Pension Contributions Must be Monetary to Attract Relief
Transfers of shares to a pension fund do not qualify for tax relief under the Finance Act 2004 – contributions must be in money to qualify. So held the Upper Tribunal in favour of HMRC in a ruling that will require operators of pensions schemes to re-examine their exposure to tax relief.
In HMRC v Sippchoice Ltd [2020] UKUT 0149 (TCC), it was decided that “transfers of non-cash assets made in satisfaction of pre-existing money debts are not ‘contributions paid’”.
What’s the background?
Contributions to a pension scheme were made in 2016 by four scheme members by way of the transfer of shares in companies to a self-invested personal pension scheme (SIPP). At issue for the Upper Tribunal (UT) was whether or not those transfers of shares were “contributions paid” by the members within the meaning of section 188(1) Finance Act 2004 and, therefore, entitled the members to relief from income tax.
Section 188 provides that “an individual who is an active member of a registered pension scheme is entitled to relief under this section in respect of relievable pension contributions paid during a tax year if the individual is a relevant UK individual for that year”.
HMRC had refused the claimant’s claim for relief from income tax at source (RAS) under section 188, arguing that in specie contributions did not qualify for tax relief. The First Tier Tax Tribunal allowed the claimant’s appeal - but HMRC successfully appealed it to the UT which ruled that the expression “contributions paid” in section 188 is restricted to contributions of money only.
HMRC argued, in part, that the FTT erred in law in its construction of the expression “contributions paid”. On its true construction, it contended that section 188 gives relief for money payments only and not for transfers of assets - whether or not the asset is transferred in satisfaction of a money debt.
The claimant argued that “contributions paid” includes the transfer of assets in satisfaction of a money debt and the four individuals each transferred their shares to the SIPP in satisfaction of such a debt. It argued, in the alternative, that transfers of non-cash assets are nevertheless “contributions paid” within s188(1) - even if they are not in satisfaction of a money debt.
HMRC’s argument won.
On the basis of those arguments and the construction of statute, the UT ruled that the expression “contributions paid” in section 188 is restricted to contributions of money. Therefore, HMRC had properly refused the claim for tax relief.
It is notable that the UT accepted the argument put forward by Sippchoice that statements in HMRC’s internal Pensions Tax Manual (PTM042100) were consistent with its case, but this actually carried little weight in the circumstances. This was because Sippchoice did not try to argue that it relied on the passages or had a legitimate expectation that HMRC would not resile from them.
In any case, the UT stressed that statements in its manuals are merely HMRC’s interpretation of the law and do not have legal force.
The UT also accepted that HMRC’s interpretation avoids a ‘valuation problem’, that is to say, that an interpretation of “contributions paid” that included non-monetary assets would potentially require HMRC to check the valuations applied to many such transfers.
What does this mean?
The ruling means member contributions to a pension scheme must be paid in monetary form in order to qualify for tax relief. Pension scheme operators need to look again at their approach particularly to in specie contributions in light of the restriction on the availability of tax relief.
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