In Curtis v HMRC the First-Tier Tribunal Tax Chamber has allowed a member's appeal against an unauthorised payments charge, holding that HMRC had not followed the correct procedure when making the tax assessment.

The Tribunal found that the member, Mrs Curtis, was an honest individual who had fallen victim to a scam in relation to her pension.  Mrs Curtis had met with a financial adviser who arranged a £20,000 loan for her from a business called Blu Funding and also recommended that she transfer her pension rights from the BT pension scheme, valued at almost £50,000, to an arrangement with a company called Fast Pensions.  Mrs Curtis understood the pension transfer and the loan to be two unrelated transactions.  Unbeknownst to her, the transfer value was used to provide the funds for the £20,000 loan.  Fast Pensions was subsequently wound up and Mrs Curtis was unable to recover any of the pension fund that she had transferred to it.

In 2015 HMRC required Mrs Curtis to complete a tax return for the tax year 2012/13.  The covering letter suggested that a payment had been made to her as a result of the changes to the investment of her pension.  However, as Mrs Curtis was unaware of any connection between the loan and the change to her pension arrangements, her completed tax return made no mention of any unauthorised payments.

In 2017 HMRC issued a tax assessment for £9280 to Mrs Curtis.  This was based on HMRC considering it likely that Mrs Curtis had received an unauthorised member payment of £16,872, being 35% of the transfer value.  The tax assessment was made under section 29 of the Taxes Management Act 1970 (Assessment where loss of tax discovered).  Mrs Curtis appealed.

The Tribunal found that the loan had been funded via the funds from Mrs Curtis's transfer value, thus giving rise to an unauthorised member payment under the Finance Act 2004.  It was not relevant that Mrs Curtis had been unaware of the connection between the two.

Because Mrs Curtis had already completed a tax return for the year to which the discovery assessment related, one of two conditions had to be satisfied in order for the tax assessment to be valid.  The first was that the shortfall in tax had been brought about by the taxpayer's carelessness.  The Tribunal rejected HMRC's arguments that Mrs Curtis had been careless, holding that there was no reason for Mrs Curtis to suspect that her loan from Blu Funding was connected to her pension transfer.  The Tribunal then considered the second condition set out in the legislation.  It concluded that HMRC could not issue a discovery assessment unless either (a) the period for making an enquiry into the tax return had expired, or (b) HMRC had given notice of an enquiry but then closed it.  The Tribunal held that neither of these conditions were satisfied in the case of Mrs Curtis and that the discovery assessment was invalid.

In case the Tribunal was wrong and the assessment was technically valid, the Tribunal considered whether it was just and reasonable for Mrs Curtis to be liable to the unauthorised payments surcharge of £3000.  It concluded there was nothing more Mrs Curtis might reasonably have been expected to do that would have avoided the unauthorised member payment.  She had obtained what she believed to be independent financial advice and had been the victim of a scam.  HMRC's criticisms of Mrs Curtis were made with the benefit of hindsight.  The Tribunal therefore held it would not be just and reasonable for Mrs Curtis to be liable to the unauthorised payments surcharge.

Our thoughts

This case illustrates the invidious position in which victims of pension scams can find themselves.  Having lost pension rights worth thousands, they then find themselves also pursued by HMRC for substantial tax bills.  The facts reported in this case show that Mrs Curtis had actually repaid over half of the amount that she had been loaned, exacerbating her losses.  Although the Tribunal held that it would not be just and reasonable for Mrs Curtis to have to pay the unauthorised payments surcharge, it had no power to relieve her from liability from an unauthorised payments charge.  It was a matter of luck for Mrs Curtis that the discovery assessment in this case was invalid due to a procedural error on HMRC's part.  Members faced with a discovery assessment would be well advised to check whether it could potentially be invalid on similar grounds to those which applied in the case of Mrs Curtis.