The First-Tier Tribunal has dismissed a scheme administrator's appeal against liability for a scheme sanction charge where the administrator unquestioningly accepted valuations provided by a third party valuer without applying "commercial common sense" to the question of whether the valuations were realistic (Morgan Lloyd Trustees Limited v HMRC).

HMRC raised assessments on a number of scheme employers on the basis that they had been involved in transactions that gave rise to unauthorised employer payments.  HMRC also raised an assessment on the scheme administrator on the basis that it should be liable to the scheme sanction charge.  The tax charges arose in relation to: (1)  loans made from the pension fund to the Employer secured by a charge over intellectual property (IP) assets owned by the Employer; and (2)  sale and leaseback – a sale from the Employer to the pension fund of IP assets and their lease back to the Employer. The IP involved comprised trademarks, domain names, websites and databases.  

Was the approach to valuing the IP realistic?

A key issue before the FTT was whether the value which the parties had attributed to the IP represented its genuine arm's length or market value.  The employer businesses involved were relatively small and HMRC argued that the IP's real market value was much lower than the value that had been attributed to it by the valuers for the purpose of the transactions and did not reflect the commercial reality. For example, HMRC argued that a trademark owned by a small business was likely to have limited value as a stand-alone asset, taking into account that any similar business in the market would probably already have its own trademark.  HMRC also argued that a database which had been valued actually had no open market value because it would be relatively easy to recreate, and that a website to which value had been attributed was a "brochure style" website which could easily be recreated with only the risk of a "minor hiccup" in trading during the time it took to relaunch the website.  

FTT's approach to the scheme sanction charge issue

Under the applicable legislation, the burden of proof was on the scheme administrator to demonstrate that it reasonably believed that the unauthorised payment was not a scheme chargeable payment.  The FTT said that there was a complete lack of any evidence that the scheme administrator did anything other than accept the valuations at face value.  For example, no one had raised any questions when the value of one trademark had apparently doubled in a year.  

The FTT said that it was only reasonable for the scheme administrator to rely on third party valuers if it had undertaken some steps to ensure that the valuers had the relevant expertise.  However, it had been clear that some of the valuers lacked experience.  Even where the expertise of the valuers had been established, it was incumbent on the administrator to "at least apply basic commercial acumen" to test the valuations being provided.  The FTT concluded that the scheme administrator had not done so.

Given its conclusions, the FTT decided that there was no reasonable basis on which the scheme administrator could have concluded that the payments made were not scheme chargeable payments.  It therefore dismissed the scheme administrator's appeal against the scheme sanction charge.

Our thoughts

There are various instances in the pensions tax regime where, to avoid giving rise to an unauthorised payment, transactions must only take place on an arm's length/market value basis.  This case shows that in such circumstances, it is important (a) to check that any valuer has appropriate expertise, and (b) even where the valuer does appear to have the necessary expertise, to apply "basic commercial acumen" to assess whether there is reason to believe that a valuation may be unrealistic.