Mark McLaughlin looks at a recent case on how pension contributions should be ‘paid’ for tax purposes, in which HM Revenue and Customs seemingly ignored its own guidance.
Tax relief is available to individuals for contributions to a registered pension scheme if certain conditions are satisfied. The conditions can be complex and are beyond the scope of this article, but if relief is available, it is given on contributions paid during the tax year.
Was it ‘paid’?
HM Revenue and Customs (HMRC) considers that ‘paid’ in this context generally means that contributions to the registered pension scheme must be a monetary amount (e.g. cash, cheque, direct debit, bank transfers) (see HMRC’s Pensions Tax Manual at PTM042100).
However, there are rules that enable the transfer of eligible shares by the individual to count as a contribution paid on which tax relief may be given, where certain conditions are satisfied (FA 2004, s 195). ‘Eligible shares’ are broadly shares which the member acquired on exercising a right under a SAYE option scheme, or which were appropriated to the member under the provisions of a share incentive plan.
What about payments in the form of other shares, or other assets? HMRC’s guidance (at PTM042100) states: ‘…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.’ There are two requirements. Firstly, there must be a clear obligation on the member to pay a contribution of a specified monetary sum (e.g. £10,000), to create a recoverable debt obligation. Secondly, there must be a separate agreement between the pension trustees and scheme member to pass an asset to the scheme for consideration.
HMRC’s guidance adds: ‘If the scheme agrees, the cash contribution debt may be paid by offset against the consideration payable for the asset. This is the scheme effectively agreeing to acquire the asset for its market value.’
HMRC moving the goalposts?
The above HMRC guidance appears clear and straightforward. Taxpayers might, therefore, expect to be able to rely on it, even though it does not carry the force of law. However, in Sippchoice Ltd v Revenue and Customs  UKFTT 122 (TC), HMRC seemingly ignored this clear statement of its understanding of the effects of the tax legislation on contributions of assets in satisfaction of a debt.
In Sippchoice, the appellant pension scheme provider claimed income tax relief at source in respect of a net contribution of £68,342 made by an individual (C) to a self-invested pension plan (SIPP). HMRC refused the claim. The appellant appealed. The issue in dispute was whether the contributions made by C were ‘paid’ (within FA 2004, s 188(1)) and, therefore, qualified for the tax relief. On 9 March 2016, C had executed a SIPP contribution form, indicating that he proposed to make a net contribution of £68,324. On 24 March 2016, C wrote to the appellant confirming that this contribution would be made by way of an in-specie transfer of shares. On 29 March 2016, the appellant accepted the in-specie contribution, and advised C the shares had a value of £68,323.97, and that C had to make a payment of 3p to settle the debt of £68,324.
The First-tier Tribunal considered that the parties intended to create legal relations, and there was a legally binding obligation on C to make a contribution of £68,324. This was because (among other things): C’s completion of the contribution form created the legally binding obligation to make a contribution of £68,324; C had subsequently indicated to the appellant how he wished to discharge his obligation; and the legal obligation on C to make a contribution of a monetary amount existed even though C intended to settle the debt obligation he had created by transferring the shares to the administrator. The tribunal considered there was no ambiguity as to what was meant by ‘contribution paid’ (in FA 2004, s 188(1)), and that its view was supported by the explanatory notes to the Finance Bill clause which became s 188. The tribunal also said it was clear from McNiven v Westmoreland Investments Limited  UKHL 6 that satisfaction of a monetary obligation or debt in cash or kind amounted to ‘payment’. The appellant’s appeal was allowed.
A worrying aspect of Sippchoice is that C’s actions accorded with the above guidance given by HMRC at PTM042100, and yet HMRC still contested the appeal (albeit unsuccessfully) on the basis that C’s pension contribution had not been ‘paid’, despite its clear statement on this point in the guidance.
The courts have previously indicated that HMRC guidance can be relied upon (e.g. Aozora GMAC Investment Ltd, R (On the Application Of) v Revenue and Customs  EWHC 2881 (Admin)). Taxpayers who rely on HMRC guidance in similar circumstances may potentially have a ‘legitimate expectation’ that can be enforced by the courts. However, this is a legal principle on which professional advice would need to be sought.
This article was first printed in Business Tax Insider in July 2018.