Danvers v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 January 2017 |
| Neutral Citation | [2016] UKUT 569 (TCC) |
| Date | 10 January 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2016] UKUT 0569 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Hon. Mrs Justice Rose DBE, Chamber President, Judge Timothy Herrington
Frances Ratcliffe, Counsel, appeared for the appellant
Laura Poots, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Registered pension scheme – Scheme funds invested at member's direction in preference shares of finance company – Finance company lending its assets to third party lender who made loan to scheme member – Scheme member obliged as condition of receiving loan to ensure scheme assets remain invested in finance company preference shares – Whether loan to scheme member was unauthorised member payment – Whether payment made in connection with the investment in the preference shares – Finance Act 2004 (FA 2004), s. 161(3) and (4).
The Upper Tribunal 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) held 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 and which derived most of its funding from KJK, 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. The FTT upheld the imposition of 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)). The appellant appealed on the grounds that the FTT had erred in law, first in its construction of “in connection with” (FA 2004, s. 161(3), (4)), and second in finding that the investment by the HP SIPP in KJK was inextricably linked to the loan and hence the loan was made “in connection with” the investment.
In relation to the first argument, the UT did not agree that the reference to a payment made “under or in connection with” a pension scheme investment was confined to payments directly sourced from such investments, as the legislation could otherwise have used the word “from” or “by”, rather than “in connection with”. They also rejected the contention that only payments that dissipated the assets of the pension scheme were intended to be caught, pointing out that the approach of FA 2004, Pt. 4 was to give a wide definition of “payment” and then treat certain payments as authorised, using a deliberately prescriptive list (FA 2004, s. 164).
Turning to the second argument and applying the correct interpretation of s. 161(3), (4) to the facts of the case, the UT did not agree that the commercial terms on which the loan was issued were a relevant factor. As the appellant would not have received the loan if he had not ensured the HD SIPP invested in KJK (and disinvestment from KJK was not permitted during the currency of the loan) there was sufficient evidence that the loan and investment were inextricably linked and the FTT were entitled to conclude that the loan was made “in connection with” the KJK preference shares, which had been acquired using sums held for the purposes of the HD SIPP (a registered pension scheme).
The appeal was therefore dismissed.
HMRC have recently targeted a number of so-called “pension liberation schemes” designed to allow members to access their pension savings by way of loan without triggering a tax charge (see, for example Sippchoice Ltd [2016] TC 05217; White [2016] TC 05527). This case was a lead case, with another 80 appeals stayed pending the outcome.
[1] Mark Danvers (“Mr Danvers”) appeals against a decision by the First-tier Tribunal (“FTT”) (Judge Poole and Ms Janet Wilkins CTA) released on 5 January 2016 (“the Decision”). The FTT dismissed Mr Danvers' appeal against an amendment to his tax return for the year 2009/2010. The amendment imposed an additional tax charge of £10,260.80 on Mr Danvers by way of an unauthorised payment charge and unauthorised payment surcharge under the provisions of the Finance Act 2004 (“FA 2004”) concerning registered pension schemes.
[2] The FTT found that a loan of £18,656.69 (“the Loan”) by a lending company G Loans Limited (“G Loans”) to Mr Danvers fell within s 161(3) and (4) FA 2004 as being made in connection with an investment made by Mr Danvers' self-invested pension scheme, the HD SIPP. The relevant investment was that made by the HD SIPP in a finance company, KJK Investments Limited (“KJK”), in circumstances where it was a condition of the making of the Loan that the HD SIPP invest the whole of its net assets in cumulative preference shares of KJK and where G Loans was funded substantially by loans made to it by KJK.
[3] The FTT found that the investment made by the HD SIPP in the KJK preference shares had the necessary connection with the Loan because on the facts the investment and the Loan were inextricably linked.
[4] Consequently, the FTT concluded that the Loan was an unauthorised payment for the purposes of FA 2004 and accordingly Mr Danvers was properly subject to an unauthorised payments charge pursuant to s 208 FA 2004 and an unauthorised payments surcharge pursuant to s 209 FA 2004.
[5] Permission to appeal against these findings was given by Judge Poole on 3 March 2016. We were told that this was originally a lead case with some 80 other appeals remaining stayed pending the outcome of this case notwithstanding the revocation of the rule 18 order.
[6] The FTT made its findings of fact at [4] to [26] of the Decision. The FTT heard no oral evidence, and therefore its findings rely to a significant extent on the documentary evidence that was before it. The FTT's findings can be summarised as follows.
[7] Mr Danvers was at the time of the relevant events 41 years old. He was therefore below the statutory age at which he was entitled to take benefits from his pension fund without incurring the income tax charge that is designed to deter such access.
[8] In mid-November 2009 Mr Danvers decided to transfer his existing pension funds with Windsor Life and Winterthur Life, which at that time had a value of approximately £35,000, to the HD SIPP, a registered pension scheme. The FTT found that this decision was taken specifically with a view to the obtaining of a loan.
[9] The FTT referred to two documents which it found Mr Danvers had seen before he reached his decision to transfer his pension funds.
[10] The first of these documents was headed “G Loans Questions and Answers”. It described a “G Loan” as “a loan whereby the capital is repaid using the proceeds from your personal pension fund”. This document 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.”
[11] The second of these documents was a document headed “KJK Investments Limited – Information Memorandum”, which gave details of a proposed issue of cumulative preference shares by KJK. The FTT found that this document was issued sometime shortly before 1 May 2009. The proposed business of KJK was said in this information memorandum 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 lending to bridging finance companies and lending to other companies offering unsecured loans (with which KJK was said to “have connections”). It was said that those other companies would then use the money, among other things, to advance loans where the client can provide evidence that he will be getting monies in the future to repay the loan, and included as an example the drawing of a pension.
[12] We note that a “snapshot” of KJK's activities as at 30 June 2013 showed that 58.8% of KJK's outstanding loan book, a sum of £6,968,221, was represented by lending to G Loans. The abbreviated accounts of G Loans for the year ended 31 January 2013 showed debtors of £7,006,884 and long-term creditors of £6,830,115. Although the FTT found there was no direct evidence before it beyond the trading statement of KJK as to where G Loans obtained its finance, it appears that most, if not all, of G Loans' funding came from KJK.
[13] On 25 November 2009 Mr Danvers signed three documents as follows. First, he signed an application to become a member of the HD SIPP and to be a co-trustee of his fund held within it. Second, he signed a form indicating that he was acting on an “execution only” basis and not seeking any advice from the HD SIPP. Third, he signed an instruction to the trustee of the HD SIPP to invest £34,899 in KJK cumulative preference shares. The FTT found that Mr Danvers expected the investment of funds in KJK to generate the loan from G Loans to him. The FTT made no findings as to whether Mr Danvers believed that KJK would lend funds (directly or indirectly) to G Loans to finance the loan to him but stated that its decision would be the same whether or not that was the case.
[14] The preference shares issued by KJK carried a cumulative dividend at the rate of 6% per annum and were redeemable at the option of the holders by giving 3 months' notice to KJK at any time after 1 January...
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Gordon and Others
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