The UK tax legislation is hardly a model of clarity and precision. However, the ambiguity of tax law sometimes results not from what the legislation states, but rather what it does not state.
An example is the law on tax relief for contributions to registered pension schemes (FA 2004, s 188(1)): ‘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’ (emphasis added).
What does ‘paid’ mean in this context? HMRC considers it generally means that contributions to the registered pension scheme must be of a monetary amount, such as cash, cheque, direct debit, or bank transfer.
What about pension contribution payments in the form of non-monetary assets? HMRC guidance (in its Pensions Tax manual at PTM042100) indicates that in certain circumstances, it is possible for a pension contribution involving an asset to retain its monetary form for tax purposes. Unfortunately, such contributions are not as straightforward as might be thought.
For example, in Revenue and Customs v Sippchoice Ltd [2020] UKUT 149 (TC), the First-tier Tribunal (FTT) had been required to rule whether contributions made by four members of a SIPP were ‘paid’ and therefore qualified for relief from income tax at source. The FTT focused on a claim for relief made by the respondent in respect of one of the four members (MC). MC had executed a SIPP contribution form indicating that he proposed to make a net contribution of £68,324. Around two weeks later, MC wrote to Sippchoice confirming that the contribution would be made by way of an in specie transfer of shares. Five days after that, Sippchoice accepted the in specie contribution. However, HMRC refused Sippchoice’s tax relief claim, arguing that the expression ‘contributions paid’ (in FA 2004, Pt 4, Ch 4) should be given their natural meaning, which would require the tribunal to find it meant a ‘money payment’. However, the FTT disagreed with HMRC’s view that the expression ‘contributions paid’ (in FA 2004, s 188(1)) must be construed as restricted to money payments.
On appeal, the Upper Tribunal (UT) accepted that, when viewed in isolation, ‘paid’ was broad enough to include non-monetary payments. However, the outcome of HMRC’s appeal depended on whether ‘paid’ in the legislation must be construed, not in isolation, but in the context of the pension tax relief provisions as ‘paid in money’. The UT concluded that the expression ‘contributions paid’ was restricted to contributions of money. On that basis, ‘contributions paid’ could not include settlement by a transfer of non-monetary assets, even if the transfer was made in satisfaction of an earlier obligation to contribute money. HMRC’s appeal was allowed.
What about a monetary debt (IOU)? Does the assumption of an IOU by a pension scheme member constitute a ‘contribution paid’ (within FA 2004, s 188(1)) in the amount specified in the IOU, regardless of whether the IOU is actually satisfied? This issue was considered in Mattioli Woods plc v Revenue and Customs [2022] UKFTT 179 (TC).
In that case, the appellant scheme administrator of a number of registered pension schemes appealed against decisions by HMRC to refuse part of the appellant’s claims for relief at source in respect of individual member contributions to the various pension schemes. The issue related to the creation of an IOU and the settlement of that IOU by an in specie transfer of shares. The appellant contended that the decision in Sippchoice was not determinative because (unlike in Sippchoice, where the issue was whether the IOU caused the share transfer), the issue in the present case was whether the IOU itself was a relievable contribution paid. The appellant argued that the IOU became an asset of the scheme and therefore a ‘contribution paid’ within the legislation.
However, whilst the FTT accepted that the IOU, once delivered to the pension scheme, was an asset of the scheme, the tribunal found it was the same as any other creditor recorded as an asset. Those creditors had not paid anything until they actually made a payment. The granting of an IOU deprived the taxpayer of nothing until it was honoured. Thus, the appellant’s appeal was dismissed.
The current scoreline following Sippchoice and Mattioli Woods plc stands at 2-0 to HMRC. This is despite HMRC’s guidance in the Pensions Tax manual at PTM042100 originally appearing to support Sippchoice’s case. The UT acknowledged this point, and HMRC accepted that the guidance was not very clearly worded. However, the UT pointed out that Sippchoice had not tried to argue that it relied on HMRC’s guidance or had a legitimate expectation that HMRC would not resile from it.
Following the UT’s decision in Sippchoice, HMRC published its ‘Pension Schemes Newsletter’ in December 2020, which included an item on in specie pension contributions. In it, HMRC stated that the Sippchoice decision confirmed its view on in specie contributions, and that HMRC’s view had not changed. Nevertheless, HMRC amended its guidance at PTM042100 to “clarify” its position.
The amended guidance states that it is possible to enter into contractual arrangements involving an asset and for a pension contribution to retain its monetary form for tax purposes. HMRC will expect the following requirements to be met:
The second and third requirements replace HMRC’s earlier guidance in PTM042100, which stated simply that there must be “a separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration”.
At least HMRC admits to the possibility of giving effect to a monetary pension contribution through the transfer of an asset. However, unless there is contemporaneous documentary evidence to demonstrate that HMRC’s requirements in the above bullet points are met, it seems that tax relief claims are likely to be resisted. A formal valuation of the asset would also be prudent. If the asset’s market value is lower than the contribution debt, the balance will need to be paid in cash for the entire contribution to qualify for tax relief.
You can read more about pension schemes tax strategies in Robert Maas’s Taxation of Employments, or Peter Rayney’s Tax Planning for Family and Owner-Managed Businesses
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Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is General Editor and a co-author of Tax Planning (Bloomsbury Professional).
