[2010] UKFTT 521 (TC)
TC00776
Appeal number TC/2009/14101
Income Tax – Schedule E – S.647 FCTA 1988 – Pension Fund Transfer – Unauthorised – Yes – Reciprocal Arrangements for Transfer between UK and Guernsey – Appellant liable for income tax – Not liable to penalties and interest – Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
NEIL & MEGAN GRATTONAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMSRespondents
TRIBUNAL: JUDGE DR K KHAN
RUTH WATTS DAVIES MHCIMA, FCIPD
Sitting in public in London on 15 September 2010
Mr David Craddock, Tax Consultant, for the Appellant
Mr J Brothwood, Senior Officer,HMRC, for the Respondents
© CROWN COPYRIGHT 2010
1
DECISION
Introduction
1.The Appellant appeals against the review decision issued on 13 August 2009 by the Inland Revenue, Pension Scheme Service, Technical Section (Alan Welsby).
2.The Appeal concerns the pension fund transfer on 31 July, 1996 made by Scottish Equitable Personal Pension to the NBCG Guernsey Retirement Annuity Trust Scheme (“NBCG GRATS”) on behalf of Mr Gratton and the pension fund transfer on 31 July, 1996 from Scottish Equitable Personal Pension Scheme to MFG Guernsey Retirement Annuity Trust Scheme (“MFG GRATS”) on behalf of Mrs Gratton. The contention is that these transfer payments were unauthorised giving rise to Schedule E charges on Mr and Mrs Gratton, the Appellant, pursuant to Section 647 ICTA 1988. The transferred sums were £152,991 for Mr Gratton and £78,841 for Mrs Gratton.
3.The Commissioners contend that the transfers are unauthorised payments pursuant to Section 647, ICTA 1988 and assessments have been issued for tax payable by Mr Gratton of £58,650 and tax payable by Mrs Gratton of £27,350. The tribunal must decide if these assessments are appropriate.
4.The Commissioners have issued directions under Regulation 72, PAYE Regulations 2003 (SI 2003/2682) and is asking that these directions be upheld with no part of the Schedule E liability recovered from Scottish Equitable. Further, the Commissioners have made penalty determination on Mr and Mrs Gratton and take the view that the penalties should be charged at 45% of the tax payable. Further, the Commissioners are seeking to charge interest.
5.The assessments with regard to the year 1997/8 were discharged and are not the subject of appeal.
The relevant facts
6.Mr and Mrs Gratton have personal pension schemes with Scottish Equitable and are also members of the Crouch Chemicals Ltd Pension Plan.
7.Sometime before 1996 Mr and Mrs Gratton attended a seminar on pensions planning held by Knightsbridge Associates (later Knightsbridge International) a company which is owned 100% by Richard Knight, a FIMBRA registered adviser. They met Terry Moore, a self-employed agent with Knightsbridge Associates.
8.Mr Knight, the owner of Knightsbridge Associates, offered to the Appellant, as one of his products, a pension planning scheme designed by Mr Malcolm Tune (a financial adviser later convicted of fraud).
9.The Appellant became interested in the product which avoided having to buy an annuity with their pension funds and enabled the funds to be part of their estate on death. The idea involved migrating their existing pension funds in order to bypass the requirements of the UK pension regime. The transferred funds could be accessed through loans.
10.In order for the proposed scheme to be implemented in Guernsey, it was required that Mr and Mrs Gratton become resident in Guernsey or Alderney, a bailiwick of Guernsey. It was explained that it would be necessary to rent a property in order to establish a place of residence on the island. The lease rental should be for one year with three months rent being paid in advance. It was also required that they spend at least one night of the tax year on the island. It was explained that it was not required for the Appellant to continue with Guernsey residence after one year, when the lease could be cancelled.
11.It was necessary for the existing pension funds in the UK to be transferred overseas in order to implement the scheme. This required that a transfer application be made to Scottish Equitable, who held those funds. Mr Tune organised and submitted the application to Scottish Equitable. A covering letterdated 27 June 2006 was sent by Clarke Middleton, financial advisors to the Appellant, with the forms confirming that all was in order to effect the transfer.
12.The scheme sounded attractive to the Grattons since they were promised a loan back from the fund (though they never actually took any money out of the funds). Mr and Mrs Gratton saw it as an attractive way of making financial provision for their children and grandchildren through the use of various trusts.
13.In order to effect a tax free pension transfer, the requirements of the Reciprocal Transfer Agreement between the UK and Guernsey (“PS 121”) had to be satisfied.. It stated, inter alia, that the receiving pension scheme must be approved by the Guernsey authorities and the arrangements were meant to facilitate a transfer on change of jobs. At the time of the transfer, the transferee schemes were approved schemes pursuant to section 157A of the Income Tax (Guernsey) Law 1975, as amended.
14.The Scottish Equitable Scheme Rules allowed the transfer of funds out of the scheme at a member’s request provided the scheme to which it was transferred was approved by the UK Inland Revenue in terms of Inland Revenue “literature “ setting out such approval. Such approval would be given automatically if PS 121 was complied with.
15. The UK Pension Office has discretionary power, Section 591 ICTA (Occupational Schemes and Section 631 ICTA (Personal Pensions), to approve and review applications for approval of pension schemes.
16.The Pension Schemes Office issued Memorandum 117 (IR12 (1991)), a practice note, which gave an explanation of the requirement of the reciprocal transfer of pensions between the UK and Guernsey. In that document, there is a reference to PS 121 giving details of the arrangements for the transfer of pension rights between the UK and Guernsey.
17.PS 121 states in paragraph 1 that arrangements have been made, on a reciprocal basis, to facilitate the transfer of pension rights where “on a change of job, an individual moves from Guernsey to the United Kingdom or vice versa”. It then sets out the requirements for a transfer.
18.The Scottish Equitable Personal Pension Scheme rules (paragraph 12) does contemplate the transfer of pension funds. It sets out the schemes to which funds may be transferred and then has a sweep up clause (Clause 12(2) (4) ) which allows the transfer of funds to “other schemes” where such a scheme is an approved scheme. In other words, the transferee scheme had to be a scheme approved by the Inland Revenue as required under the scheme rules. .This was a requirement for the transfer of funds. In the event of a transfer of pension funds from the UK to Guernsey to a scheme not authorised by the UK Inland Revenue, the transfer would be an unauthorised payment pursuant to section 647 ICTA 1988, which would give rise to a tax charge. The scheme rules are clear on the conditions for transfer. The scheme rules therefore require implicitly the UK Inland Revenue approval for a valid transfer of funds out of the scheme.
19.On the advice of their advisors and in order to satisfy Guernsey requirements, the Grattons entered into a lease of a property in Alderney and paid rent for the property for a period of three months from 3 May 1996. They made visits to Guernsey between 4 May 1996 and 31 July 1996 totalling a few days in total. They did not occupy the property for which they had taken a lease. They wanted to be treated as resident in Guernsey.
20.The Guernsey authorities published some background information in Explanatory Notes dealing with Retirement Annuity Trust Schemes (RATS) dated October 1997 and January 1999 (“Explanatory Notes”). In the Notes it is stated that in order to join a RATS, an individual had to be resident in Guernsey. Paragraph 2(c) of the Notes states that residence for this purpose would include being “present in the island at any time with the intention of setting up a dwelling and actually doing so in that year or the following year”. The Notes stated that they were not to be taken “as a definitive statement of the law or any particular aspect, or in any particular case, and it is strongly recommended that the appropriate advice is taken before entering into a scheme”. This health warning was at the very beginning of the Notes and applied to all its provisions.
21.The Commissioners obtained details of the transfer by Mr and Mrs Gratton after conducting a criminal investigation into the promoters of similar schemes.
22.The Commissioners believe that the transfer of the pension funds to Guernsey from Scottish Equitable fell to be taxed under Section 647 ICTA 1988 as
income under Schedule E and within the PAYE regime. The requirements of PS 121 were not met and therefore the transfer was not authorised by the scheme rules.
23.On 7 July 2003 the Commissioners wrote to the Grattons outlining their position explaining that the transfer had not met the criteria set out in the Reciprocal Arrangement between Guernsey and the United Kingdom.
24.The accounting firm advising the Appellant, Clay, Ratnage Strevens & Hills, questioned the relevance of PS 121 in deciding whether a tax charge arose under section 647 ICTA 1988. There were several correspondences between these parties but there was no settlement of the core issues. The change of jobs requirement in PS 121 was fundamental, in the Revenue’s view, in effecting an approved transfer of funds pursuant to the scheme rules. The Explanatory Notes issued by the Guernsey authorities was not in their opinion, strictly relevant. It explained the Guernsey requirements for joining a retirement annuity scheme only.
25.The Commissioners wrote to Scottish Equitable stating that the transfers fell to be taxed under section 647 and therefore came under the PAYE regime and asked for payment of the PAYE. They asked whether they felt that they had made an error in good faith and if so , a direction under the PAYE Regulations could be considered. The Commissioners decided on the facts that Scottish Equitable were not liable for the PAYE tax on the payments.
26.Assessments were therefore made on the Appellant for the tax due together with penalties and interests.
APPELLANT SUBMISSIONS
27.The following arguments were presented by Mr Craddock on behalf of the Appellant.
1.The general point was made that the Appellant acted in good faith, not seeking to deprive the Revenue of tax and seeking to reserve the funds in their pension for their children and grandchildren.
2.The Tribunal was made aware of the age of the Appellant (75 and 76 with Mr Gratton suffering from Parkinsons) and the likelihood that the Appellant can become bankrupt as a result of having to pay the sums required under the assessments.
3.The scheme was approved under section 157 of the Income Tax (Guernsey) Law 1975 and the reason for the withdrawal of approval by the Guernsey tax authorities was not in relation to any dispute over the status of the transfers from the Scottish Equitable Personal Pension Scheme.
4.At the time the retirement annuity schemes were established, Guernsey were not rigidly enforcing the “change of job” requirement or the transfer of pension funds. The island wanted to attract this type of business.
5.The Explanatory Notes required only that a person be resident in Guernsey in order to be a member of the retirement annuities scheme. The Appellant satisfied the requirement in 2(c) of the Explanatory Notes and therefore were resident. It was their intention at the time to settle in Geurnsey. There was no requirement in the Explanatory Notes for an individual to have changed jobs but only to be resident in Guernsey. The fact that the Grattons were not making further contributions to their pension fund made the job requirement superfluous.
6.The Explanatory Notes “held out” to the member and their advisers the requirements of Guernsey authorities. The Appellant relied on this representation.
28.The Appellant makes further submissions below.
29.The fact that there was a discretionary pension trust holding the funds meant the transaction contemplated did not have a preordained series of steps which were designed to achieve a particular tax result. The existence of independent trustees meant that by its nature the transactions contemplated were not automatic (Dexter v MacDonald ) There was a commercial intention to settling in Guernsey.
30.The requirement in section 2(c) of the Explanatory Notes was only one of present intention. The evidence showed that the Grattons intended to start a European consultancy business and therefore satisfied this requirement
31.The Guernsey authorities, who had a discretion in the implementation of the Reciprocal Agreement, only required a person to be resident in Guernsey in order to be a member of a retirement annuity scheme. There was no requirement, as there was in the UK, for a change of jobs to also take place. For a time, the Grattons were actually resident in Guernsey.
32.The Guernsey authorities were implementing PS 101 as they saw fit. For this purpose they provided the Explanatory Notes which are handed out to prospective investors in pension schemes. It was fair and reasonable to rely on that document as being comprehensive of the requirements for prospective investors who transferred their pension funds. The Explanatory Notes, issued by the “Administrator of Income Tax Guernsey”, clearly stated which individuals qualified as residents, it provided:,
“Present in the Island at any time with the intention of setting up a dwelling place and actually doing so in the year or the following year”.
33. The purchase of property or the renting of premises on a long lease was sufficient to establish residence for this purpose.
34.The rules of the Scottish Equitable Scheme stated that the members’ funds can be transferred to one or four types of schemes. The relevant scheme which the Appellant sought to bring themselves within was,
“any other scheme approved for the purpose of this rule by the Inland Revenue and approval here may be obtained by following and adhering to a process set out by the Inland Revenue in its literature”.
The relevant Inland Revenue literature was the Inland Revenue Memorandum 117 dated 13 January 1994, issued by the Pension Scheme Office. The section headed specifically “Reciprocal Transfer Agreements with Jersey and Guernsey” refers to the revision of the existing transfer agreements with Jersey and Guernsey . The revised document, PS 121/ 95, “Arrangements for the Transfer of Pension Rights between the United Kingdom and Guernsey” explained the Inland Revenue current views. This document represents the agreed position between the UK Pension Scheme Office and the Guernsey Administrator of Income Tax, Since there is no recognised approval mechanism (e.g. a clearance letter from HMRC) for the approval of the transfer of funds between the transferor scheme and the transferee scheme , all payments which are compliant with the Reciprocal Transfer Agreement are therefore authorised payments under the scheme rules.
35.The Inland Revenue have not suffered any loss of tax as a result of the transfer of the pension funds. It is possible that the Grattons may eventually pay more tax as the funds will be treated as part of their estate for inheritance tax purposes.
36.A distinction can be drawn between the transfer out of the UK and the receipt of the funds in Guernsey. The transfer of the funds from the UK only required that there be a transfer from one approved pension fund to another approved fund of which the Appellant were members.
Respondents’ Submissions
37.The Respondents say that the Appellant who enjoyed the benefit of tax exemption on their personal pension schemes entered into a tax avoidance arrangement to transfer their personal pension schemes outside the UK tax net.
38.Under section 647 ICTA 1988 the payments from the Scottish Equitable Personal Pension Scheme are chargeable to tax under Schedule E. Payments would be chargeable unless they were authorised payments. To be authorised, the payments would have to be made under the rules of the scheme and therefore in accordance with the UK/Guernsey Reciprocal Agreement as set out in PS 121.
39.The requirements of PS 121 were not met because the Appellants did not move to Guernsey on a change of job. They remained in the UK as directors of Crouch Chemicals Ltd and did not take up new job in Guernsey as required.
40.The transfer of pension funds did not fulfil the requirements of PS 121 and there cannot therefore be transfers authorised by the rules of the Scottish Equitable Personal Pension Scheme.
41.The only transfer the Inland Revenue allowed were those for people who were going to live and work in Guernsey and who met the terms of the Reciprocal Agreement.
42.Scottish Equitable applied for a direction under Regulation 72(5) of the PAYE Regulation that they were not liable to deduct PAYE on the basis that they took reasonable care and the error in not deducting tax from the payment was made in good faith. Such a direction was granted by the HMRC PAYE Directions Unit on the basis of Scottish Equitable were following normal transfer procedures. They were informed that the transfer was to proceed in accordance with Memorandum 117 and as such it met the conditions set out in the UK/Guernsey Reciprocal Agreement. Scottish Equitable were informed in June 2006 by Clarke Middleton Associates, financial advisers, that the transfer met those requirements The Inland Revenue say that this was not an accurate representation.