Robert Rowland v Revenue & Customs (Income Tax - Pension) -[2019] UKFTT 741 (TC)- (09 December 2019)

Key Facts

Tax Type

Issues

• The court determined that the loan from G Loans constituted an unauthorised payment under the Finance Act 2004, as it was inextricably linked to the Appellant's pension investment in KJK Investments. The arrangement required the pension funds to be invested in KJK to secure the loan, creating a causal connection that satisfied the statutory definition of an unauthorised payment.
• The court confirmed that the unauthorised payments surcharge applied because the loan amount exceeded 25% of the Appellant's pension fund. The Appellant's failure to apply for discharge under section 268 FA 2004 meant the Tribunal could not waive the surcharge, as HMRC had not made a decision on such an application.
• The court found the Appellant was careless in failing to declare the unauthorised payment in his tax return, as he knew about the link between the loan and pension investment and received HMRC's concerns from G Loans. The penalty was correctly calculated at 15% due to prompted disclosure.

Tax Years

Holdings

• The court dismissed the appeal, finding that the loan from G Loans was an unauthorised payment, the unauthorised payments charge and surcharge were correctly applied, and the Appellant was careless in his tax return. The court concluded that the facts of the case did not support a discharge of the surcharge on the 'not just and reasonable' basis.
• The court determined that the unauthorised payments surcharge was correctly applied, as the Appellant did not apply to HMRC under section 268 FA 2004 for a discharge of the surcharge on the 'not just and reasonable' basis. The court also found that the facts of the case did not support a discharge of the surcharge, as the Appellant knew of the causal link between the loan and the pension investment, and did not take reasonable steps to verify if the loan constituted an unauthorised payment.
• The court determined that the Appellant was careless in completing his tax return, as he failed to declare the unauthorised payment he received from G Loans. A prudent taxpayer in the Appellant's position would have sought independent professional advice regarding whether the loan needed to be declared, especially given the letter from G Loans dated 31 October 2011 which indicated HMRC's concerns about the arrangement. The penalty was correctly calculated at the minimum rate of 15%.
• The court determined that the loan from G Loans was an unauthorised payment under the Finance Act 2004, as it was inextricably linked to the investment of the Appellant's pension funds in KJK Investments. The court found that the payment from G Loans was clearly a payment for the purposes of the relevant statutory provisions, and the amount of the unauthorised payments charge was correctly calculated.

Tax Issue Category

Legal Principles

• The court applied the standard of 'a prudent and reasonable taxpayer' to determine whether the Appellant was careless in completing his tax return. The court found that a prudent taxpayer would have sought independent professional advice about the tax implications of the arrangement, especially given that HMRC had raised concerns about the scheme and G Loans was not an impartial advisor.
• The court recognized the anti-avoidance nature of sections 160-181 FA 2004, which are designed to prevent taxpayers from circumventing restrictions on accessing pension funds. The court found that the arrangement structured by G Loans and KJK Investments was specifically designed to allow the Appellant to access pension funds before retirement age, which is precisely what the anti-avoidance provisions are intended to prevent.
• The court applied the substance over form principle to determine that the loan arrangement constituted an unauthorised payment. The court reasoned that the anti-avoidance provisions are wide enough to encompass transactions structured to circumvent pension restrictions, regardless of the formal arrangement. The court found that the causal link between the pension investment and the loan was sufficient to bring the transaction within the scope of the legislation, even though the pension scheme's assets remained intact.
• The court considered the Appellant's legitimate expectation that the arrangement was legal, as he was assured by IQ Business Services and G Loans that it was 'totally legal' and 'compliant with the scheme rules.' However, the court found that this expectation was not sufficient to absolve the Appellant of the requirement to seek independent advice, as the arrangement involved a complex tax avoidance scheme.

Disputed Tax Amount

Precedent Name

• David Collis v HMRC
• O'Mara v HMRC
• Dalriada Trustees Limited v Faulds and Others
• Mark Danvers v HMRC

Cited Statute

• Finance Act 2004
• Finance Act 2007

Penalty Amount

Judge Name

Passage Text

• I agree with the FTT's observations. The same 'extra features' as were in Danvers appear in the present case. This was not a situation where the loan was advanced simply on the basis of an expectation of repayment in due course from the pension funds. Rather, as I have already held, the loan and the pension investment were inextricably linked and, as in Danvers, had extra features which would not be expected in a standard loan arrangement.
• An obvious situation where the necessary link would exist would be if a third party lender was funded entirely by a company in which a pension scheme was invested, loans being made by the investee company to the third party lender only in circumstances where the scheme member was to take up a loan from the third party lender, the amount being lent by the investee company being identical to the amount on-lent to the scheme member. However, in our view, the connection can go further than that and would cover an arrangement whereby a scheme member receives a loan from a third party lender and it is a condition of him receiving such a loan that he directs the pension scheme to invest in a particular investment and remain invested in that investment until the loan is repaid. In our view, that gives rise to a sufficient causal link between the payment to the member under the loan and the investment made by the pension scheme. Viewed realistically, the anti-avoidance provisions are wide enough to bring such a payment within their scope. Despite the scheme's assets remaining intact, the scheme member has received a benefit from the scheme prior to his normal retirement date. In our view, we see no difference between this and a direct loan made from the scheme to the member where it is also the case that one of the scheme assets is now represented by a debt owed by the member to the scheme.
• the investment by the HD SIPP in the KJK preference shares (including the issue made to the HD SIPP in respect of the appellant's fund) for its purposes generally and did not specifically allocate the money received from any particular investor for lending to any particular borrower; nonetheless it is quite clear that the entire arrangement was orchestrated from beginning to end to ensure that the appellant received his expected loan as a result of transferring his pension funds to the HD SIPP and instructing it to invest them in the KJK preference shares. In the absence of fraud (i.e. theft of the appellant's pension funds) there was in our view never any realistic likelihood that the transfer of his pension funds to the HD SIPP would not result in those funds being invested in the KJK preference shares and the appellant receiving a loan of an agreed amount from G Loans. That, we find was certainly the appellant's expectation.