monies being required from him or by way of a mechanism to do with any overpayment he made).
On 29 March 2016 Sippchoice accepted the in-specie contribution and asked for a stock transfer form to be executed in the name of the SIPP trustee.
The Tribunal had to decide whether:
(A) The documentation T completed evidenced an intention to create legal relations and created a legally binding contract (as opposed to a mere unenforceable promise to pay) to make a contribution of the stated amount which could be and was satisfied by a transfer of the unlisted shares with an equivalent value, and
(B) The requirements for contributions to be “paid” included the discharge of a debt and transfer of monies worth (as opposed to cash).
Was there a legally binding obligation to make the payment?
The starting point for the Tribunal related to whether or not the combination of the documentation and scheme rules constituted a legally binding obligation. The Tribunal decided that it did on the following basis:
(A) The application form completed by T constituted an offer by T which Sippchoice, as a SIPP administrator, was able to refuse or accept.
(B) The contribution form, being accepted by Sippchoice, constituted the acceptance of the offer under which T became a scheme member.
(C) When T completed the contribution form he agreed to make the contribution of the specified monetary amount and, in consideration, under the scheme rules SIPPchoice agreed to administer the scheme and applied contributions in such manner as T directed.
(D) The completion of the contribution form on 9 March 2016 created the legally binding obligation on the part of T to make a contribution of the amount specified in it.
(E) The legal obligation on T to make the contribution of a monetary amount existed even though T intended to settle the debt obligation he had created by transferring the unlisted shares to Sippchoice, as scheme administrator.
Could the contribution be made by the discharge of the debt/transfer of the asset?
When construing the meaning of “contribution paid” in section 188 Finance Act 2004, the Tribunal is required to ascertain the intention of Parliament from the words used in that Act and it was not appropriate to admit extraneous evidence from a Hansard Report of a Standing Committee to assist in the interpretation.
The Tribunal considered that there was no ambiguity in defining “contribution paid” in section 188 (1). It rejected HMRC’s assertion that “contributions paid” must be construed and restricted to money payments and held that a payment in kind out of a SIPP would be a “payment” for the purposes of Part 4 of Chapter 3 of Finance Act 2004, even without the extended definition of section 161 Finance Act 2004.
The Tribunal held that HMRC’s assertion that the absence of any evaluation mechanism meant that the terms “contribution paid” should be given a narrow meaning in the context of assets being transferred in satisfaction of a specified monetary amount / debt. Of particular relevance was the fact that the SIPP administrator required valuation of assets transferred to discharge the debt and top up payments, if appropriate, from the member.
In conclusion, a legally binding monetary obligation to make the specified contribution had been created by T on 9 March 2016 and this was discharged by T on 24 March 2016 by the transfer of the unlisted shares to the SIPP together with the very modest balancing payment.
The fact that there had been an intention from the outset of the transaction to make an in specie contribution did not affect the Tribunal’s decision.
Outworkings of this decision
Unpalatable to HMRC but a relief to many SIPP administrators who have had to make notifications to their professional indemnity insurers. Is this a temporary reprieve though?
HMRC has decided to appeal this decision. Watch this space!