In the case of HMRC v Bella Figura Limited, the Upper Tribunal has ruled on the law around tax charges for unauthorised payments. 

The case concerned a loan made by a pension scheme to a company connected with the scheme employer.  The director of the scheme employer had intended the loan to be an authorised employer loan and had relied on a firm of pensions administrators to draft the loan documentation for him, but the loan was not secured by a registered charge, as was required in order for it to qualify as authorised.  The loan therefore gave rise to an unauthorised payment, in relation to which HMRC sought to impose three separate tax charges: an unauthorised payments charge, and unauthorised payments surcharge, and a scheme sanction charge.

Under the relevant tax legislation, an assessment to an unauthorised payments charge and an unauthorised payments surcharge cannot generally be made more than four years after the end of the tax year to which they relate.  However, this period is extended to six years if a loss of tax is brought about carelessly by the taxpayer.  "Carelessly" is defined as the person failing to take reasonable care to avoid bringing about the loss or situation.  In the Bella Figura case, HMRC was out of time if the four year time limit applied, so the issue as to whether Bella Figura had brought about the loss carelessly was key.  

The burden of proof lay with HMRC to show that Bella Figura's failure to take care had caused an insufficiency of tax.  The First Tier Tribunal had concluded that this test was satisfied, as the director of Bella Figura had not obtained advice that the loan documentation drafted satisfied the requirements for an authorised employer loan.  However the Upper Tribunal overturned this decision, holding that although Bella Figura's director had not obtained specific advice from the pensions administrators that the loan would be authorised, he had taken reasonable care to select the firm of pensions administrators as advisers who could help him navigate the rules on authorised employer loans, and it was reasonable for him to conclude that the loan documentation drafted by the pensions administrators would achieve the desired result.  HMRC had also failed to show that it was the taxpayer's carelessness that had caused the insufficiency of tax, as had Bella Figura's director asked the pensions administrators to confirm that the documentation would give rise to an authorised employer loan, it was reasonable to infer that they would have given that confirmation.

In the light of its conclusions on the carelessness point, the Upper Tribunal set aside the assessments to the unauthorised payments charge and unauthorised payments surcharge on the grounds that they were out of time.

Because different legislation applied to the scheme sanction charge, this was not out of time.  Bella Figura had asked for this to be set aside under provisions which allow a scheme sanction charge to be set aside if (a) the scheme administrator had a reasonable belief that there was no scheme chargeable payment; and (b) in all the circumstances, it would not be just and reasonable for the scheme administrator to be liable to the scheme sanction charge.

The Upper Tribunal concluded that in determining what was just and reasonable, it was important to look at the pensions tax regime as a whole, which is predicated on Parliament being content for the Exchequer to suffer the costs involved in providing tax relief in relation to pension schemes, but only where the "entire bargain"  (ie the entire authorised payments regime) is respected.  In this context, a breach could be more or less serious depending on whether the Exchequer had suffered loss.  The Upper Tribunal held that the First Tier Tribunal had failed to take account of two relevant considerations: (a) that Bella Figura had at least tried to ensure that the loan met the requirements for an authorised employer loan; and (b) that the loan had been repaid so there was ultimately no loss to the Exchequer.  

The Upper Tribunal concluded that if HMRC's assessment to the unauthorised payments charge had not been set aside for being out of time, it would in all likelihood have concluded that it would not be just and reasonable for Bella Figura to be liable to the scheme sanction charge.  However, the Upper Tribunal did not consider that it would be appropriate for Bella Figura to suffer no tax charge whatsoever in respect of the unauthorised payment.  It therefore held that the scheme sanction charge should stand.

Our thoughts

This case illustrates that even where an unauthorised payment has not been made deliberately, HMRC may still seek to impose the maximum possible tax liability.  The Upper Tribunal's judgment is helpful in clarifying the factors to be taken into account in deciding whether it is just and reasonable to impose a scheme sanction charge, but as the test allows tribunals a broad discretion based on their assessment of all the circumstances of the case, it will often be difficult to predict in advance what conclusion a tribunal is likely to reach in any particular case.