No tax relief for in-specie transfers

On 12 May 2020, the Honourable Mr Justice Roth and Judge Greg Sinfield, sitting in the Upper Tribunal Tax & Chancery Chamber, released their judgment in the matter of HMRC v Sippchoice Ltd [2020] UKUT 149 (TCC). The matter concerns the tax treatment of in-specie transfers of assets into pensions.

Background

Four individuals applied to become members of a SIPP administered by Sippchoice. They completed contribution forms confirming their irrevocable agreement to make specific net contributions. Sippchoice requested confirmation of how they intended “to settle the debt”. The individuals stated that the contributions would be made by way of in-specie transfers of specified shares. Sippchoice accepted the proposals and stock transfer forms were executed.

Sippchoice claimed income tax relief at source in relation to the transfers on the basis that they were ‘contributions paid’ within the meaning of section 188(1) Finance Act 2004 (“FA 2004”). HMRC rejected the claim. Sippchoice appealed to the First-tier Tribunal which allowed the appeal on the basis that 1) the four SIPP members had contracted to pay particular sums of money to the SIPP and the subsequent transfers of the shares were in satisfaction of those money debts; and 2) the expression ‘contributions paid’ in section 188(1) is “wide enough to cover a transfer of assets in satisfaction of a debt”. HMRC appealed.

Legal analysis

While the Upper Tribunal considered that the word “paid” is broad enough to encompass non-monetary payments when viewed in isolation, it found that section 188(1) must be construed in the context of Chapter 4 of Part 4 FA 2004, including section 195 of that Act. Section 195 provides that ‘contributions paid’ in sections 188 to 194 includes contribution by transfers of shares if the shares are ‘eligible shares’ (i.e. shares which have been acquired via a Save As You Earn option scheme, or which have been appropriated via a share incentive plan) and they are transferred within 90 days of acquisition. Those conditions would make no sense if section 188(1) permitted transfers of any shares made at any time. If it did, either the 90-day condition would be entirely ineffective or the owners of eligible shares would be subject to a time limit that would not apply to owners of other shares.

The fact that section 195(2) provides for the valuation of eligible shares emphasises the point, since Chapter 4 of Part 4 FA 2004 does not contain any valuation mechanism for other types of shares. Moreover, while section 161(2) states that “‘Payment’ includes a transfer of assets and any other transfer of money’s worth”, section 161(1) provides that section 161 applies only to the interpretation of Chapter 3 of Part 4 of FA 2004. Section 188(1) is found in Chapter 4. The fact that the extended meaning of ‘payment’ was expressly limited to Chapter 3 indicates that Parliament did not intend for it to apply to Chapter 4.

Since the expression ‘contributions paid’ does not include the transfer of non-money assets, the Upper Tribunal also concluded that it is irrelevant for the purposes of section 188(1) whether assets are transferred in satisfaction of a money debt and the existence of an obligation to pay an amount of money does not change that. The Upper Tribunal also could not see why pensions legislation should provide different tax treatments for transfers of assets in place of payments made under a contractual obligation and transfers of assets in place of payments where there is no debt. In any event, the Upper Tribunal found that the SIPP members had promised to make in-specie contributions rather than monetary payments, so there was never any debt to be settled.

Impact

The decision is of major significance because it invalidates the interpretation that some administrators had (in the Upper Tribunal’s view) correctly ascribed to the guidance contained in HMRC’s Pensions Tax Manual (“PTM”), which states at PTM042100 that “contributions to a registered pension scheme must be a monetary amount.  However, it is possible for a member to agree to pay a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets.”  

The Upper Tribunal concluded that the natural reading of PTM042100 is that HMRC did not object to a promise to make a monetary contribution to a pension scheme being satisfied by a transfer of assets. However, Sippchoice had not suggested that it relied on the PTM or had a legitimate expectation that HMRC would stand by its content. The Upper Tribunal found that “Statements in HMRC’s manuals are merely HMRC’s interpretation of the law in their internal guidance and they do not have the force of law.  We must interpret the legislation in accordance with the principles of construction described above and if we conclude, as we have, that the legislation bears a different meaning to that found in the HMRC manual, the legislation must be preferred.”

Subject to any further appeal or some other outcome arising from the conflict between FA 2004 and the PTM, the decision opens the door to HMRC seeking to recover very substantial sums from SIPP administrators in relation to tax relief claimed pursuant to the PTM. If the SIPP terms provide for the member to indemnify the administrator in relation to any such liability, the liability for repayment of the tax relief (plus interest) may be paid out of members’ pension funds. In turn, that might be expected to trigger claims against IFAs who advised members in relation to in-specie transfers, or the SIPP administrators themselves.