Mark McLaughlin looks at pension scheme contributions and what constitutes a valid payment of pension contributions for tax purposes.
Tax relief is available to individuals for contributions paid to a registered pension scheme, where certain conditions are satisfied.
HM Revenue and Customs (HMRC) considers ‘paid’ generally means the contributions must be of a monetary amount, such as cash or bank transfer (NB, a possible exception applies for eligible shares relating to SAYE schemes or share incentive plans, which is not relevant here).
HMRC says ‘yes’ …
However, HMRC’s Pensions Tax manual (at PTM042100) currently states that in certain circumstances, it is possible for a pension contribution involving an asset to retain its monetary form for tax purposes.
Taxpayers (or advisers) and pension scheme trustees reading the previous version of HMRC’s guidance at PTM042100 might have assumed that pension contributions could be paid through a transfer of assets. Unfortunately, in Revenue and Customs v Sippchoice Ltd [2020] UKUT 149 (TC), that assumption proved to be incorrect.
In Sippchoice, the appellant (S) was a pension scheme provider. A dispute arose with HMRC about whether contributions made by an individual (MC) (and others) to a self-invested personal pension (SIPP) were paid for tax purposes and therefore qualified for tax relief. MC completed a SIPP contribution form on 9 March 2016, indicating that he proposed to make a net contribution of £68,324. Around two weeks later, MC wrote to S confirming that the contribution would be made by way of an in specie transfer of shares. Five days after that, S accepted the in specie contribution. However, HMRC refused S’s tax relief claim.
The First-tier Tribunal (FTT) allowed S’s appeal and found the contribution was made in accordance with HMRC’s guidance at PTM042100. The FTT considered that the legislation was wide enough to include a monetary amount later satisfied by a transfer of shares, as in MC’s case.
but means ‘no’?
Unfortunately for S, HMRC appealed to the Upper Tribunal (UT), which concluded that contributions paid for pension tax relief purposes were restricted to contributions of money. Furthermore, as ‘contributions paid’ meant paid in money, it could not include a transfer of non-monetary assets, even if the transfer was in satisfaction of an earlier obligation to contribute money. HMRC’s appeal was allowed.
Even though the UT accepted that HMRC’s guidance at PTM042100 was consistent with S’s case, this carried little weight because S had not tried to argue that it relied on HMRC’s guidance, or it had a ‘legitimate expectation’ that HMRC would not resile from it.
Where are we now?
Following the UT’s decision in Sippchoice, HMRC amended PTM042100 to clarify its position. The amended guidance states it is possible to enter into contractual arrangements involving an asset and for a pension contribution to retain its monetary form for tax purposes, if there is:
- a clear obligation to pay a contribution of a specified monetary sum (e.g., £10,000), creating a recoverable debt obligation;
- a separate agreement between the pension trustees and the contributing party to sell an asset to the scheme for market value consideration; and
- a separate agreement that the cash contribution debt may be offset against the consideration payable for the asset.
Practical tip
If the asset’s market value is lower than the contribution debt, the balance will need to be paid in cash for the entire contribution to qualify for tax relief.
