In Killik & Co LLP v HMRC the First-tier Tribunal (Tax) has rejected an appeal by a SIPP administrator in relation to HMRC's withdrawal/refusal of tax relief in respect of "in specie" contributions. The appeal had been based on provisions which offer some protection to taxpayers who follow a "practice generally prevailing".
The background to the case was the Upper Tribunal's decision in HMRC v Sippchoice in which it held that a transfer of shares to a pension scheme in satisfaction of an agreement to make a contribution was not a "contribution paid" for the purpose of conferring entitlement to tax relief. The Upper Tribunal's decision in Sippchoice sent shockwaves through the SIPP industry as it went against the widely held understanding, developed following engagement by the SIPP industry with HMRC, that a member could claim tax relief where the member agreed to pay a monetary contribution and then settled the debt by way of a transfer of assets.
The administrator's appeal had been based on section 29(2) of the Taxes Management Act 1970 (TMA) which protects a taxpayer against a tax assessment based on an error or mistake in a tax return where the return was made in accordance with the "practice generally prevailing" (PGP) at the time the return was made.
In order for a practice to qualify as a PGP, the practice must be one adopted by taxpayers and HMRC alike. A practice will not be "generally prevailing" if taxpayers adopt only those parts of the practice that are favourable to them, but dispute others.
The First-tier Tribunal (FTT) held that the PGP protection under section 29(2) of the TMA applied only in the context of self-assessment tax returns. It was therefore of no application to relief at source claims, as no tax return was submitted in such cases. The FTT rejected various technical legal arguments put forward by the SIPP administrator as to why the PGP protection under section 29(2) should be read as applying to relief at source claims.
The FTT went on to consider whether there had been a PGP that a transfer of an asset would be a "contribution paid" for the purposes of being eligible for tax relief. The FTT noted that HMRC had changed its guidance in 2009 and that all the contributions in respect of which HMRC was reclaiming/refusing tax relief in the case in question related to periods after 2009. Following the 2009 changes, the guidance had stipulated that there had to be: (a) a clear obligation on the member to pay a contribution of a specified monetary sum, (b) a separate agreement between the scheme trustees and member for the scheme to acquire an asset from the member for its market value; and (c) an agreement by the scheme that the cash debt due from the member as a contribution could be paid by offset against the money due from the scheme for the asset.
Applying the test to the case in question, the FTT held that these requirements had not been satisfied. The member had submitted a "SIPP additional contribution form" stating the net contribution that he wished to make, and the SIPP administrator had written making reference to the form and saying, "I understand that you wish to pay for this contribution by way of shares and cash. Please note that payment in this manner creates an irrevocable and legally enforceable debt…" The FTT held that this did not follow the three step process set out in the 2009 guidance. It found that in the relevant years, HMRC did not have a policy or practice of accepting that the transfer of an asset would be a "contribution paid" for the purposes of the legislation where the transfer simply followed an offer to pay a monetary amount.
Our thoughts
The FTT in this case found that HMRC did not have a PGP at the relevant time of allowing tax relief in the circumstances in question. However, it is important to appreciate that even if the SIPP administrator had succeeded in this aspect of the case, its appeal would still have failed, as the FTT found that the relevant PGP provisions did not in any event apply to relief at source claims.
