“Holy nightmare”, exclaimed Robin.
In a surprising turn of events, HMRC won its appeal battle over tax relief being claimed on in-specie contributions. However, what was even more surprising, was the judge’s comments on HMRC’s pension tax manual and how in essence, the HMRC guidelines can be challenged…by HMRC themselves. As the caped crusader’s wingman would say, “You can’t get away from HMRC that easy!”…
It’s taken for granted that a personal contribution to a pension scheme attracts tax relief for the member, provided they satisfy certain criteria, such as having relevant UK earnings (the “basic amount” of £3,600 gross, excepted), and in more or less all instances those contributions are of a monetary nature. However, it was generally held by the industry that it was possible to accept an asset in lieu of a monetary contribution, or what is termed an in-specie contribution.
Indeed, the Pensions Tax Manual (PTM), published by HMRC, which offers guidance on the relevant parts of the Finance Acts and pertinent statutory instruments, states:
“… contributions to a registered pension scheme must be a monetary amount. However, it is possible for a member to agree to pay a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets … There must be:
• a clear obligation on the member to pay a contribution of a specified monetary sum, say, £10,000. This needs to create a recoverable debt obligation
• a separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration.”
In 2016 HMRC challenged SIPP firms over tax relief claimed on in specie contributions, which in turn was then challenged by Sippchoice, who were successful in their challenge at the First Tier Tribunal in 2018. Undaunted, HMRC appealed the case to the Upper Tribunal, with Judge Sinfield’s ruling, published on 12 May 2020, favouring HMRC. The judge also went on to say that “the HMRC guidance was not consistent with the relevant law” and “Statements in HMRC’s manuals are merely HMRC’s interpretation of the law in their internal guidance and they do not have the force of law”.
Where does this leave pension providers, and advisers and their clients? Well there are probably two areas to consider, the first being how much faith we can now put in any HMRC guidance manual, and the second being the tax relief aspect. With regard to the former, the PTM is personally one of my main ‘go-to’ reference sources when dealing with pension tax legislation enquiries. Therefore, this recent ruling raises major concern, as it implies that any opinion, decision or action taken with reference to the guidance could still be challenged by HMRC themselves, should they wish to do so.
In respect of the latter, consider a scenario where an additional rate taxpayer agreed to make a net contribution to their SIPP of £32,000 and to which they are entitled to full tax relief. However, rather than paying cash, they made the contribution in the form of publicly quoted shares to that value. The pension provider then claimed from HMRC £8,000, through relief at source, and the individual in turn claimed the additional rate relief of £10,000 through their tax return. As a result of this ruling, HMRC can now pursue both parties for the ‘unjustified’ tax relief, with each having to repay the appropriate amount.
A further potential outcome of this ruling is that the contribution of £32,000 may now be treated as a gross amount, which in turn could have implications for individuals who had earnings in excess of £100,000, as they may no longer be entitled to the full, or part, reclaim of their personal allowance. Also -although less likely as most providers ceased accepting in specie contributions until this matter was fully resolved – there could still have been more recent instances where such a contribution was used previously to reduce an individual’s threshold income to £100,000 or less, to mitigate any tapering of their annual allowance. However, the ‘removal’ of the tax relief could mean the individual’s threshold income now exceeded £110,000, and tapering is once again applicable.
We’ll need to await HMRC’s guidance on these latter aspects, for what that guidance or opinion is now worth, or, to borrow from Batman, perhaps we should just take the stance of “pass me the HMRC guidance repellant, Robin!”
This article originally appeared on New Model Adviser