Danvers
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 January 2016 |
| Neutral Citation | [2016] UKFTT 3 (TC) |
| Date | 04 January 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Kevin Poole, Janet Wilkins CTA
Frances Ratcliffe of counsel appeared for the Appellant (Direct Access)
Laura Poots of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Unauthorised payment charge – Finance Act 2004 (FA 2004), s. 207 – Scheme funds invested at scheme member's direction in preference shares of finance company as part of arrangement providing for loan from a third party lender to pension scheme member – Whether loan to scheme member was unauthorised member payment under FA 2004, s. 160(2) – Whether loan was a payment – Held yes – Whether the payment was made … in connection with the preference shares acquired using scheme assets under FA 2004, s. 161(3) – Held yes – Appeal dismissed.
The First-tier Tribunal (FTT) found that a loan made to a member by a third party on condition that funds of the pension scheme remained invested as specified in the loan agreement constituted an unauthorised member payment.
Mr Danvers (the appellant) had funds invested in two registered pension funds with an aggregate value of approximately £35,000. As he was aged under 50, he was unable to access any pension benefits. He therefore entered into an arrangement whereby the funds in his existing pension arrangements were transferred to HD SIPP, a pension scheme registered with HMRC, giving specific instructions for 100% of his fund to be invested in preference shares of KJK Investments Ltd (KJK), a company specialising in wholesale lending. He also entered into a loan arrangement with G Loans Ltd (G Loans), a company to which KJK had lent a substantial sum, for an interest only loan of £18,656, the capital to be repaid from his pension fund. As a condition of the loan, money could not be disinvested from KJK or transferred out of HD SIPP. HMRC sought to impose an unauthorised payments charge (FA 2004, s. 208) and surcharge (FA 2004, s. 209) on the grounds that the loan constituted an unauthorised member payment (FA 2004, s. 160(2)).
It was agreed between the parties that the preference shares in KJK held by the HD SIPP were an investment acquired using sums or assets held for the purposes of the scheme (FA 2004, s. 161(4)) and therefore the question to be determined was whether or not the loan made by G Loans was a payment made under or in connection with those preference shares (s. 161(3)). The FTT dismissed the appellant's argument that the loan was not a payment, in particular because, if a loan were not a payment, there would be no need for authorised employer loans to be included within the class of authorised employer payments in FA 2004, s. 175. Although it was accepted that KJK did not specifically allocate the money received from any particular investor to any particular loan, the FTT considered that the appellant transferred his pension funds to HD SIPP with a specific instruction to invest in KJK in order to obtain the loan from G Loans and therefore also concluded that the loan was made in connection with the KJK preference shares. Accordingly the appeal would be dismissed.
In this case the FTT agreed that the purpose of the FA 2004 provisions relating to unauthorised payments was to prevent abuse by unauthorised access of the funds, but declined to consider whether or not the arrangements were abusive because this would involve judging what would have been Parliament's reaction to the specific arrangements. Instead the approach of applying the legislation to the specific facts and interpreting it as accurately as possible in its context was preferred.
[1] This appeal is concerned with whether a particular set of arrangements which were described as having the purpose of helping people improve their liquidity positions prior to taking their retirement benefits achieved their desired result.
[2] The arrangements constituted a version of what is commonly known as pension liberation, i.e. a structure designed to afford a pension scheme member effective access (in this case, by way of loan) to some part of his/her pension fund before the normal qualification age of 50 without incurring the income tax charges designed to deter such access. The question before the Tribunal was whether the particular set of arrangements in this case were effective to achieve that end.
[3] We received a bundle of documents, unsupplemented by any oral testimony. Some of the detail of the relevant facts was therefore not available to us, but the documents provided a reasonably clear outline.
[4] We find the following facts.
[5] In late 2009 the appellant was a member of two registered pension schemes, a Flexible Pension Plan with Windsor Life Assurance Company (Windsor) and a Rainbow Plus Personal Pension Scheme with Winterthur Life UK Limited (Winterthur).
[6] As at November 2009, the total value of the appellant's rights within the two schemes was approximately £35,000.
[7] The appellant was born on 10 November 1968 and therefore attained the age of 41 in November 2009.
[8] By mid-November 2009 the appellant had clearly reached a provisional decision to transfer his existing pension funds from Windsor and Winterthur to HD SIPP, a pension scheme which had been registered by HMRC with effect from 13 December 2006, and had become an appropriate personal pension scheme which effect from 1 October 2008, with the Newcastle Building Society as Provider. We infer this decision was taken specifically with a view to the obtaining of a loan (as subsequently occurred – see below).
[9] Included in the documents before us was a document headed G Loans Questions and Answers, a document which we infer was given to the appellant before he reached his decision. It described a G Loan as a loan whereby the capital is repaid using the proceeds from your personal pension fund. It referred to the fact that a participant's pension fund had to be invested with a company on an approved panel, in order to ensure that G Loans Ltd can be as sure as possible that sufficient funds will be available to repay your loan.
[10] Also included in the documents before us was a document headed KJK Investments Limited – Information Memorandum. This document (the Information Memorandum) was not dated, but it must have been issued at some point shortly before 1 May 2009, as it gave details of a proposed issue of cumulative preference shares of up to £3 million during the period from 1 May 2009 to 30 April 2010 (subject to possible extension). The proposed business of KJK Investments Limited (KJK) was said to be taking advantage of the current difficulties in the lending market by specialising in wholesale lending, i.e. lending to other lenders. Typical opportunities were said to include (a) lending to bridging finance companies in connection with property purchase at a proposed interest rate of 1% per month; and (b) lending (at an expected rate of 1.5% per month) to other companies offering unsecured loans (with which KJK was said to have connections). The other companies would then use the money to advance either payday loans or other types of loans where the client can provide evidence that he will be getting monies in the future to repay the loan (e.g. sale of house, car, drawing of pension/tax free cash, bonus, inheritance).
[11] The appellant gave specific instructions, in his application form to become a member of the HD SIPP (see below), for 100% of his fund to be invested in KJK; he also referred to it (including a reference to IM, which we take to refer to the Information Memorandum) in a risk warning which he signed at the same time. As a result, we infer he had previously seen this Information Memorandum, was aware of its contents and expected the investment of funds in KJK to unlock the loan from G Loans Limited (G Loans) to him. He may or may not have believed that KJK would lend the necessary funds (directly or indirectly) to G Loans to finance the loan; our decision would be the same whether or not this was the case.
[12] The appellant contacted Winterthur and Windsor around 16 to 18 November 2009. He requested up to date statements of his fund values, and asked for transfer forms to transfer them to another pension scheme. Windsor confirmed to him that he was too young to receive any benefits under the plan with them. Both companies provided the transfer values requested and the necessary forms to effect the transfers.
[13] On 25 November 2009, the appellant signed:
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