Berkeley Burke developments

We have previously reported on the landmark decision in Berkeley Burke in which the High Court upheld a Financial Ombudsman decision that a SIPP administrator should have undertaken significantly more due diligence before accepting an investment into its SIPP despite numerous disclaimers signed by the scheme member.  An appeal hearing had been scheduled for October 2019.  However, on 18 September 2019, Berkeley Burke SIPP Administration Limited (BBSAL) went into administration, following which the decision was taken to drop its appeal.  Immediately following their appointment, the administrators sold BBSAL's SIPP business to Hartley Pensions Limited.

Following BBSAL's administration, the FCA published a statement reiterating the message in its "Dear CEO" letter published in October 2018 that if the outcome of the Berkeley Burke case calls into question a SIPP operator’s ability to meet financial commitments as they fall due, they should contact the FCA immediately.  The statement says that if a firm pursues a sale of part or all of its business or assets, it should pay due regard to its implications for customers who may have compensation claims.  It also says that in assessing any future regulatory applications, including applications for individuals to hold FCA-approved roles, the FCA will take into account how those individuals have acted in the context of the considerations outlined in the "Dear CEO" letter.

The Financial Services Compensation Scheme (FSCS) website advises customers that the FSCS is accepting claims against BBSAL.  The website says, "There are currently civil claims cases against SIPP operators underway in the High Court. The outcome of these court cases will affect whether we can pay a claim against SIPP operators like Berkeley Burke SIPP Administration Ltd."  The Financial Ombudsman Service has also published a statement saying that it will no longer progress existing complaints against BBSAL and will be in touch with existing complainants in due course with further information about passing their complaint to the FSCS.  It says that there should be no need for complainants to submit all of the claim documentation again.

Court holds Ombudsman wrong to reject claim where investment opportunity lost due to delayed transfer value

In the case of Tenconi v The James Hay Partnership, the court has allowed a member's appeal against the Pensions Ombudsman's rejection of the member's claim relating to loss of opportunity to invest in the stock market before or immediately after the EU membership referendum.  The member had first initiated the transfer process in March 2016, but the relevant funds and assets were only received by the receiving scheme in the period from July to October 2016.

The Ombudsman had upheld the member's claim that there had been an unacceptable delay by the pension provider in dealing with the transfer, and had awarded the member £2000 for distress and inconvenience.  The Ombudsman agreed that the transfer should have been completed before 23 June 2016, the date of the referendum, and that the pension provider's maladministration in not completing the transfer within a reasonable time had caused the member to miss the opportunity to invest in the stock market either before or immediately following the referendum.  However, the Ombudsman noted there was no evidence to suggest the member informed the pension provider of the specific shares he intended to purchase, that he would have been able to purchase those shares, what price would have been achieved, and that those specific shares were negatively affected by the outcome of the vote but subsequently recovered.  He held the lack of certainty and the presence of so many variables meant that he could not conclude what actual loss the member had suffered or that it was reasonably foreseeable to the pension provider that the member would suffer the losses that he was now claiming.

On the question of foreseeability, the judge said, "When a customer asks for his pension pot to be moved from one provider to another it is obvious that it is for the purpose or the possible purpose of investment; and it is equally obvious that if there is a delay through maladministration of the transfer that the investor will or may lose the opportunity to invest over that period, and if there are spikes or perceived spikes in the market during that period that is likely or foreseeable to cause the investor loss."  He therefore held that it was reasonably foreseeable that the member might suffer a loss as a result of a delayed transfer value.

On the point of measurability of the loss, the judge said that expecting the member to identify the specific shares he would have purchased was setting far too high a test.  He said it was perfectly possible for an investor to say, "I cannot say exactly what shares I would have invested in but, given that I could see that there was likely to be a spike in the market after a particular event, if I had had the money available then I would have been able to take advantage of that, and the precise loss is a matter of quantification not a question of recoverability".

The judge remitted the case to the Ombudsman.  He said that the Ombudsman firstly needed to reach a conclusion regarding the date the funds would have been received by the scheme in the absence of maladministration.  The burden of proof was then on the member to show what he would have done had the funds arrived by that date.  If the member was able to convince the Ombudsman that he would have invested the funds, it was not necessary for the member to show precisely which shares he would have bought, but the Ombudsman would need to consider the nature of the portfolio the member was likely to have bought, perhaps by looking at the member's pattern of investing and what the member had done with other money available to him.  The judge was clear that he was not saying that the member was bound to win before the Ombudsman, nor that the Ombudsman was bound to accept the member's assertions as to what he would have done had the money arrived earlier.

Our thoughts

Cases where a member's transfer value is delayed can easily lead to claims for investment loss from the member based on what the member would have done had the funds arrived on time, and clearly there is the potential for hindsight to colour the member's view on this issue.  This judgment is therefore useful in providing guidance as to the approach which the courts and the Ombudsman are likely to take to such cases in future.

Supreme Court to rule in HMRC v Parry on whether terminally ill member's omission to draw benefits gave rise to inheritance tax liability

A hearing before the Supreme Court took place on 31 October 2019 and judgment is awaited in the case of HMRC v Parry.  The Supreme Court is due to rule on whether the deceased member's transfer from a section 32 policy to a personal pension scheme followed by her omission to take income benefits when she was terminally ill constituted a disposition which amounted for inheritance tax purposes to a transfer of value to the deceased member's two sons.  The sons had received a lump sum death benefit from the scheme paid under discretionary trusts in accordance with the member's expression of wish form.

FTT rejects taxpayer's appeal against unauthorised payment surcharge

In the case of Franklin v Commissioners for HMRC, the First-Tier Tribunal for tax matters has rejected a member's appeal against an unauthorised payments surcharge issued by HMRC for an unauthorised payment from her registered pension scheme.  The member, who was under age 55, had entered into an arrangement promoted as a "Pension-backed Loan" scheme.  The arrangement involved transferring funds to a SIPP which then purchased preference shares in a specific investment company.  That company would then lend to another company which would make a personal loan to the member up to a maximum of 50% of the amount which the member had used to purchase preference shares.  Once the member's SIPP had purchased the preference shares, the member was guaranteed to be able to obtain a loan provided he/she was not in an IVA or bankrupt.

In this case, the member had been informed by G Loans Limited (the company that would provide the loan) that HMRC had threatened to levy tax charges against "a very small number" of the clients to whom G Loans had made loans.  G Loans had therefore requested its tax advisers, Optimum, to comment.  The member was provided with a copy of Optimum's advice which referred to HMRC having decided to levy unauthorised payment charges in respect of members who had taken advantage of the loan arrangement.  The Optimum advice suggested that HMRC had either misunderstood the arrangement or were "clutching at straws" to raise tax charges on members.  

Notwithstanding the information received from G Loans and Optimum, the member decided to go ahead with the arrangement.  HMRC subsequently levied an unauthorised payments charge and unauthorised payments surcharge on the member.  Following the member's appeal, the Tribunal considered whether she should be discharged from liability for the unauthorised payments surcharge under provisions which allow a Tribunal to discharge the surcharge if in all the circumstances it would not be just and reasonable for the member to be liable for the surcharge.

Following previous judgments, the Tribunal said that it was not necessary to establish that the member was dishonest or negligent, or that she was aware that the payment to her was an unauthorised payment, in order to establish that the surcharge was just and reasonable.  It noted that the member had been put on notice by G Loans, and to some extent by Optimum, that there was a risk that tax charges could result from the arrangement she was entering into.  She had nevertheless decided against taking independent, legal, accounting or tax advice before making the decision to proceed, instead relying on the generic advice of Optimum who owed her no personal duty of care.  It considered that the member had "an almost careless disregard of the risks that were inherent in the scheme".  The Tribunal therefore confirmed the surcharge and dismissed the member's appeal.

Our thoughts

In the light of previous cases in which the Tribunal has had to consider similar issues, the outcome of the case is unsurprising.  It underlines that ignorance of the law is not a defence to pensions tax charges.  For anyone with an understanding of the pensions tax regime, the arrangement in this case would have rung immediate alarm bells.  However, it is difficult not to feel some sympathy for members unfamiliar with pensions law who might assume that the regulatory regime would prevent from people promoting pensions arrangements with obvious tax pitfalls.

HMRC withdraws appeal in Hymanson fixed protection case

In our previous Update we reported on the case of Hymanson v HMRC in which  the First-Tier Tribunal ordered HMRC to re-instate a member's fixed protection against the lifetime allowance where the member had not stopped contributions paid under an existing standing order due to a mistaken belief that existing contribution arrangements could continue without resulting in loss of fixed protection.  HMRC has now withdrawn its appeal in the case.

Tribunal holds no unauthorised payment where HMRC unable to prove that loan to member came from member's pension fund

In the case of Hughes v Commissioners for HMRC, the First-Tier Tribunal for tax matters has allowed a scheme member's appeal against HMRC's assessment that she was liable for an unauthorised payments charge and unauthorised payments surcharge in respect of a loan which HMRC alleged had been funded, either directly or indirectly from the member's pension fund.  The companies which had operated the pension scheme and the provided the loan to the member had been wound up in the public interest by the Insolvency Service, which described them as "rogue pension and finance companies", but the Tribunal concluded in the particular case in question that it could not be satisfied, even on the balance of probabilities, that the amount loaned to the member was connected to any of the tranches of money advanced by the trustees of the scheme to the loan company.

Much of the factual background to this case is unclear from the judgment.  However, it appears that the member, Miss Hughes, had approached a financial adviser with a view to consolidating three separate pension pots.  She subsequently transferred her pension fund to a scheme called FP1 Retirement Plan and also received a loan from a company called Blu Funding Corporation Limited ("Blu").  The Tribunal accepted Miss Hughes' evidence that she was completely unaware of any connection between these two transactions.  HMRC put evidence before the Tribunal to show that the operations of Blu and the scheme were very much interlinked.  It sought to levy an unauthorised payments charge and surcharge on Miss Hughes on the grounds that the loan to Miss Hughes from Blu had been sourced by Miss Hughes' pension fund.

The Tribunal referred to the documents relating to the finances of Blu and the pension fund as "a miasma of confusion" and "a documentary tangle which defeated even the Insolvency Service's investigators".  The position was so lacking in transparency that the Tribunal concluded that it could not be satisfied, even on the balance of probabilities, that the funds loaned to Miss Hughes were connected with any of the funds advanced from the scheme trustees to Blu.  As HMRC had concluded that the loan was not an unauthorised payment, it followed that no unauthorised payments surcharge could be due.

Our thoughts

The member in this case appears to have been lucky that the financial records of the arrangement to which she had transferred her pension fund were so confusing and unreliable that HMRC was unable to show a link in the member's specific case with the loan which she had received from a related company.  

There is an interesting postscript to the judgment in which the Tribunal appears to be critical of HMRC for not having made it aware of a previous Tribunal decision dealing with similar circumstances.  The Tribunal cites a passage from that judgment in which the Tribunal in that case expresses the hope that HMRC's priority is to investigate the major beneficiaries, orchestrators and promoters of unlawful schemes rather than individuals with low or no level of culpability, no knowledge of the link between pension transfer and loan received, and who have suffered financial loss rather than deriving a benefit from the arrangement.